Tax guide for Americans in France
Ah, France! A land of romance, art, and culinary delights. Whether you're drawn by the lavender fields of Provence, the bustling streets of Paris, or the serene landscapes of the Loire Valley, there's something in France for everyone.
However, if you're considering a longer stay, it's essential to understand how France views its residents and non-residents, especially in terms of taxes.
Table of contents
- Resident vs. non-resident of France
- Who can be considered a resident of France
- Types of taxation in France
- Types of income in France
- Social security in France
- French pension system
- Deductions and credits for expats in France
- Filing income tax returns in France
- Tax treaty between the US and France
- Most popular tax forms for US expats
- When are France's taxes due?
- France tax forms for US expats
Resident vs. non-resident of France
As a resident, France expects you to declare all your worldwide income for tax purposes.
In contrast, as a non-resident, you only need to declare the income you earn within France.
Residents can benefit from certain tax allowances, while non-residents might have different tax rates for their French income.
Who can be considered a resident of France
There are specific criteria that determine one's residency status. In France, you're considered a resident if:
- Duration of stay: You spend more than 183 days in France within a calendar year. It doesn't have to be consecutive days; the total duration over the year is what counts.
- Primary home: Your main home or place of abode is in France. This means if you have a house or apartment where you live most of the time, you're a resident.
- Professional activities: If your main job or professional activity is based in France, you're considered a resident. This applies even if you might travel frequently for work.
- Center of economic interest: If the core of your economic activities, like investments or business operations, is in France, you gain resident status.
Types of taxation in France
France, with its intricate tax system, ensures that various forms of income and gains are taxed appropriately. One of the significant areas of taxation is capital gains, which can be derived from various sources.
Personal income tax rates
France has a progressive tax system for individuals, meaning the more you earn, the higher the percentage of tax you'll pay.
Here's a general breakdown of the personal income tax rates:
|Taxable income (€)||Tax rate (%)|
|168,994 and above||45|
These rates are applied to your net income, which is your total income minus certain deductions and allowances. It's worth noting that there are additional social contributions that might apply, and tax rates can change based on government policies. If you're an expatriate or have multiple sources of income, it's advisable to consult with a tax professional to understand your tax obligations in France fully.
Capital gains refer to the profit realized from the sale of a capital asset, such as stocks, bonds, or real estate. In France, these gains are subject to taxation, but the rate and method of calculation can vary based on the type of asset.
- Capital gains on securities
Securities, such as stocks and bonds, when sold at a profit, result in capital gains. In France, the capital gains on securities are taxed at a flat rate of 30%.
This rate includes both income tax and social contributions. However, there are provisions for reduced rates if the securities have been held for a longer duration. For instance, if you've held onto your securities for over two years, you might be eligible for certain allowances or reductions.
- Capital gains on real estate properties
The sale of real estate properties can also lead to capital gains. In France, these gains are subject to a progressive tax rate, which can range from 19% to 45%, depending on the profit amount.
Additionally, social contributions of 17.2% are applied to the gain. It's worth noting that if you've owned the property for more than 22 years, the capital gains tax is exempt, though the social contributions still apply until the property has been held for 30 years.
There are also specific deductions available based on the duration of ownership, making it beneficial for long-term property holders.
For instance, each year after the fifth year of ownership, a certain percentage of reduction is applied, which can significantly reduce the taxable amount.
Council Tax, known as "Taxe d'Habitation" in France, is a local tax levied on the occupant of a property, whether they are the owner, tenant, or a free occupant.
The amount is determined based on the rental value of the property and can vary significantly depending on the municipality and the local services provided.
Factors like the size, location, and condition of the property, as well as the income of the occupant, can influence the final amount.
Reforms are underway to gradually abolish the 'immeubles' for many households, with the aim of exempting a large proportion of the French population. However, second homes and luxury properties are likely to remain subject to this tax.
The exit tax is designed for individuals who decide to transfer their tax residence out of France, primarily to ensure that those with significant wealth or assets don't move to avoid taxation on potential capital gains.
If you're leaving France and you own shares or securities exceeding a certain value, you might be subject to this tax on the latent capital gains.
