New France/UK Double Tax Treaty
The new France/UK Double Tax Treaty End of important loopholes for individuals
The new income tax treaty between the France and the UK signed in London on 19 June 2008 has been finally ratified by France on 18 December 2009. Due to the discrepancy between the start dates of the respective tax years in France and in the UK, this new treaty has entered into force in France from 1st January 2010 and should come into effect in the UK from 6 April 2010. There will be a short period of time during which the old treaty will apply in the UK and the new treaty will apply in France.
This treaty replaces the old tax treaty of 22 May 1968.
The new treaty is largely consistent with the OECD model income tax treaty, but there are significant changes to the treatment of companies and individuals compared to the current treaty. This article will focus on the main changes for individuals.
Limitation of the remittance basis rule: challenging times for French expatriates in the UK
France and the UK differ regarding the scope of taxation of locally resident individuals. In France, like in most countries, a resident individual is taxable on his worldwide income. In the UK, the extent of an individual’s liability to UK tax depends not only whether the individual is resident in the UK, but also on whether the individual is “domiciled” in the UK. “Domicile” is not a tax concept and is different from the commonly accepted concept of residence. To simplify, a person is considered as domiciled in the UK to the extent that such person considers the UK as “his/her country” (i.e. he/she intends to live in the UK permanently or indefinitely). This is usually not the case for French expatriates in the UK. UK resident but non UK domiciled individuals are taxable on their foreign emoluments, and passive income and gains, only to the extent that such foreign income and gains are remitted to the UK. This is known as the rule of the “remittance basis”.
Under article 29 of the new treaty, a UK resident individual who receives income (other than dividend) or gains in France will benefit from tax treaty relief only if the income or gains are taxed in the UK i.e. if he does not use the remittance basis rule.
Professional activity
Under the previous treaty of 1968, French employees who came to work in the UK (and became not ordinarily residents) but received part of their salary offshore for duties of employment in France, were exempted under certain conditions from income tax both in France and in the UK on that portion of their salary. Indeed they were exempted from French income tax by virtue of article 15(2) if they spent less than 183 days in France, they did not have a French employer, and their remuneration was not borne by a permanent establishment of their employer in France. This part of their salary may also have been exempted from UK income tax if they did not remit it to the UK. This means that French employees expatriated in the UK were able to avoid taxation both in France and in the UK for the part of their salary corresponding to their days they spent in France for their professional activity.
The provisions of article 29 under the new treaty mean that such individuals will eventually have to choose between being taxed in the UK when they remit this part of their salary to the UK (this part will be exempted in France under the provisions of the tax treaty) or being taxed in France if they do not remit their salary in the UK (with the consequence that they are exempt from tax on these monies in the UK under the remittance basis rule). In practice, French expatriates in the UK will have to decide whether to be taxed in France on their activity performed in France (even if paid offshore) or in the UK by not claiming the remittance basis. Clearly a careful consideration will be required in each case. It should be remembered that from 6 April 2008 onwards most non-UK domiciled individuals need to make a claim for the remittance basis to apply to them.
Interest and capital gains
Regarding interest received in a French bank account by French expatriates, a choice will have also to be made between taxation in France or in the UK. As the interest income tax rate is substantially lower in France, it should be recommended to claim for the remittance basis and be taxed in France (rate of 18% compared to up to 50% in the UK from next tax year).
Similar issues arise in relation to capital gains tax and, in particular, the taxation of gains arising on the sale of shares of French companies by UK resident non-UK domiciled individuals. Under French domestic tax law, non-residents of France are exempt from capital gains if they sell less than 25% of the shares of a French company. In this case, it is clear that it should be possible for a UK resident, non-UK domiciled individual to completely avoid tax on any such gains if the sale proceeds are kept outside the UK.
If a French non-resident sells more than 25% of the shares of a French company, they will be taxed in France at the rate of 18%; the same rate that now applies in the UK (subject to the application of entrepreneur's relief). In this case, non-UK domiciled individuals taxable on the remittance basis will need to consider whether or not to remit the funds and claim a credit under the tax treaty. Again, it must be remembered that from 6 April 2008 onwards most non-UK domiciled individuals will need to make a claim for the remittance basis to apply to them.
Director’s fees
As under the previous tax treaty, article 16 of the new treaty provides for director’s fees derived by a resident of a contracting state in his capacity as a member of the board of directors of a company that is resident of the other contracting state, to be taxed in that other state.
However, unfortunately, the new treaty avoids double taxation on directors’ fees taxed at source, in the case of French residents, via the credit for “the amount of paid tax in the UK” method i.e. an actual credit method. This means that a French resident being a director of a UK company will become taxable in France on the fees received with a tax credit equal to the tax paid in the UK in this respect. As the rate of taxation of director’s fees in the UK is relatively low, in practice the fees will be totally taxable in France. The previous treaty provided for the most favourable method i.e. exemption in France with progression method and was used as a tax planning tool for French resident director in multi national group.
“Wealth tax holiday”
Under French domestic tax law, French residents are subject to wealth tax on their worldwide assets whereas non-residents are subject to wealth tax only on their assets located in France. Non residents of France are subject to French wealth tax only if the net value of their French asset exceeds the threshold of 790,000 euros on the 1st January each year. Although French wealth tax is not generally within the scope of the new treaty, article 29(3) provides that UK nationals (not being nationals of France) coming to France are exempted from wealth tax for five years on their assets located outside of France. This exemption can apply again if the UK national ceases to be a resident of France for a period of at least three years, and then becomes a resident of France again.
Please note that the LME (Loi de Modernisation de l'Economie) law of 23 July 2008 has extended the scope of this exemption to French nationals returning to France after being absent for a fiveyear period.
French residents owning UK property; new taxation in France
Under the previous treaty an individual taking up residence in France (or returning to France) could avoid both UK and French capital gains tax on any gains realised on the sale of their UK property by delaying a sale until after they have ceased to be UK resident. In these circumstances, no UK tax was payable because the individual was non-UK resident at the time of the sale and no French tax was payable because the terms of the treaty provided that the gains were taxable only where the property is situated, i.e. the UK.
Under the new treaty, in these circumstances, any gains realised on the sale of the UK property will now be taxable in France.
This article is for general information only and is not intended to provide legal advice.
January 2010
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