Covid, Brexit and French Tax Residence Issues: Resident permit applications and possible impact on tax residence status.
Reporting of Foreign Financial Holdings: What is at stake?
Covid19, Cartes de Séjour and French Tax Residence
Many second homeowners are finally planning a trip back to France for the first time in nearly two years. Covid has added tremendous anguish and uncertainty on top of a situation which was already going to change British citizens’ relationship with France forever: BREXIT.
Brexit no longer seems top of the list of considerations when getting bags packed, cars serviced and ensuring that adequate European travel insurance is obtained. The focus is now very much on obtaining vaccination certificates, booking PCRs or lateral flow tests for the whole family, buying the regulatory masks and setting up online Covid travel tracker accounts ahead of any travelling to avoid being refused entry into France.
With all these added considerations it is very easy to forget that British citizens are no longer able to freely return to the UK with the car boot full of favourite French foods and goods. Furthermore, the length of stays in France and movements in and out of Europe is now restricted and monitored, with passports stamped on arrival at the borders and again when heading back home.
Non-European passport holders are only allowed to spend time in the Schengen area for up to ninety days in any six-month period. A long-stay visa is required in order to remain in France for longer than three months. With this in mind, some second homeowners may be tempted to apply for the easily obtainable “carte de séjour”, allowing longer stays on French soil.
BE AWARE…there are several types of resident permits or cards available, depending on an individual’s personal circumstances, i.e. student, spouse of a French national, employee seconded in France...etc. The decision to apply for a carte de séjour is not to be taken lightly, since applications for French residence permits may lead to French tax residence issues. A long-term permit may trigger an exposure to the French tax system on a worldwide basis – subject to any relevant double tax treaty provisions. Indeed, the cardholder may be subjected to French tax as a resident of France or become dual resident with UK/French tax exposure. It is important to note that, unlike the UK, there is no concept of domicile in France and this may have a bearing on estate planning.
Taking up residence in France usually requires tax planning. It is also important to gain a proper understanding on how the French system may impact on different sources of income and certain assets. Below are some areas which usually need consideration:
- UK tax free investment holdings such as ISAs or premium bond winnings are fully taxable in France.
- Certain UK qualifying policies are not qualifying products in the French tax system. Non-French establishments may not be geared up to apply relevant French withholding taxes or to calculate taxable income or gains as per French tax rules. If written in trust with French resident parties, some foreign policies may need to be regularly reported to the French Tax Authorities (see below).
- Tax credit claims may be needed to avoid double taxation under the terms of any relevant double tax treaty. • Certain assets may become liable to wealth tax.
- French tax residents’ worldwide estates are exposed to French inheritance tax, subject to any relevant double estate duty treaties.
- Health cover regimes need to be considered.
- Trusts with French resident parties or French situs assets are reportable to the French Tax Authorities. Omissions carry a €20,000 penalty per missing report.
Automatic International Exchange of Information and Foreign Financial Holdings Reporting
The automatic international exchange of information is starting to translate into an increase in requests for further details by the departmental tax verification offices. Bank accounts and roll-up bonds wrappers or life assurance policies and, broadly speaking, “financial holdings” held abroad must be reported by French taxpayers on annex form 3916 and filed with their annual income tax return. It includes accounts or investments held jointly, or in respect of which a taxpayer is a signatory or holds a power of attorney. This obligation was extended to inactive or dormant accounts from 12 January 2019. The statutory limitation in respect of any unreported account with a balance over €50,000 is ten years instead of three years.
Omissions may attract a fine of €1,500 per undeclared account. The amount of this penalty can reach €10,000 if the account is held in a state or territory that has not concluded an administrative assistance agreement with France or €20,000 in the case of trusts. An 80% penalty may also apply in respect of any liability of any unreported income and gains.
Transfers of cash or investments outside or into France from abroad through unreported accounts or policies are deemed taxable income unless taxpayers can provide sufficient evidence to the contrary.
Where the reporting obligations have not been respected at least once in the previous ten-year period, the administration may instruct the taxpayer to provide full evidence of origin of funds within 60 days. In the absence of any adequate reply, the sums may be taxed at 60%, that is to say the rate of French inheritance tax applicable to legacies between unrelated individuals.
If the tax administration can demonstrate that the use of unreported foreign holdings is motivated by fraud, it can apply criminal proceedings for aggravated tax evasion which may lead to a prison sentence of up to seven years and a fine of €3,000,000.
Given the levels of fines, it is important to double check that all non-French holdings have been duly reported on annex 3916 and to spontaneously rectify any omissions.
Income Tax Assessments
The 2021 income tax assessment, based on 2020 income reported in May, should soon be available online. If the final tax liability is below the total paid to date under the “pay as you go” or any withholding tax deductions, a refund should be transferred directly into your account between 20 July and 6 August 2021. If you spot any issues with your final assessment, you may file a claim online to obtain a rectified “Avis d’Imposition”.
We hope you stay safe and well, and that you manage to enjoy these summer months despite the ongoing Covid19 and post-Brexit challenges.
For any advice on French tax residence issues, a review of your 2021 Avis d’Imposition or of your French tax affairs, please contact Virginie Deflassieux or Catherine Le Pelley.
This publication has been carefully prepared, but it has been written in general terms and should be seen as containing broad statements only. It cannot be relied upon to cover specific situations without obtaining professional advice.
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