However, there are certain conditions and exemptions, and in some cases, the payment can be deferred until the actual sale of the asset.
Value-added tax (VAT)
Value-added tax, commonly known as VAT (or "TVA" in French), is a consumption tax levied on the value added to goods and services at each stage of production or distribution.
In France, the standard VAT rate is 20%. However, reduced rates of 10%, 5.5%, and 2.1% apply to certain goods and services, such as food, public transport, books, and some medical products.
Businesses collect VAT from their customers and then remit it to the government, minus the VAT they themselves have paid on their purchases. It's one of the primary sources of state revenue in France.
Inheritance tax in France is levied on assets that are passed on to beneficiaries upon the death of an individual. The rate of this tax varies depending on the relationship between the deceased and the beneficiary. For instance:
Direct descendants (children, grandchildren) and ascendants (parents, grandparents) benefit from significant allowances before the tax is applied.
After these allowances, the tax rate can range from 5% to 45%, depending on the amount inherited.
- Spouses and civil partners are exempt from inheritance tax in France.
- Siblings have a different set of allowances and tax rates, which can range from 35% to 45%.
- Other relatives and non-relatives face varying rates, generally higher, with fewer allowances.
Gifts given less than 15 years before the death of the donor are added back into the estate for tax purposes.
Tax on real estate properties (IFI)
The "Impôt sur la Fortune Immobilière" (IFI) is a tax on real estate properties in France. Introduced in 2018, it replaced the previous wealth tax, "Impôt de Solidarité sur la Fortune" (ISF), narrowing the scope to only real estate assets.
Individuals who own real estate in France with a net value exceeding a certain threshold are subject to IFI. This includes both residents who own property in France and non-residents who own French real estate.
The tax is calculated on the net value of the property (or properties) after certain deductions, such as outstanding loans.
Various rates apply depending on the property's net value, with progressive rates ranging from 0.5% to 1.5%.
While the term "estate tax" is commonly used in countries like the U.S., in France, the concept is encompassed by the inheritance tax system. There isn't a separate "estate tax" as such.
Instead, the inheritance tax system covers the taxation of assets passed on after death.
However, it's essential to differentiate between the inheritance tax and the previously mentioned "Tax on real estate properties (IFI)." The latter is a yearly tax on the net value of real estate owned by an individual, while the inheritance tax is a one-time tax applied upon the transfer of assets after death.
Unsure of every piece to be filed?
Get a free consultation with a tax pro!
Types of income in France
Employment income, known as "Traitements et Salaires" in French, encompasses the wages, salaries, and other remunerations received by an individual for services rendered as an employee.
This includes basic wages, bonuses, allowances, and any in-kind benefits like company cars or housing provided by the employer.
In France, employment income is subject to progressive tax rates after considering various deductions like social security contributions, mandatory pension contributions, and certain job-related expenses.
The net taxable employment income is then taxed at rates that can range from 0% for lower income brackets to 45% for the highest earners.
Equity compensation refers to non-cash pay that represents ownership in a company. This can include stock options, restricted stock units (RSUs), and other forms of equity-based compensation.
In France, the tax treatment of equity compensation depends on the type of equity and the conditions of the grant:
- Stock options: If an employee is granted stock options, they might be taxed at the time of exercise on the difference between the market value of the shares and the exercise price.
This "benefit" is generally treated as an additional salary and taxed accordingly. When the shares are eventually sold, any further gain (or loss) is treated as a capital gain (or loss).
- Restricted Stock Units (RSUs): RSUs are taxed when they vest. The taxable amount is the market value of the shares at the time of vesting.
Like stock options, this is treated as salary. Any subsequent gain or loss upon sale of the shares is treated as a capital gain or loss.
Business income in France referred to as "Bénéfices Industriels et Commerciaux" (BIC) for industrial and commercial profits, encompasses the income generated from sole proprietorships, partnerships, and certain types of corporations.
This income is derived from the regular operations of a business, excluding any extraordinary or incidental sales or gains.
For taxation purposes, business income is calculated as the difference between the business's revenue and its deductible expenses.
