Tax residency is more complex than people realise – it is not just about day counting. We often meet individuals who think they are resident in one country when in fact they meet the tax residency rules of another. Paying tax in the wrong country can produce a costly shock.
Recent concerns regarding offshore disclosures have forced many individuals to consider the certainty of their tax position. Whilst there is nothing at all wrong in holding assets in tax efficient ‘shelters’, it is vital that you clearly understand where your tax, if any, is actually payable. Many get this wrong, so this month I am going back to basics and looking at what makes you tax resident in France.

Tax residency is more complex than people realise – it is not just about day counting. We often meet individuals who think they are resident in one country when in fact they meet the tax residency rules of another. Paying tax in the wrong country can produce a costly shock. You could have to pay back taxes, interest and possibly penalties; try and claim back incorrectly paid tax and maybe face a tax investigation.

What makes you resident in France?

Under the Code General des Impôts, an individual is deemed to be a tax resident of France if at least one of the following four tests is fulfilled.

  1. France is your main residence or home – your foyer. This rule embraces the idea of permanence and stability. Your foyer is the place where your close family (spouse/cohabiting partner and minor children, but not parents or siblings) habitually live, or, if you are single with no children, where most of your personal life is centred. Your foyer can be in France even if you spend much of your time out of the country. This is the rule the French authorities rely on most.
  2. France is your principal place of abode – your lieu séjour principal. This usually means you spend more than 183 days in France in a calendar year, but beware, residency may also apply if you spend more days here than in any other single country. Days of arrival and departure count towards the cumulative total of days.
  3. Your principal activity is in France; for example your occupation is in France or your main income arises here.
  4. France is the country of your most substantial assets, your centre of economic interests – so if France is the place of your principal investments, or where your assets are administrated, or your business affairs are, or where a larger part of your income is drawn.
If you meet any of the criteria you are liable to pay French tax on your worldwide income, gains and wealth. It is your responsibility to make yourself known to the French tax authorities and fully declare all your income and wealth according to the rules. You want to be certain that you have your tax residency right, and then move on to implement effective and compliant tax planning strategies.

France takes a ‘split-year’ approach. In the year of arrival, only income received after you arrive is liable to French income tax. If you leave France the reverse is true – only income up to the date of departure will be taxable in France. Note however that French source income is always liable to tax in France, regardless of where you are resident.

For those who are leaving or arriving in France, you could avoid French tax by timing when you sell assets. However you also need to consider where you are tax resident at the time and what tax is due there. There could well be opportunities to save tax, with specialist cross border tax advice and careful planning.

What about UK tax residence?

British expatriates need to understand and follow the UK’s Statutory Residence Test as well as France’s domestic rules. If you spend time in both countries and/or retain ties with the UK you could be deemed resident in the UK for tax purposes, even though you do not realise it. The test is detailed and complex in some situations.

You are automatically not resident in the UK if you spend less than 46 days there in a tax year and were not resident in any of the previous three tax years, or, if you were resident in last three years, you spend under 16 days a year in UK. You are also not UK resident if you work overseas full time and meet the restrictions on how many days you spend in Britain.

You are definitely UK resident if you spend 183 days or more there in the current tax year; if your only or main home is in the UK, or you work full time there.

Otherwise, whether or not you are UK resident for tax purposes depends on how many ties you have with the UK and how many days you spend there – it operates on a sliding scale.

You can meet the domestic tax residency rules of both France and the UK in the same year. In this case the ‘tie-breaker’ rules in the UK/France double tax treaty come into operation and determine where you pay taxes. These look at where you have a permanent home, where your centre of vital interests (personal and economic interests) is and where you have a habitual abode. If residence still cannot be determined it comes down to nationality.

While you do not have a choice ¬– you either are or are not resident under the rules – you can be careful with amount of days you spend in each country, where you own assets/have ties etc, to make yourself resident in a particular country. But this is a very complex area so specialist advice is essential. Where you are better off being tax resident depends on your personal situation and also what tax planning arrangements you use.

Any questions? Ask our financial advisers for help.

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 is advised to seek personalised advice.