French Social taxes: The Big Bad Wolf

Once upon a time was a President who promised that personal taxation in France would become a lot more welcoming to foreign investors. Looking back over the past year, let’s numbers speak for themselves : if we consider an individual whose assets are equally divided between real estate and investment securities, the newly introduced 30% flat tax on investment income (12,8% for non-resident investors) and the limitation of the scope of wealth taxation to real estate assets has cut down global tax liability by a good 50%.

Yet, social taxes are still lurking in the background. Asian investors, beware! You will be liable to social taxes at a 17.2% rate on your French-sourced real estate income. Your rental income or capital gains derived from French real estate will be taxed accordingly (in case of direct ownership).

And yet, hopes were high in early 2015 when the European Court of Justice (ECJ) ruled that a foreign national (even if resident of France) should not be liable to French social taxes on capital income where he participates to a social security scheme in another EU Member State (or a State of the European Economic Area, or Switzerland) as two social security legislations could not overlap according to EU regulation. For example, a resident of the United Kingdom shall not be liable to social taxes on his French capital income as he participates to a social security scheme under UK law.

Accordingly, an enlarged EU resident who derives French-sourced capital income, for example, capital gain from the sale of a house located in France, will not be liable to social taxes where he participates to a social security scheme in another enlarged EU Member State.

Following this ruling by the ECJ and the thousands of claims it brought in its wake, some started dreaming of an extension of that solution to non-EU residents.

Unfortunately, non-EU residents, who participate to the social security scheme of a State outside the enlarged EU, will be liable to social taxes on his French-sourced capital income. The ECJ ruled as such in early 2018 as it considered that a non-EU resident could not claim the protection of the EU regulation as he had not made use of the freedom of movement within the enlarged EU.

As an example, a Singapore resident, who participates to a Singapore social security scheme, will be liable to social taxes on the rental income he derives from the flat he owns in Paris.

Foreign investors, also beware of the PUMa!

Persons who contemplate moving their tax residence in France may take into consideration the positive tax side. Yet, they should also consider some drawbacks. One of them is the new universal healthcare, funded by a specific 8% tax assessed on worldwide capital income and due by French tax residents who mainly live off that capital income. As this PUMa only targets French residents whose professional income is less than 3973€ a year, potential candidates for a move to France may consider starting a professional activity in France (or pay the 8% PUMa tax).

As it is applied to French residents only, foreign investors who decide to leave France, while keeping investment there, will not be liable to the PUMa.

Moral of the story: Taxes, especially attractive, low taxes, may hide other taxes. Always beware and rely on your tax adviser...

French Chamber Singapore, 27 June 2018