Deductible expenses can include rent, salaries, raw materials, and other operational costs. Depending on the legal structure of the business and the chosen tax regime, the business income might be taxed at the corporate level, the individual level, or both.
Dividends are distributions of a company's earnings to its shareholders. In France, dividend income received by individuals is subject to taxation.
While a portion of the dividend might be exempt from tax, the remaining amount is added to the taxpayer's total income and taxed at the progressive income tax rates.
Additionally, social contributions are levied on the gross dividend amount, further impacting the net amount received by the shareholder.
It's worth noting that France has double taxation treaties with numerous countries, which can affect the taxation of dividends received from foreign sources. Such treaties aim to prevent the same income from being taxed twice.
Interest income, known as "Revenus de Capitaux Mobiliers" in French, refers to the earnings derived from savings accounts, bonds, or other financial instruments that accrue interest.
In France, interest income is generally subject to both income tax and social contributions. The taxpayer has the option to choose between a flat tax rate (known as the "Prélèvement Forfaitaire Unique" or PFU) or the progressive income tax rates.
The PFU is a combined rate that covers both income tax and social contributions. However, if the interest income is added to other sources of income and taxed at progressive rates, social contributions are levied separately.
Rental income, or "Revenus Fonciers," arises from renting out real estate properties. In France, this income is subject to income tax after deducting allowable expenses. There are two main regimes for taxing rental income:
- Micro-foncier: Suitable for landlords with annual gross rental income below a certain threshold. Under this regime, a fixed percentage is automatically deducted as expenses, and the remaining amount is added to the taxpayer's total income.
- Régime réel: Used when the actual expenses exceed the fixed percentage offered under the micro-foncier regime or when the gross rental income exceeds the threshold. Under this regime, actual expenses such as interest on loans, property taxes, maintenance, and repairs are deductible.
Inbound assignee regime (Article 155 B)
The Inbound assignee regime, as stipulated in Article 155 B of the French Tax Code, offers tax incentives to foreign employees and executives temporarily assigned to work in France. Under this regime:
- A portion of the expatriate's compensation related to the assignment in France can be exempt from French income tax.
- Certain expatriation bonuses or allowances can also be exempted.
- Income from foreign sources, such as capital gains or dividends, might be exempt from French taxation for a specified period.
To benefit from this regime, the assignee must not have been a French tax resident for at least five years before starting their assignment in France. The regime can apply for a maximum of eight years.
Never had a pro tax help before?
Check out how it works!
Social Security in France
The French social security system, known as "Sécurité Sociale," is a comprehensive welfare system that provides a wide range of benefits to its residents.
It covers areas such as health care, family benefits, unemployment insurance, and retirement pensions. Funded primarily through contributions from employers and employees, the system ensures that individuals have access to essential services regardless of their employment status or income level.
- Health care: Residents in France are entitled to health care benefits, which cover a significant portion of medical expenses, including doctor visits, hospital stays, and prescription medications.
Individuals may also opt for supplementary private health insurance, known as "mutuelle," to cover costs not fully reimbursed by the state.
- Family benefits: The system provides various benefits for families, such as allowances for childbirth, child-rearing, and housing. These benefits aim to support families and ensure the well-being of children.
- Unemployment insurance: In the event of job loss, eligible individuals can receive unemployment benefits, which are calculated based on their previous salary and the duration of their employment.
French pension system
The French pension system is a pay-as-you-go system where current workers fund the pensions of current retirees. It is divided into three main pillars:
- Basic state pension (Régime de base): This is the mandatory pension scheme for all workers in France. The amount of pension received depends on the individual's earnings, the number of quarters contributed, and the age at which they retire.
The legal retirement age varies depending on the birth year, with reforms aiming to gradually increase it.
- Compulsory occupational pension (Régimes complémentaires): In addition to the basic state pension, employees and employers contribute to occupational pension schemes.
These schemes provide additional retirement benefits and are typically based on the individual's salary and years of service.
- Voluntary private pensions: These are optional pension schemes that individuals can choose to contribute to, either through personal pension plans or employer-sponsored schemes.
They offer a way to supplement the state and occupational pensions, especially for those who wish to maintain a certain standard of living in retirement.
