French Tax Rules on Foreign Rental Losses
Thursday 07 March 2019
Are foreign rental deficits deductible against French income tax for those resident in France?
That was the question recently considered in a court in France, when a German couple resident in France appealed against a decision of their tax office not to grant a tax reduction on a rental property they owned in Germany.
The couple reported a deficit of €26,232 on the property, which they sought to set-off against their income tax liability in France between 2010 and 2012.
Under French tax law, a deficit incurred on a rental property is deductible against other revenue, provided the taxpayer has opted for the rental income to be taxed using the system of régime réel.
That is to say, they have elected to be taxed on the basis of standard profit and loss accounting practice, and not on the basis of a fixed cost allowance against rental income.
Either method is available for both furnished or unfurnished lettings, although slightly different rules apply. In this case, the property was let on an unfurnished basis.
Under the terms of the tax treaty between France and Germany, “profits and other positive income arising in the Federal Republic …. shall also be taxable in France when they accrue to a resident of France. German tax is not deductible for the calculation of taxable income in France. However, the beneficiary is entitled to a tax credit against the French tax on the basis of which this income is included".
Nothing in the treaty excludes the inclusion of German source deficits in taxable income in France. The court considered that if the tax authority was entitled to take "profits and other positive income" into account in the taxable base, then by extension they could not exclude losses.
The couple reported a deficit of €26,232 on the property, which they sought to set-off against their income tax liability in France between 2010 and 2012.
Under French tax law, a deficit incurred on a rental property is deductible against other revenue, provided the taxpayer has opted for the rental income to be taxed using the system of régime réel.
That is to say, they have elected to be taxed on the basis of standard profit and loss accounting practice, and not on the basis of a fixed cost allowance against rental income.
Either method is available for both furnished or unfurnished lettings, although slightly different rules apply. In this case, the property was let on an unfurnished basis.
Where a deficit occurs on the rental property then under the system of régime reel the deficit on an unfurnished property can be deducted from your taxable income in the same year up to €10,700. The eventual surplus can be carried forward on your taxable rental income for the next 10 years, although particular rules apply.
Under the terms of the tax treaty between France and Germany, “profits and other positive income arising in the Federal Republic …. shall also be taxable in France when they accrue to a resident of France. German tax is not deductible for the calculation of taxable income in France. However, the beneficiary is entitled to a tax credit against the French tax on the basis of which this income is included".
Nothing in the treaty excludes the inclusion of German source deficits in taxable income in France. The court considered that if the tax authority was entitled to take "profits and other positive income" into account in the taxable base, then by extension they could not exclude losses.
Accordingly, the court ruled that “Pursuant to these provisions, a taxpayer whose tax domicile is in France may deduct from his total income used as a basis for income tax the property losses recorded for a year, under the conditions set out in these provisions, even if these losses are from a foreign source....”
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