French Tax for Gite owners and landlords
Feature Article – November 19, 2010
French Furnished Lettings: Finding your way through the different regimes and recent tax changes.
By Virginie Deflassieux – French tax senior manager at PKF (Guernsey) Limited
Holiday lets have always been a very popular activity among the British community either living in France or renting out their French holiday home. In accordance with the France-UK double tax treaty this French rental income is taxable in France even if received by a UK resident, paid in the UK, in sterling, by non French resident clients.
The specific tax regime applicable to this activity was substantially modified by the Loi de Finances 2008, the introduction of the auto-entrepreneur regime and the modification of the qualifying turnover thresholds for the Micro BIC regime. Below is a review of how the main changes will impact on furnished landlords (loueurs en meublé) and what options are now available.
Professional Landlords Versus Non-Professional
The professional status offers the following attractions:
- Professional landlords may set their rental losses and pre-letting charges against the rest of their taxable income. The latter are spread at a rate of a third over the first three years of activity.
- The capital gains tax exemption on the sale of the rented property is now restricted to professional furnished rental activities with a turnover below €90,000 (instead of €250,000 formerly). This change does not affect lettings carried out as one of the following: gîtes ruraux, meublés de tourisme, or chambres d’hôtes classed as part of the para-hôtellerie sector. These should continue to benefit from the higher €250,000 turnover limit for capital gains tax exemption.
- Subject to strict conditions, one may claim wealth tax business asset exemption in respect of dwellings rented out on a furnished basis as part of a professional landlord activity.
There is now a greater differentiation between the professional and non-professional landlord status. The conditions to qualify for the professional status have been noticeably tightened to include all of the following criteria:
- A registration as loueurs en meublé professionnels with the registre du commerce et des sociétés, and
- An annual turnover in excess of €23,000 (total per household), and
- A turnover that exceeds the household’s other total net earnings (including pensions and annuities).
Furnished letting activities which do not fulfil the above requirements are automatically treated as non-professional. Taxpayers in this situation and assessed under a régime réel (see below) can nevertheless set their losses against the same type of income for up to ten years.
Choices of Tax Regimes: Micro-BIC, Régime Réel or Auto-Entrepreneur?
Traditionally, furnished landlords (professional or non professional) with an annual turnover below €80,300 could chose between the Micro BIC or the régime réel. The Micro BIC offers a set deduction of 71% of the gross turnover as opposed to the real regime which requires itemised deduction of expenditure. Subject to specific turnover limits, these taxpayers may now opt for the Auto-entrepreneur regime which is a system of taxation at source.
A two-tier Micro BIC regime
With the exception of recognised and registered hotel-like activities (para-hôtellerie) such as gîtes ruraux, meublés de tourisme, or chambres d’hôtes, furnished lettings activities are now subject to specific Micro BIC regime limit and set deduction which are not as attractive as previously. The qualifying annual turnover limit is €32,600 instead of €81,500 and the allowance for expenditure was reduced from 71% to 50%.
As a result, Préfectures and Mairies have been swamped with queries from owners wanting to register their properties as résidences meublées de tourisme in an attempt to remain under the more generous Micro BIC treatment. This has caused havoc and has lead to a complete review of the meublé de tourisme registration process. A dedicated site was set up and property visits and evaluation have been relegated to the private sector. Below is a summary of the new registration process, bearing in mind that as with all things new there may be a period of adjustment leading to possible further changes:
- A visit to the www.classement.Atout-france.fr website to register online or to print out the required application form known as Demande de classement d’un logement meublé dans la catégorie Meublé de Tourisme.
- Appointment of an accredited surveyor listed on the website to visit and evaluate the property (at a cost). The surveyor’s report, valid for three months, should be issued within a fortnight. The report should also be available on line.
- The report is then forwarded together with the completed application form to the local Préfecture (the list of préfectures is available on the www.classement.Atout-france.fr Website).
- The agreement is normally issued within one month. The owner must then organise the sign display of the awarded star rating in his property. The name and rating of the establishment is also published on the www.classement.Atout-france.fr website.
Activities which generate an annual turnover in excess of the Micro BIC limit are automatically assessed under a régime réel. Those who normally fall under the Micro regime may opt for the real regime provided they notify the tax office before 1 February for the current tax year (for instance before 01/02/11 to apply to 2011 income). In the absence of any notification, the regimes that apply by default are determined by reference to the turnover. For instance, if the turnover is below €32,100 for a non-hotel like furnished letting activity, the default regime (in the absence of any option) is the Micro-BIC with the 50% deduction. Micro businesses must still be in a position to provide the administration with details of income and expenditure in the form of chronological entries in a livre-journal (basic bookkeeping).
