There is living somewhere and then there is your fiscal residence, ie. where you pay your tax.
The difference is always important. However, it has become a frequent question for British nationals looking to be sure that they are “established in France” before the end of the year.
When explaining the difference between a residence and your fiscal residency, an example is helpful. You can have two homes, in different countries, and live in each for six months of the year.
If you live in them, then you are residing in both. You are, however, probably fiscally resident in only one.
This is the country where you are assessed on your worldwide income (I say assessed, as you may not actually pay any tax).
When it comes to residency between two countries with a clear tax treaty, such as the UK and France, you are either in one or the other.
It’s a bit like driving a car – you must get out of one to get in the other. It’s not possible to drive two at the same time.
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This is where the arguing bit comes in. “I pay tax in the UK and France, so I am resident in both.” If you are fiscally resident in France, you are assessed on your worldwide income here.
You may, however, have income, which is also assessed in the UK. That is to do with the tax treaty between France and the UK.
Civil service and property rental income, as examples, are always assessed in the source country.
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Income may be exempt in France, with a credit equal to the French tax. It has been assessed in France (although maybe not taxed). This is because the ‘car’ you are driving is France.
I am often asked: “Where is it best to pay taxes … France or the UK?” To be clear, there is no choice. It depends where you fall within the rules.
But how do you know? What are the rules?
“That’s easy, HMRC rules say it’s over six months!” So I heard a British person in a French tax office explaining to a French tax inspector by citing how tax works according to the UK rules.
It is not that uncommon, British people using UK tax law to define their residency of a country that has nothing whatsoever to do with the UK.
Residency is a series of tests:
1: Where is your main home? Article 4B1a – CGI
This is supported by article 3a of the UK/France double tax treaty. If you have one “home”, this is easy. If the only “residence” available to you is in France, you are French resident.
For any property to be seen as your “residence”, it must be available for your use (so not rented out) and either belong to you or be rented to you with a formal contract.
Proof often requested is utility bills in your name.
This means that the number of days can be inconsequential to your residency, which is a shock to those clinging to UK rules.
This was shown in the case of a businessman who had never been to France but whose children lived and went to school here, and his wife lived here too.
France was viewed as his principal residence. The “main home” test overrides the number of days test.
For those who own a “residence” in each country, we move on to the next most important test.
2: Place of your habitual abode
This is where French law and the tax treaty stop overlapping and the tax treaty takes over.
Article 3b states that if there is no principal residence, or “home”, then it is down to where you have your habitual abode. This does not count the number of days in a country, but merely where you spend most of your time.
If you only spend your time between the UK and France and nowhere else, then it can be simplified as where you spend more than 183 days.
However, it is this oversimplification that has led to many problems.
If you spend time in a third country, it is possible to be in France for, say, five months and still be considered resident, as it is where you are spending most of your time.
“I get six months free here before I have to declare my residency!” It is important to note that it is not after 183 days that you become resident; it is from your day of arrival in France. So it is from the day of arrival that you are assessable to tax in France. There is no ‘free’ period. If, unusually, you do not fit these two tests, then there are more:
3: Where do you have a professional activity?
Article 4B1b -CGI: If you work or have a business here, this can make you a French resident.
If it is ancillary to your main profession and this is in the UK, for example, it is not necessarily the case. However, if it is your only activity, you will generally be deemed as resident where you work, if the other tests have not proven clear.
But what if you do not work?
Where is your centre of economic or “vital” interest? Article 4B1c -CGI: This is supported by article 3b of the UK/France double tax treaty. Ultimately, this is where you run your financial life from.
For example, it may be where your income is paid from, where your business interests are and where you manage your assets from. It is rarely used, so the next test is:
4: Country of which you are a national
Article 3c states that if residency position remains unclear, your residency will be decided by the country of which you are a national. I have never seen it get to this, let alone the next one:
5: Mutual agreement: Article 3d states that if you are a national of both France and the UK, and none of the other tests make your residency status clear, it then goes to deadlock, where the respective fiscal authorities must decide between them.
For most people, the first two tests decide. It rarely gets more complicated than that, so hopefully now you are confident of your residency and, if British, your right to remain here after Brexit.
Though I would say much of that is a red herring, but that is an article for another time!
This column was written by Robert Kent of Kentingtons financial advisers. Seewww.kentingtons.com
