New France-UK
Double Taxation Treaty Signed - Could it Affect You?
By Steve Grover September
27, 2008
It may have taken
over four years in the making but on the 19 June 2008 a new version of the
double taxation treaty between France and the UK was finally signed by the
Rt Hon Alistair Darling MP, Chancellor of the Exchequer, and Mme Christine
Lagarde, the French Minister for the Economy, Industry and Employment.
The new treaty is
expected to enter into force some time late 2009 provided all treaty
adoption procedures (i.e. parliamentary approval, ratification and exchange
of diplomatic notes) are completed.
Below is a summary
of some of the key elements which could affect British citizens living in or
moving to France should the new draft of the treaty be ratified and become
law.
Delayed Wealth tax
liability
Currently UK
nationals moving to France are liable for wealth tax (impot sur la fortune)
on the net value of their worldwide assets, including the value of any real
estate or rights in real estate outside France. However under the new
agreement for the first five years after becoming a resident of France your
wealth tax liability will only be based on French assets, with all other
assets outside France not being taken into account. From the sixth year of
residence onwards, wealth tax will then be payable on worldwide assets as
normal.
If the taxpayers
leave France and provided they remain outside France for at least three
years, the five-year exemption applicable to non-French assets would apply
once more.
It is currently
unknown if this temporary exemption will only benefit individuals who move
to France after the treaty enters into force, as it is a possibility that
anyone who moved to France before the treaty comes into effect could still
qualify for any balance of the first five years of residence when the treaty
become law.
Capital Gains Tax on UK properties by a Resident of France
Within the
existing double taxation treaty a loophole exists which can mean in certain
situations if a non-UK resident sells a UK property that is not used in a UK
trade usually no Capital Gains Tax is levied. This is because the UK in
general does not impose capital gains tax on individuals who are neither
resident nor ordinarily resident in the UK, and as the treaty states that
such gains are taxable in the country where the real estate is situated
(which would be the UK in this case) no tax would be due in France either.
This is however provided that the vendor does not move back to the UK within
5 years of leaving.
Under the new
treaty this loophole will be closed through a clause that states France may
tax the gain, and any double taxation will then be eliminated by a tax
credit equal to the amount of tax paid in the UK. This will mean that from
the date the new treaty becomes law, any gain realised on the sale of a UK
property by a resident of France will fall under French capital gains tax
regulations so would then be assessed and taxed accordingly. So for the
example above as there is normally no liability in the UK, there would
therefore be no tax credit in France and you would be fully liable to the
French CGT rates.
Airline
pilots
Under the
existing treaty pilots who work for a UK airline but live in France can
largely escape tax on their earnings in both the UK and France. This is
because it gives primary taxing rights to the UK -- with the income only
taken into account in France to calculate the effective rate of tax payable
in France on other income, but the UK only taxes the income for the days
when flights start and end in the UK. Under the new treaty the loophole has
been closed. French tax will be payable on the entire earnings, with a
credit for any taxes paid in the UK.
Social
Charges
Under the new
treaty French social charges will now be treated as French Tax, which is a
major change from the existing treaty as social charges did not exist when
it was put into place. One area this is likely to have a significant impact
on is individuals receiving rental income from the UK where currently France
levies Social Charges on the income, It is expected that this will now be
covered for by a credit from the UK income tax already paid.
These are the
main changes that could have an effect on individuals and the full text of
the new treaty is available here -
http://www.hmrc.gov.uk/international/france.pdf,
but otherwise it stays the same as the existing treaty with the taxation of
government pensions in the country of origin only and the France-UK
residency 'tie breaker' remaining in place.
This information
is only provided as a guide and is based on our understanding of current
legislation at the time of writing the article, if you need assistance in
this area you are strongly advised to seek the help of a specialist in this
field as each individual case is different.
If you have a
question, want to arrange for full financial review or just want further
information I can be contacted on +33 (0)325461631, via my website
www.financialexpat.com or via e-mail
steven.grover@spectrum-ifa.com.
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