The new income tax treaty between France and the UK, which came into effect in France in January 2010, includes many changes in the tax treatment of French expatriates in the UK and UK citizens investing in france, says Caroline Cohen
Challenging times for French expatriates in the UK
France and the UK differ regarding the scope of taxation of locally resident individuals. In the UK, UK resident but non UK domiciled individuals, such as French expatriates, are taxable on their foreign emoluments, and passive income and gains, only to the extent that such foreign income and gains are remitted to the UK. This is known as the rule of the "remittance basis".
Under the new treaty, it will become more difficult to take advantage of the remittance basis rule.
Under the previous tax treaty, some French employees who came to work in the UK but received part of their salary offshore for duties of employment in France were able to avoid taxation both in France and in the UK for the part of their salary corresponding to the days they spent in France for their professional activity.
Under the new treaty such individuals will eventually have to choose between being taxed in the UK when they remit this part of their salary to the UK (this part will be exempted in France under the provisions of the tax treaty) or being taxed in France if they do not remit their salary in the UK (and be exempted in the UK under the remittance basis rule). In practice, French expatriates in the UK will have to decide whether to be taxed in France on their activity performed in France (even if paid offshore) or in the UK by not claiming the remittance basis. Clearly a careful consideration will be required in each case.
Interest and capital gains
Regarding interest received in a French bank account by French expatriates, a choice will have also to be made between taxation in France or in the UK. As the interest income tax rate is substantially lower in France, it should be recommended to claim for the remittance basis and be taxed in France (rate of 18% compared to up to 50% in the UK from next tax year).
Similar issues arise in relation to capital gains tax and, in particular, the taxation of gains arising on the sale of shares of French companies by UK resident non-UK domiciled individuals. However, in France, non-residents are exempt from capital gains if they sell less than 25% of the shares of a French company. In this case, it is clear that it should be possible for a UK resident, non-UK domiciled individual to completely avoid tax if the sale proceeds are kept offshore.
Mixture of good and bad news
The new tax treaty is likely to prove to be a mixed blessing for taxpayers. It includes a series of good news such as a 5 years "wealth tax holiday" for UK nationals on their non French assets, and new tax treatment for partnerships. However it also triggers the taxation in France of capital gains realised by individuals taking up residence in France on the sale of their UK property, and the taxation in France of director fees from UK companies received by French residents. ■
Caroline Cohen, Solicitor, The French Law Practice
This article is for general information only and is not intended to provide legal advice
First published in INFO March/April 2010