Article on selected taxation aspects of retiring to France by Professor Robert Anthony, Professor of Law at St Thomas University Miami and Principal Partner of Anthony & Cie, Valbonne Sophia Antipolis France. Anthony & Cie are members of MSI, a world-wide association of independent professional firms
Published in the March 2001 issue of "Tax Adviser"
Not surprisingly, many foreigners fall in love with France. The ‘Sun and Sea’, the wonderful countryside, the lifestyle, the food and wine are certainly a bonus. The ‘Frenchness’ alongside ‘French charm’ incite many foreigners to seriously consider retiring to France.
France is seldom seen as a low tax jurisdiction. Certainly the taxation on unearned and earned income in France is not at all attractive. But when one scratches below the surface one finds that things are very different from the first view. Correctly structured and planned, retirement in France can be very interesting. The taxation can even be lower than the UK or Switzerland. In other words, France can be a low tax jurisdiction !
This article is intended to whet the appetite for retiring to France by highlighting three specific advantageous aspects to consider:
- Defiscalisation of unearned income by using insurance investments
- Defiscalisation of earned income by way of property investments
- How to structure the purchase of the property to fiscal advantage
‘Defiscalisation’ of unearned income
A foreigner taking up residence in France and using a French approved insurance plan for their investments can make a considerable difference to the ultimate taxation on any withdrawals or gains. I like to call this an ‘approved umbrella insurance investment policy’. This should ideally be taken out prior to becoming resident in France.
The different advantages are the following.
- The growth not drawn from the fund remains untaxed (apart from wealth tax).
· On the basis that the descendants are identified as beneficiaries to the insurance policy, no inheritance tax is payable within the limits of one million French Francs per beneficiary. Estate duty in excess of this is at 20 per cent (special rules apply for those over 70 years old).
· The investments can be structured in a flexible way offering new residents discretion on their investment portfolios.
· The potential French resident can subscribe to the fund before taking up residence. Thus, tax at a higher rate in the earlier years of the policy can be avoided altogether. The total investments, together with growth, can be drawn from the policy at any time subject to the policy conditions.
· One may change beneficiaries at any time (subject to the Napoleonic estate law whereby one has to avoid being seen as deliberately disinheriting ones heirs).
· Certain policies may allow the first 80 per cent of the initial capital to be withdrawn tax free by paying the deferred income by way of bonuses at a later stage of the policy.
Nevertheless there are some disadvantages.
- It requires an up-front capital investment.
- Wealth tax will be payable on the portfolio value once residency is established. This is however, relatively modest (see below).
- An initial commission is generally charged by the insurance company.
- The French government taxes this type of investment on the basis of growth withdrawals from the fund. This is taxed at the following withholding tax rates:
· At 45 per cent on growth withdrawals in the first four (4) years
· At 25 per cent on growth withdrawals over the subsequent four (4) years
· At 17.5 per cent on growth withdrawals thereafter (an allowance of 60000 French Francs per year is given for married couples on the growth withdrawn.)
Withdrawals are made based on the residual growth and capital of the policy, thereby ensuring capital withdrawals are not taxed.
- A beneficiary has the advantage of the first 1.000.000 FF (one million French francs) tax free. Thereafter, all proceeds from the deceased’s policy have a 20 per cent tax.
Special rules apply where someone is over the age of 70. The original capital is considered part of their estate and taxed for inheritance accordingly, but, the person has an exemption on the first 200000 FF invested. The growth is taxed as part of the policy normally. Wealth tax is calculated as normal.
The Ideal Plan
Generally speaking, the ideal situation is to draw from a policy at a lower rate than that of the growth. This will reduce the withholding tax rate payable on the policy.
Living off this type of policy can reduce tax rates to much less than ten per cent per annum. Often, the tax payable is in fact negligible.
It is advisable to provide a capital sum to live off for the first year or two and commence drawing on a policy thereafter. This reduces the tax rate still further and avoids paying unnecessary commission on setting up the policy.
Example - unearned income drawn from an insurance policy:
Let us assume a person taking up residence in France who:
· Invests FF 10.000.000 net in a policy
· Obtains a ten per cent return on investment
· Withdraws FF 700.000 each year
· Begins withdrawals after the first 12 month period
Please find below a calculation of withholding tax (‘prélèvement libératoire’) and (approximate) wealth tax in the first year :
Tax levy Calculation 1st Year 2nd Year
WEALTH TAX The first 4.700.000 FF exempt exempt
4.700.001-7.640.000 @ 0.55% FF 16.169 FF 16.169
7.640.001 – 15.160.000 @0.75% FF 19 750 (on 10 273 273 FF) FF 22 048(on 10 579 722 FF)
Total wealth tax FF 35 919 FF 38 217
Total tax on withdrawals 45% of the growth withdrawn for the 1st four years FF 26 727 FF 20 879
Total Taxes FF 62 646Tax rate including wealth tax on FF 700000 is 8.9% FF 59 096Tax rate including wealth tax on FF 700000 is 8.4%
Example - earned income as pension:
This simulation is of a couple without children and an annual net taxable pension of
FF 700 000.