French residents eligible to a Micro regime may elect to pay their income tax and all social charges at source under the Auto-entrepreneur regime. The written election must be sent before 31 December to apply in the following tax year, or within three months of the start of any new activity. As the Auto-entrepreneur regime is relatively new, the authorities are still experiencing difficulties with the whole process.
The levies are handled by the local URSSAF office. These comprise the micro fiscal (effectively the tax charge) and the micro-social. The latter covers social security and the extra social contributions known as CSG, CRDS and PS. The liability thus paid is final. Taxpayers still need to report the income taxed at source on their return as it is included in the barème computations, to set the overall rate of tax applicable to their other sources of income.
In summary, conditions to become an Auto-entrepreneur and pay income tax at source are as follows:
a) The annual turnover must be within the Micro BIC limits and a second limit fixed by reference to the household’s total taxable income (revenu fiscal de référence). This is determined using the barème’s 3rd band (i.e. €26,420 – est. 2010). It applies per person so the total income of a married couple must not exceed €52,840 in 2009 for the taxation at source to apply in respect of 2010 income. This limit is increased by €13,210 (half of the 3rd band’s limit) per extra half family share of the household.
b) The taxpayer must register for the micro-social, i.e. payment at source of social charges.
c) In the absence of any income for 36 months or 12 quarters consecutively the Auto-entrepreneur registration is forfeited.
The 2010 micro-fiscal (tax) and micro-social rates applicable on the turnover are as follows:
- For trading activities and hotel-like rentals: 1% for tax and 12% for social charges.
- For services and general furnished lettings: 1.7% for tax and 21.3% for social charges.
- For non-commercial profits: 2.2% for tax and 18.3% for social charges. This applies to Professional activities (professions libérales) subject to CIPAV (Caisse Interprofessionnelle de Prévoyance et d’Assurance Vieillesse) contributions.
Further thoughts on the new regime ….
Many non-professional resident landlords were not necessarily registered for mainstream French social security. If they opt for the Auto-entrepreneur these earnings would automatically be brought into the scope of the micro-social charges which include the social security levies. It is not yet fully known how this affects taxpayers who already have existing health cover (through another activity, Couverture Maladie Universelle or cover under reciprocal agreement such as form E121, for instance).
The Auto-entrepreneur tax at source triggers the loss of the deductible portion of CSG (5.8%) on the following year’s overall taxable income.
Non-resident taxpayers are not liable to French social charges. As a result, the taxation at source option will not be available to them as they would not be able to register for the collection at source of any social levy. The net taxable income is subject to a minimum income tax charge of 20% when it is received by non residents.
In the first year of application, Auto-entrepreneurs will effectively be paying the tax in respect of their previous year’s earnings and current earnings. For instance, if the taxation at source applies to 2011 income, the tax payments will take place throughout 2011, as well as the liability due in respect of 2010 income.
The Taxe Professionnelle (local business tax) was also reformed at the same time. It was replaced by the Contribution Economique Territoriale or CET, which is in fact made up of two charges: A Cotisation Locale d’Activité (CLA) calculated on the cadastral rental values, and a Cotisation Complémentaire (CC) based on added value. Regular seasonal lettings should attract the CET but no taxe d’habitation. If the property is rented out all year round, the tenant should pay the taxe d’habitation and the landlord pays the CET. Occasional lettings of a second home may attract the CET but this is at the discretion of the local council and may vary from one tax year to another. If applicable, the property owner should normally claim for an exemption from taxe d’habitation.
Registration of furnished lettings whether carried out on a professional or non-professional basis is now more scrutinised and the recent changes have rendered this process necessary. It is done through the filing of form P0 with the local tax registry office.
Unfortunately, the legislation changes which have stretched across several areas of French taxation have no doubt complicated the decision process when it comes to choosing a suitable option to conduct furnished lettings. Comparing the final tax bill or even eligibility for each option has become increasingly difficult.
For further information or a review of your French tax affairs, please contact: Virginie Deflassieux or Catherine Le Pelley at firstname.lastname@example.org
Or visit www.pkfguernsey.com. A complete French tax guide “Taxation in France, a Foreign Perspective” is available on this website.
Disclaimer: The information contained in this article is offered as a basis for further consideration only and is not to be acted upon without independent professional advice based on the actual circumstances of the taxpayer. Neither the author or PKF (Guernsey) Limited can accept any responsibility for any loss occasioned to any person no matter howsoever caused or arising as a result of or in consequence of action taken or refrained from in reliance to the contents of this article.