If you relocate to France to live on an early retirement pension, you pay the notorious ‘social welfare levy’. Or do you?

Pick up any one of several standard texts on living in France and they will all tell you that, with the exception of those who hold an ‘E’ form, everyone is liable for the levy.

Whilst we bow to the infinite wisdom of these specialists, in practice it is not quite so clear-cut.

The social welfare levy is often referred to as the 'third income tax' in France. It is neither income tax per se, nor a social security contribution, but a general social charge levied on most incomes to make up for the shortfall from the two other systems of taxation.

The levy is made of of three different charges, which are known collectively as the prélèvements sociaux.

It is our understanding of the rules that early retirement pensions from the EU are ostensibly liable for the levy, at the rate of 7.1%, although those covered for health care on an E106 or E121 escape payment of the tax.

This is because, in order to be liable for the tax on your pension, you must be affiliated to an obligatory system of health insurance in France. As those on ‘E’ forms receive health insurance cover from their home country, they do not pay the levy.

On this basis, only those granted continued right to remain in the system (notably those with 5 years residence), will continue to be liable for the levy, which is an additional charge to the basic 8% health insurance contribution payable for affiliation to the French health service.

However, when we spoke to a senior French official about the liability of early retirement pensions we were advised that EU pensions were exempt from the charge. They explained this was because early retirees paid a health insurance contribution to the State health insurance scheme, the CMU, and not to an employment based scheme.

The response of the official surprised us, except for the fact that we asked the question in the first place because we are aware that there are many early retirees who do pay the levy on their pension, and all the specialist advice points in the same direction. The response also resonates with the technical guidance the French tax authority have provided to us on this issue.

Part of the explanation for the mixed picture may well be that there is an exemption (or reduction in the levy) for those in receipt of a low pension.

However, it may equally be that, because the rules are so complex, they are applied differently across the country! We have spoken to specialist French tax consultants PKF (Guernsey) who say that they regularly deal with claims for repayment of the social welfare levy, erroneously paid by expats.

Some of the confusion may well arise because many expats have their pension taxed in the UK. This grants them exemption from French income tax on their pension, and it seems it may well be a route to gaining exemption from the social welfare levy in France.

Expats whose pensions are taxed in the UK need to complete an additional tax form. As bizarre as it may seem, depending on the forms you complete, and the boxes in which you enter the information, could determine whether or not you will be charged the levy!!