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Property in France? Beware risks of becoming French tax resident!

This information has been prepared by Sykes Anderson Perry Limited as a general guide only and does not constitute advice on any specific matter. We strongly recommend that you seek professional advice before taking action. No liability can be accepted by us for any action taken or not taken as a result of any information or advice given or omitted. The information herein does not constitute investment advice. Always consult an IFA if before taking any investment decision.

For many people a French holiday home is their dream. Summers on the Riviera and / or winters in the Alps can be idyllic! But as many people know, France can be a high tax jurisdiction depending on your circumstances. For many individuals it will be crucial that they do not end up being considered as tax resident in France. Not only could you end up liable for French income tax and social charges on your worldwide income but legitimate tax planning you have carried out, on the assumption that it has nothing to do with France, may suddenly result in significant French tax charges (for example, gifts to children).

The residency test

The difficulty is that the tests for French residency, as set out in the French tax code, are wide and fairly vague. Like the pre-2013 approach in the UK, this uncertainty generally works in the favour of the French authorities rather than the individual if the position is ever considered by the tribunals.

If any of the following criteria are met, you can be considered French resident:

  1. You or your family (family means partner/spouse and children, it does not include parents, siblings etc.) have your usual place of residence in France.
  2. You spend at least 183 days in France in the year.
  3. You have a professional activity in France.
  4. Your centre of economic interests is in France.

Time in France

The above criteria are considered in quite a wide manner – if you have a holiday home in France which is bigger and / or of higher value than any other home, there is a high risk that the authorities will consider you to be French resident.

Further, the day counting does not contain similar rules to the UK, where you are only treated as having spent a day here if you are present at midnight. In France, technically, if you spend any part of the day in the country, this counts towards the 183 day test.

A major issue is that it is very easy to travel between France and places like Switzerland and Monaco – people assume that if there is no border control then the authorities will not know that they have entered France. This is a dangerous assumption to make and the tax authorities are known to carefully police the areas close to these borders, recording number plates etc. The safest approach is to acknowledge and accept that if you are in France then you have spent a day there for the purposes of tax residency.

There is particular exposure for people in Monaco where their French holiday home will almost certainly be larger than their home in Monaco. If they are travelling, they are likely to fly from Nice which means they are spending some time in France.

Tax Treaties

For UK residents this becomes less of an issue because there is a double tax treaty in place with France. This treaty contains a residency tie-breaker test which overrides the terms of the internal French legislation. In most cases, your links to the UK are likely to exceed those with France and so the treaty will point towards UK residency.

Monaco does not have a full treaty with France and the Swiss treaty may not always apply depending on the individual’s arrangements.

Current Approach in France

Our experience is that France is becoming more aggressive with residency claims. In recent years there have been numerous high profile cases involving individuals who claim to have left France. This is a huge issue because France has suffered a “brain drain” over the last 5+ years, with high earners keen to escape the high income tax charges and wealth tax. Although France has introduced an exit charge for individuals who leave the country, people are still moving away. These individuals have to take extreme care with the steps they take, the links they maintain in France and the time they spend back in the country.

The landscape is moving further now and the French Revenue is keen to bring individuals within the French tax net even if they have never been French resident. As you would expect, Swiss and Monegasque based individuals are high on their list of priorities as well as “international” people who view themselves as resident nowhere.

Disputes with the French authorities are generally long and drawn out. They are also expensive; particularly as you are unlikely to recover most of your costs, even when successful. This is relevant for UK residents as well – even though they may be in a better position to depend a claim, there is unlikely to be a quick resolution. It is likely to lead to wide ranging questions from the French tax authorities as to your assets and to a legal charge being put on your home in France to secure any possible French tax liabilities. Our experience is that if you ignore initial correspondence from the tax authorities events quickly overwhelm you.

Steps to take

When living in these countries but having a holiday home or other connection to France it is absolutely essential to receive advice on the practical steps you need to take to reduce the risks of becoming French resident inadvertently.

This will generally involve building evidence to show that time in France is for holiday purposes, rather than any other, more settled, purpose.

The key is to know what limits to adhere to and what actions to take to reduce the chance of a claim ever arising.

We have experience of advising individuals in all of these jurisdictions on the steps required both before and after any action has been taken by the French tax authorities.

July 2015