Unless otherwise provided by a Double Tax Treaty, income from furnished letting activities is taxable in France. The taxpayer might be entitled to a tax credit in their country of residence.
Under French tax law, habitual furnished lettings are considered as commercial activities (these are called ‘locations meublées’) and when a property investment company (known as an ‘SCI’) carries out such letting activities, it becomes subject to French corporation tax. However, there are planning solutions available to avoid corporation tax applying to an SCI.
When the activity is carried out by an individual, the income is taxed in their hands as business income (called “BIC”).
In broad terms, the net taxable income is equal to the difference between the gross profits (i.e. the rents received) less certain expenses related to the ownership of the property and the letting business, such as maintenance and repairs, insurance premiums, property taxes, estate agent management fees, bank interest etc.
Deductible expenses must be prorated in accordance with the length of letting during the tax year. For example, assuming that the property is let 20 weeks per year, 20/52 of the total expenses is deductible.
Depreciation of the property might also be possible but its amount is limited. When depreciation is accounted for, the use of the property by the owner when it is not let gives rise to a taxable profit (a deemed income).
The net income is subject to French income tax as follows:
At the progressive income tax rates. For non-French tax residents, the application of those rates cannot give a tax rate of less than 20 per cent on taxable income up to €27,510 and 30 per cent above this threshold. Therefore, the minimum tax is either 20 per cent or 30 per cent.
In addition to income tax, French social contributions are at the rate of 7.5 per cent for EU/EEA residents covered by a health care system in their country of residence. Otherwise, the rate is 17.2 per cent.
A more favourable tax regime can apply when the gross annual rental income derived from the furnished lettings does not exceed a fixed amount of €70,000 each year. This regime is called Micro-BIC.
Under this regime, income tax only applies after deduction of a fixed percentage allowance, which is a lump sum deduction, deemed to include the Property deductible expenses. This allowance amounts to 50 per cent of the gross income.
Furthermore, this lump sum regime also requires less tax filing and formalities. This simplified regime is not obviously advisable when the actual deductible expenses exceed the 50 per cent of the gross income.
No action should be taken on the basis of this note, nor should it be construed as amounting to tax, legal or VAT advice. Suitable, specific and professional advice should always be obtained in respect on any particular issue.
