Why does France assess my ‘tax-free’ foreign pension?
UK government pensions are not taxed in France but still affect your overall tax assessment under the UK-France double tax treaty
Connexion has reported on how the French central tax authorities have confirmed that UK government (public sector) pensions are not taxable in France. Yet, the French use a tax credit system for this income but then assess all of my income, which results in me paying more tax on my ordinary UK state pension than I otherwise would if this alone was assessed. Is this a mistake on their part?
No, it is not a mistake. It stems from article 24 of the UK-France double tax treaty, which looks at how France deals with incomes, such as this, that are only taxable in the other country. As a matter of interest, many forms of US income are treated similarly under the France-US treaty, including all US pensions.
The treaty confirms that in the case of UK government pensions of Britons in France, France is allowed to ‘take [it] into account for the computation of the French tax’ and then a tax credit is awarded equal to the amount of French tax that results.
In the case, for example, that 50% of the overall income is ‘tax credit income’, then the overall income is assessed for tax and then 50% of the tax is cancelled with a credit.
This can, however, mean that tax on the other income has higher bands applied than if the ‘tax credit’ income was not declared at all.
Adding to the confusion is the fact that this income is declared in the 2047 form, section 6, called Revenus imposables ouvrant droit à un crédit d’impôt égal à l’impôt français; it seems that in this case the French authorities are using ‘imposable’ in a broad sense, meaning they are able to take it into account in their calculation, not that they are entitled to actually tax it.
It is in fact rare that foreign incomes of French residents are totally exempt from being declared and taken into account (as is the case, for example, for income from a French Livret A account).
Other than the system described above, depending on treaties and income types, some kinds must be declared but a credit is given equal to the amount of any foreign tax actually paid on the income, and other kinds are deemed ‘exempt’ but are still taken into account for the taux effectif.
The latter means that an overall average income tax rate for all of your income, including this income, is worked out using the usual bands. This rate is then applied to total income minus the exempt income. Ultimately the effect in terms of tax paid is generally the same as with the tax credit system.