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Ensuring you are paying tax in right place

Regular readers of this column will know that I often talk about reviewing your tax planning for France, so that you can take advantage of the tax mitigation opportunities available here. However, the very first step, before you start re-organising your assets, is to make sure you understand the tax residence rules of both France and the UK (or wherever you have financial interests). You need to be certain which country you should be paying tax in, and on which assets.

This is even more important with today’s greater global tax transparency through the ‘Common Reporting Standard’.

With the next tranche of countries making their first ‘automatic exchange of information’ in September 2018, there are now 100 jurisdictions sharing information on taxpayers around the world.

Paying tax in the wrong country can prove costly, including back taxes, interest, potential fines and even a tax investigation. HM Revenue & Customs (HMRC) has just introduced tougher UK penalties for undeclared offshore income and gains. From October 1 – coinciding with the time HMRC receives its next wave of information from abroad – potential punishments include an unlimited fine and up to six months in prison.

Tax residency is more complex than people realise. It is not just about day counting; we often meet people who think they are resident in one country when they actually meet the tax residency rules of another. Ignorance is usually no defence, so make sure you know where you stand.

What makes you resident in France?

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

 

  1. France is your main residence – your foyer. This is the rule French authorities rely on most. Your foyer is defined as the place where your spouse/cohabiting partner and dependent children, but not parents or siblings – habitually live. For those who are single with no children, it is 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.
  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 may also apply if you spend more days here than in any other single country. 
  3. Your principal activity is in France – for example, your occupation is in France or your main income arises here.
  4. France is the ‘centre of your economic interests’ – where your most substantial assets are based (such as principal investments), where your assets are administrated or your business affairs are, or where you draw a larger part of your income.

 

If you meet any of the criteria, you are liable to pay French tax on your worldwide income, gains and wealth. Remember: it is your responsibility to make yourself known to French tax authorities and fully declare all your income and wealth.

 

The relevance of timing

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, only income up to the date of departure is taxable here. Note, however, that French-source income is always liable to taxation in France, regardless of residency. For those who are leaving or arriving, you could avoid French tax by timing when you sell assets, but you must consider where you are tax resident at the time and what tax is due there. Take specialist cross-border tax advice to establish tax-efficient opportunities.

 

What about UK tax residence?

If you spend time in both countries or retain ties with the UK, you could be deemed resident in the UK for tax purposes without realising it.

As well as France’s domestic rules, British expatriates should understand the UK’s ‘Statutory Residence Test’.

 

  1. Automatic overseas test: You are 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. However, if you were UK resident within the last three years, just 16 days back could trigger residency. Those who work overseas full-time and spend no more than 90 days in the UK per year will not be deemed UK resident.
  2. Automatic residence test: You are UK resident if you spend 183 days or more there in the current tax year, if your only / main home is there or you work full-time there.
  3. Sufficient ties test: Otherwise, whether or not you are UK resident for tax purposes depends on how many ties you have with the UK (family, work, accommodation) and how many days you spend there.

 

If you meet the domestic tax residency rules of both France and the UK in the same year, tie-breaker rules from the UK/France double tax treaty determine where you pay taxes.

These look at where you have a permanent home, where your personal and economic interests are and where you have a habitual abode. Where 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 – if you have flexibility, you can be careful with the number of days you spend in each country, and where you have assets and ties. If you want the freedom to stay in France in a post-Brexit world, for example, you may want to secure your residency here before the rules change in March 2019.

Residency is a complex area for anyone with cross-border interests. For the best results, take specialist, personalised advice. Once you have peace of mind that your tax obligations are in order, you should move on to implement effective and compliant tax planning strategies to protect and grow your wealth, wherever you are resident.

 

This article is by Bill Blevins of Blevins Franks financial advice group who also writes for the Sunday Times on overseas finance. He is co-author of the Blevins Franks Guide to Living in France (www.blevinsfranks.com).

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

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