French property : Furnished rental business in France & Taxation on rental income
In referring to “Furnished Rental business” we are considering various businesses such as cattered chalets, bed and breakfasts, gites, hotels…
We will consider the rules of taxation before considering any option or strategy to structure your investment and optimize the taxation of your rental income.
Generally speaking and between most countries, a rental income is liable to tax in the country where the property is situated.
Non residents are therefore taxed on their French-sourced income.
I. Tax regime – net income
Rental business is a business activity and is categorised from a tax point of view as “Bénéfices Industriels et Commerciaux” (B.I.C) – business profits – heading of income tax (but not as corporate income).
The “BIC” tax regime includes mainly 2 regimes:
A- The regime of “Micro BIC”
This is a simplified way of calculating income tax.
If the gross furnished rental income is less than €70,000 per annum, a flat 71% can be deducted to cover all expenses and claimable deductions (which simplifies book-keeping) and the balance (i.e., 29%) will be taxed at the prevailing rate.
The “Micro BIC” regime is not applicable for companies. This regime is simple but does not enable the owner to optimise the taxation. Therefore, even if the income is below 70,000.00 €, it is possible to opt for the “Régime réel“.
In any event if the income is above €70,000.00 it is not possible to use the “Micro BIC” regime and the alternative is:
B – The “Régime Réel”
Under 70,000.00 of income, an option must be made. The option for this regime is for 2 years and has to be made before February of the 1st year. The application must be done in writing to the” Recette des Impôts” (see contact details below).
The advantage of this regime is to optimise the taxation and reduce up to almost 0 the taxable profits. This regime is advisable if you have more than 71% expenses and / or a debit situation (more expenses than income) see below.
This regime requires a lot of paperwork and requires good bookkeeping as if one were running a commercial company, it is therefore important to work with a reliable accountant in France.
C- Corporate taxation
Corporate tax applies automatically to sociétés anonymes, sociétés par action simplifiées, sociétés a responsabilité limitée, sociétés en commandite par actions, and most of the companies. Corporation tax may also apply to other bodies, such as sociétés civiles, and even to sociétés de personnes (partnerships), according to the nature of their business.
The corporate tax rate is currently 28%. Income-generating expenses are deductible when calculating taxable income.
Unfurnished lettings are taxed under income tax as “Revenus fonciers” (RF) – real property income – In arriving at net rental income, deductions can include repairs, maintenance and improvements (excluding construction), local taxes, employee costs, mortgage interest expenses, management fees and insurance costs. If revenues are less than €15,000, a 30% fixed deduction is applied.
Tax losses can offset every year against all personal income up to €10,700. Note that if interest on a loan to finance the purchase is claimed as a tax-loss, that can only be deducted over ten years.
For rentals (furnished or unfurnished), the net income received by a non-resident is generally subject (when a double tax treaty is in force) to a minimum income tax rate of 20 % (this rate applies to furnished but also unfurnished rentals), unless the taxpayer can prove that, if he had been resident in France, his effective rates of taxation (on his worldwide income) would have been lower than 20% (which is unlikely).
From 1st Jan 2020, non-residents non EU residents will also be liable for social contributions.
III. Payment of income tax
Non-residents must file the non-resident´s tax return between late April and late June; the due date depends on the country of residence.
Centre des impôts des non-résidents
Address: 14, rue du Centre TSA 10010 – 93465 NOISY LE GRAND Cedex.
In addition, non-residents will need to declare the income to the tax authority in their own home country.
France has double taxation agreements with many countries, so in most cases non-residents are unlikely to face being taxed twice on the same income. However when they are residing in a country known as « tax heaven » it is important to discuss the matter with a specialist.
UK residents benefit from a double taxation treaty, which grants partial relief against liability to tax in the UK. This means that a UK tax resident need to declare the rental income to both the French and UK tax authorities.
Where his UK tax is greater than the tax payable in France, the difference is paid in the UK. However, if the UK tax is less, there is no repayment of the French tax in the UK.
OPTION & STRUCTURE
I. Have more deductible expenses
1. Choose the “regime reel”
In order to optimize your taxation it is important to make an option for “Regime réel”. Under the “regime réel“, any expenses relating to the property can be deducted for example:
- purchasing costs,
- land tax,
- management agency’s fees,
- maintaining, refurbishing and repairing costs,
- depreciation of the property
- interest on a loan
The main advantage of the “regime réel” is to deduct the depreciation of the property. As tax is liable on profit only, because of depreciation, the amount of profit will be limited in any case.
In practice, the value of the building (not the land which cannot depreciate) is usually valued at 80% of the total value and depreciates over 20-30 years.
Every year you can deduct 2 to 5 percent of the value of the building as depreciation
“Limits on depreciation”
Article 39 C of the French Tax Code limits the deduction for depreciation. The yearly depreciation payment on rented property is limited to the difference between the acquired rental payments and all other charges related to the rented property. In other words, not only can the depreciation not contribute to creating a deficit, but no depreciation will be authorised if all the other charges exceed the rental payments.
However, losing this deduction is only temporary. The unused fraction of depreciation could be deducted at a later time on top of the normal yearly payment. These amounts therefore will be deducted from the revenue when the business makes a profit providing a guarantee of income taxed at a low level or not at all.
The depreciation mechanism is not open to civil partnership such as SCI and to unfurnished rentals.
3. Interest on a loan
Usually, the main other expense is the interest on a loan, should you wish to choose an interest only mortgage the deduction would be maximum.
In most cases, taking into account the two above mechanisms (interest + depreciation) and all the other expenses (listed above – I) the net taxable rental income on would be almost equal to 0.