Annual pension of FF 700000 for a couple without children Income tax (approx.) FF 171 957 FF 171 957
Social tax contribution in France (approx.) FF 66 500 FF 66 500
Total tax on pension FF 238 457 FF 238 457
Assets of FF 10 000 000 Wealth Tax FF 35 919 FF 38 217
TOTAL TAX including wealth tax FF 274 376 39.2% FF 276 674 39.5%
Annual economy of Tax (in comparison with the total tax on unearned income as indicated above a) FF 211 730 30.2% FF 217 57931.1%
These projections are made taking into account that the person has no other income and that they benefit from no special allowances. We have also assumed they have assets of
FF 10 000 000 which are subject to French wealth tax.
Defiscalisation of earned income
There are advantages to structuring income through property investments and the ‘Location Meublée Professionnelle’(LMP).
The conditions
According to the article 151 of the French General Tax Code, one can become a professional of furnished rent if the following conditions are fulfilled:
- Registration of the company
- Yearly turnover amounting to 150 000 FF TTC or these receipts have to represent more than 50 per cent of the total income.
An attractive fiscal package
The professional can deduct the trading deficit from their total taxable income. This possibility represents the most attractive fiscal advantage of the LMP. The charges which can be deducted are the following:
- financial charges due to the acquisition (loan interest, insurance premium, etc)
- engineer’s fees
- old age contributions
- charges for co-ownership of property
- expenses for maintenance and restoration.
As an owner, the landlord is subject to land tax ‘taxe foncière’. Nevertheless, they can be exempted for two years if the building are newly constructed. Furthermore, according to the finance act of 1990, the VAT can be recovered. This is definitively acquired pro-rata over twenty years. If the investment is held for 20 years the VAT is not repayable on a sale.
Normally, holding the property over five years enables the taxpayer to be exempted from capital gains tax provided they have a personal tax regime. As the trade is a commercial activity one can depreciate the property thereby reducing any taxable income by the depreciation.
The financial act of 1999 has cancelled the wealth tax exemption for most landlords. According to the article 885 R of the French General Tax Code professionals can be exempted from wealth tax if both the following conditions are met :
- Yearly turnover amounts to a minimum of 150 000 FF
- these receipts represent more than 50 per cent of the total income.
This can be established as personal taxation
How to purchase investment property
Using an SCI
The laws that govern buying property in France are different to those of many other countries. As property is an immovable asset one has to take into account French property law, even for non-residents of France. In order to enable the wishes of a foreign Will to apply and to give flexibility to reduce French taxes, one generally advises a foreigner intending to buy a property in France to purchase the property by way of a SCI (‘Société Civile Immobilière’).
Flexibility of the structure
An SCI is a transparent company in France but is recognised as a separate legal entity. It can therefore be taxed under personal income tax rules albeit that it is a corporate entity. The company separates the debt and the administration of the property from the physical person. It can reduce the net value of assets, thus protecting an estate transfer on death. It also reduces wealth tax. This is because of the valuation of the shares. In France wealth tax is due on the net value of property assets, even for non residents.
Please note that this is not a commercial company and is not used for LMP.
Regarding the transfer of the property, Napoleonic law determines inheritance. The estate concerning property held directly in France is subject to French inheritance tax rules. It is essential to explain, especially for non residents, how to purchase a property correctly. If the property is held through an SCI, it will be part of the home country estate and French inheritance law will no longer apply (taking into account any tax treaties with the country of residence). However, death duties may still be due in France on the net value of the property estate held. As a consequence, with an SCI, a reduced net value of shares helps transfer the estate to the home country of residence thereby allowing more flexiblility in transfering the ownership of the property.
A shareholder of the SCI can benefit from a gift allowance of 300 000 FF for children (for British marriages it is per spouse) and 500 000 FF between husband and wife, on their French assets. This allowance is renewable every ten years. It enables transfer to direct dependants without tax.
Conclusion
It is important to take advice as to how to minimise taxes in France by correctly structuring and utilising a French fiscally approved investment. Even an investment which is agreed for French tax purposes needs choosing carefully as this can have an effect on the tax rate. One really should not be lead into exotic investment choices in offshore jurisdictions. The choice of French approved products is available - so why create unnecessary problems? Subject to one’s wishes, it may be possible to retain one’s existing investment advisers; this will depend on the size of the portfolio as there are almost certainly costs involved. The securities held by most French policies have normally to be held in France. Swiss banks may not accept this permutation. There are however possible solutions, where the amounts invested are of a consequential value.
Finally, France is a good place to retire, not just for the sun, food, wine and health, but with carefully thought out tax planning, it can be very affordable for tax purposes. Its taxation may even be lower than one would have expected when comparing it with other members of the European Union.
Depending on one’s level of retirement income, France could have the lowest taxation of all the members of the European Union.
Technical Department
020 7235 9381
March 2001 by