Deductions and credits for expats in France
Personal employment expenses
Expatriates who are employed in France can deduct certain employment-related expenses from their taxable income. These include:
- Professional travel: Costs related to commuting between one's home and workplace can be deducted. This includes public transportation fees, fuel costs for personal vehicles, and other related expenses.
- Work attire: If specific clothing is required for one's profession and is not suitable for everyday wear (e.g., uniforms or protective gear), its cost can be deductible.
- Professional training: Expenses related to furthering one's professional skills, such as courses, seminars, or workshops, can be considered for deduction, provided they are directly related to the current profession.
It's essential to keep detailed records and receipts of these expenses, as the French tax authorities may request them for verification.
Several personal deductions are available to reduce the taxable income of expatriates in France:
- Alimony and child support: Payments made towards alimony or child support are deductible from the taxable income. This applies to legally mandated payments made to an ex-spouse or for the support of children.
However, voluntary payments or gifts are not considered for deduction. It's crucial to have official documentation or court orders specifying the amount and nature of these payments to claim this deduction.
- Social contributions: Certain social contributions, which are not reimbursed or compensated, can be deducted. This includes contributions towards health insurance, pension schemes, and other social welfare programs.
- Charitable donations: Contributions made to approved charitable organizations in France can be deducted. The amount of deduction may vary based on the nature of the organization and the total contribution made during the tax year.
In France, personal allowances play a significant role in reducing the taxable income of individuals. These allowances are predetermined amounts that can be deducted from one's gross income, ensuring that a portion of income remains non-taxable.
The allowances vary based on factors such as the taxpayer's age, marital status, number of dependents, and specific life situations like disability.
The French tax authorities periodically update these amounts, and it's essential to be aware of the current rates to claim them accurately.
Personal tax credits
Tax credits are amounts that can be directly deducted from the tax owed, rather than from taxable income. For expatriates and residents in France, several personal tax credits can be availed:
- Charitable contributions: Donations made to recognized charitable organizations in France can qualify for a tax credit. The credit is usually a percentage of the donated amount, encouraging individuals to contribute to charitable causes.
- Child care expenses: Parents who incur expenses for child care services, such as nurseries or babysitters for children under six, can claim a tax credit. This credit aims to support working parents and ensure the well-being of children.
- Schooling expenses: A tax credit is available for parents with children attending secondary school or higher education institutions in France. This credit recognizes the financial burden of education and aims to alleviate some of the associated costs.
- Domestic help expenses: Hiring domestic help, such as cleaners, gardeners, or caregivers, can qualify individuals for a tax credit. This initiative promotes employment while providing relief to those requiring assistance at home.
- Tax credit on expenses for energy transition: To promote sustainable living and environmental consciousness, the French government offers a tax credit for individuals who incur expenses related to energy transition.
This includes investments in energy-efficient home renovations, installations of renewable energy sources, and other eco-friendly home improvements.
Global limit of tax credits
In France, while numerous tax credits are available to taxpayers, there is a global limit imposed on certain tax advantages.
This means that the total amount of tax reductions and credits one can claim is capped at a specific threshold, ensuring that every taxpayer contributes a minimum amount to the state's revenue.
The global limit is set annually by the French tax authorities and varies based on the taxpayer's situation and the nature of the credits claimed.
If a taxpayer's total tax advantages exceed this limit, the excess amount will be added back to their tax liability.
Filing income tax returns in France
Filing an income tax return is an annual obligation for residents and certain non-residents with income sources in France. Here's a brief overview of the process:
- Declaration: Taxpayers must declare all their income sources, including wages, business income, rental income, and capital gains. The French tax authorities provide pre-filled tax forms, especially for salaried individuals, but it's the taxpayer's responsibility to verify and complete any missing information.
- Online filing: With the advancement of technology, France encourages online tax filing. The online portal is user-friendly, and secure, and provides instant calculations, making the process more efficient.
- Deadlines: The tax return filing deadlines vary based on the taxpayer's residence and the chosen filing method (paper or online). It's crucial to adhere to these deadlines to avoid penalties.
- Payment: Once the tax return is processed, taxpayers receive a notice indicating the amount of tax due. Payments can be made online, by direct debit, or at local tax offices.
