Avoiding Double Taxation In France Under The New Treaty

We have had several of our French resident clients contacting us recently to say that their local tax inspector has written to them telling them that the double tax treaty between the

We have had several of our French resident clients contacting us recently to say that their local tax inspector has written to them telling them that the double tax treaty between the UK and France changed as of 1st January 2010. This is correct, the new treaty came into force for French purposes on that date.

What they are also saying, however, is that one aspect of the treaty change is that instead of being given a credit for the French tax due on certain types of income (known as the taux effectif), that there is instead a credit for any UK tax paid on this income.

In some cases this is true. However for UK rental income and Government Service pension income (most fire brigade pensions, police, armed forces, Local Authority and Civil Service pensions), the position has not changed, and double taxation is avoided by application of the taux effectif in France.

Under this method, the income is taxed in the UK and France takes this income (calculated under French rules) into account when calculating your tax liability. A credit is then given of the French tax due on that income.

Certain other income is taxed in both the UK and France in the hands of French residents, but a credit is given of the UK for the UK tax paid. This would include tax on dividends, for example. In this case, where the income falls within the UK basic rate band (up to the first ?35,000 of taxable income), the 10% tax credit treated as being attached to the dividend satisfies the UK liability on this income, and in France can be offset against income tax and/or social charges on the same income.

What does this mean for you?

Well, generally the taux effectif gives a better result and less tax is payable than if you were to receive a credit for the UK tax (although not always). For example, if your sole UK source income is UK rental income, but because of the UK personal allowance no UK tax is due, if a credit was given of the UK tax on the income, the credit would be nil. However, if this totals say 20% of your total income, a credit of 20% of the French tax is given. So you would have less tax to pay overall, as the income is not directly taxable in France (because of the French tax credit), but this does have the effect of increasing the effective rate of tax at which your other income is taxed.

However, following on from that, French tax now includes social charges as a tax under the new UK/France double tax treaty. Under the taux effectif method of tax relief, you would also receive a credit for the social charges payable on such income. If you only receive a credit for the UK tax, whilst this can be set against the social charges, you do not receive a full credit for both the French tax and social charges. Therefore, you may well end up paying more tax in combined tax and social charges than you would if you were to be credited with these.

So, if you receive such a letter, and you have UK rental income or Government Service pension income, point the French tax inspector to Article 24(3)(a)(ii) to make sure that the taux effectif is applied to such income.

The tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; an individual must take personalised advice.