A new double taxation treaty between France and the UK was signed on 19 June 2008, containing both good and bad news, writes Virginie Deflassieux of French Tax Advice and Compliance Services, PKF (Guernsey) Limited.

This treaty will need to be ratified to enter into force. No date for this has been published yet, but the revived project may imply a speeding up in the process. Below is a summary of the main changes which will affect British citizens living in France.

Scope of the Treaty

The Contribution Sociale Généralisée and Contribution au Remboursement de la Dette Sociale as well as the additional taxes to French corporation tax are clearly included in the scope of the agreement. The term “resident of a contracting state” where that State is France, now expressly includes partnerships or other groups of persons which are not liable to French corporation tax and have their seat of effective management in France.

Rental Income

The article dealing with this type of income now specifically includes shares or other rights in a company or other legal entities (partnerships, trusts etc), which give an entitlement to enjoy immovable property situated in a contracting state. The latter is allowed to tax such income under the terms of the DTT, subject to the terms of the specific articles dealing with business profits and independent personal services.

The articles concerning the payment of dividends, interest or royalties and other income now include a general clause of nullity against any abusive use of the rules they establish, i.e. if it was the main purposes or one of the main purposes of any person concerned with the creation or assignment of the shares or other rights/ ,debt-claim /right or property in respect of which the dividend, interest or royalties is paid to take advantage of the Article by means of this creation or assignment.

Capital Gains on Sale of Real Estate

If the underlying assets of trusts and partnerships consist principally of immovable property, the gain arising from the disposal of any interest in such entities may be taxed in the country in which the real estate is situated.

Capital Gains Tax realised on UK properties by a Resident of France

The current treaty contains a loophole which leads to the double exemption of any gains arising on the sale of a UK property in the hands of individuals with a non-UK resident and not ordinarily resident status provided that the taxpayer does not move back to the UK within 5 years of leaving.

This loophole will cease under the new treaty through a clause, which states that in the case of France, France may tax the gain. Any double taxation will be eliminated by a tax credit equal to the amount of tax paid in the UK on that gain. As there is no UK liability in this context, there will be no tax credit against the French tax liability.

This means that from the date the new treaty enters into force, any gain realised on the sale of a UK property by a resident of France will be assessed and taxed according to the French capital gains tax rules.

Wealth tax

Residents of France for tax purposes are exposed to French wealth tax on the net value of their worldwide assets, including the value of any real estate or rights in real estate outside France. The new agreement would exclude non-French assets from the wealth tax computation for five years following the permanent move to France. This would only concern UK nationals who are not also French nationals.

If the taxpayers leave France and provided they remain outside France for at least three years, the five-year exemption applicable to non-French assets would apply once more. The temporary exemption will only benefit individuals who move to France after the treaty enters into force.

View the Treaty.