- Tax refunds: If a taxpayer has overpaid their taxes, they will receive a refund. The refund is typically processed a few months after the tax return submission.
- Non-residents: Non-residents with French-sourced income, such as rental income from a property in France, are also required to file a tax return. The process is slightly different, and specific forms must be used.
Tax treaty between the US and France
The United States and France have a bilateral tax treaty in place, designed to prevent double taxation and fiscal evasion for individuals and businesses operating in both countries.
This treaty played a pivotal role for American expatriates living in France and French citizens residing in the US. Key highlights of the treaty include:
- Double taxation avoidance: The treaty ensures that income earned by a resident of one country but sourced from the other is not taxed twice. Tax credits or exemptions are provided to offset taxes paid in one country against the tax liability in the other.
- Withholding tax rates: The treaty sets reduced withholding tax rates on dividends, interest, and royalties. This is particularly beneficial for businesses and investors operating cross-border.
- Pensions and Social Security: Provisions are made for the taxation of pensions, annuities, and social security payments, ensuring that retirees are not unduly taxed on their income.
- Information exchange: The treaty facilitates the exchange of tax-related information between the US and France, promoting transparency and cooperation in tax matters.
- Residency: The treaty provides guidelines to determine the residency status of individuals and entities, which is crucial for tax purposes.
Most popular tax forms for US expats
For American expatriates, especially those residing in France, navigating the US tax system can be challenging. However, understanding the most commonly used tax forms can simplify the process:
- Form 1040: This is the standard US individual income tax return form. All US citizens, including those living abroad, must file this form if they meet the minimum income requirements.
- Form 2555: Known as the Foreign Earned Income Exclusion, this form allows US expats to exclude a certain amount of their foreign-earned income from US taxation.
- Form 1116: This form is used to claim the Foreign Tax Credit, which allows US expats to offset taxes paid in France against their US tax liability.
- Form 8938: The Statement of Specified Foreign Financial Assets requires US expats to report certain foreign financial assets if they exceed specific thresholds.
- FBAR (FinCEN Form 114): This form is not a tax form but is required for US expats who have foreign bank accounts with an aggregate value exceeding $10,000 at any point during the year.
- Form 8833: This form is used to claim treaty benefits and to disclose positions taken by the taxpayer that are contrary to the provisions of the US-France tax treaty.
When are France's taxes due?
For residents and non-residents with tax obligations in France, it's essential to be aware of the tax deadlines to ensure timely compliance and avoid potential penalties. The key dates for tax filing in France are as follows:
- Income tax returns: Typically, the deadline for paper tax returns is in late May, while online tax return deadlines are staggered and usually fall in late May to early June, depending on the department in which the taxpayer resides.
- Payment deadlines: Once the tax assessment notice is received, usually around August, taxpayers have until mid-September to make the payment. For those who opt for monthly installments, payments are spread out from January to October.
- Wealth tax (IFI): For those liable for the Tax on Real Estate Properties (IFI), the filing and payment deadlines align with the income tax deadlines.
- Value Added Tax (VAT): Businesses registered for VAT in France must typically file monthly or quarterly returns, depending on their turnover. Monthly returns are due by the 19th of the following month, while quarterly returns are due by the 19th of the month following the quarter-end.
These dates can vary slightly each year, and any changes or extensions announced by the French tax authorities should be monitored.
France tax forms for US expats
Some of the key tax forms that US expats might encounter include:
- Form 2042: This is the primary income tax return form for individuals. It covers various types of income, including wages, pensions, and rental income.
- Form 2047: Specifically designed for foreign income and tax credits, this form is crucial for US expats reporting income earned outside of France.
- Form 3916: This form is for declaring foreign bank accounts. Given the stringent reporting requirements, US expats with bank accounts outside of France must ensure they file this form.
- Form 2044: For those with rental income, especially from properties outside France, this form is used to declare such income.
- Form 2074: This form is used to declare capital gains from the sale of securities, shares, and other movable property.
- Form 2042-C: For those benefiting from tax credits, reductions, or specific regimes like the inbound assignee regime, this supplementary form is used.