France: Individual Non-Resident Taxation

An individual is deemed to be tax-resident in France if:

• he has a home in France; or
  
• if France is the place of his principal abode; or
  
• if France is the place where he performs his principal professional activities; or
  
• if France is the centre of his economic interests.

These definitions are unusually wide, so that establishing non-residence after a period of residence will probably involve demonstrating that a residence has been established somewhere else.

Tax is due on French income and assets for non-residents. Non-residents remain obliged to declare their French source income and may be required by the French tax authorities to appoint a representative in France authorized to receive all correspondence relating to tax matters. Profits or gains derived from trades, professions or vocations carried out in France including self-employment are subject to tax whether or not the individual is resident.

There are gift and inheritance taxes in France which are not easily escaped, although within a family the rates are quite low. If a non-resident legatee has been a resident of France for six out of the previous ten years, the tax applies to worldwide assets transmitted, regardless of the residence status of the deceased.

General anti-avoidance legislation has not progressed far in France, and holdings in offshore or foreign assets other than trusts taken on before residence finishes will probably be subject only to income taxation. For an individual who knows he is going to leave France, there is therefore a case for switching income-generating assets into capital appreciation assets outside France, or at any rate for ensuring that gains are not made during French residence which could incur capital gains tax. Gains which crystallise after residence has finished will escape French tax.

Once French residence has been terminated, and if non-residence is expected to be permanent, then an ex-French resident is free to invest offshore in order to obtain the best possible returns.

(N.B. France does have general anti-avoidance rules in place regarding transactions with jurisdictions which have 'offshore' tax systems, and all foreign bank accounts must be disclosed to the authorities on an annual basis).

The top rate of individual income tax is 40%, and a 50% ceiling on the total amount of tax paid by individuals has been put in place. The 2008 tax package, announced in 2007, caps wealth taxes at 50%. As part of its proposals for pension reform, the French government announced in its 2011 finance bill an increase of 1% to 41% to the top rate of income tax.

Expatriates Tax Package

The French government introduced a package of tax incentives in November, 2003 under which foreign executives working in France were no longer obliged to pay income tax on bonuses derived from working abroad, which some estimate can represent between 20% and 50% of a top executive's income.

Other measures included the deductibility of pension and healthcare contributions paid in their country of origin from taxable income.

The measures were effective from January 1, 2004 and were expected to benefit around 3,000 executives. The measures also applied to French managers who had been paying taxes abroad for at least ten years.

In 2007 the French parliament voted on a new law giving more favourable tax regime to 'impatriates.' This went into effect on January 1, 2008.

Under the old regime, taxpayers who were sent to France by their employers were eligible for tax breaks for a "limited period." Under the new rules, these tax breaks will be extended to individuals directly employed by a French employer, also for a limited period. However, in order to qualify for favourable tax treatment under the new regime, the taxpayer must not have been resident in France in the five tax years immediately preceding the commencement of their employment or assignment.

These favourable provisions apply up to the 31st December following the fifth anniversary of their arrival in France.

The new regime allows those assigned to France by a foreign employer to exclude from their taxable income those elements of remuneration that are directly related to the expatriate assignment. If individuals are locally recruited, they have the option of excluding from their taxable income those elements of remuneration directly related to their expatriate assignment, or a standard 30% deduction.

However, if the amount of income which remains subject to French income tax after applying the relief is less than the level of remuneration paid locally in France or an individual in the same of similar position, the difference is added back onto their taxable income ensuring that qualifying taxpayers declare at least the same amount of taxable income as a local employee in a similar position.

There is also an exemption available for residual taxable income under the new regime (the taxable remuneration which remains after having exempted the expatriate elements or the 30% deduction), although the amount of income that can be exempted under the new regime is subject to caps.

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