Non-residents with French rental income- which tax returns to file ?

For further help and advice, please visit our website .

The time for filing the 2014 annual French tax returns (i.e. for the year 2013) is approaching !

Here’s a guide which should help you decide which tax regime you should use to declare your rental income and which forms need to be completed.

Firstly, the French tax system distinguishes between furnished and unfurnished property.

In general, the system allows for higher deductibility of expenditure on furnished property; this follows the line of thinking that property rented out unfurnished is normally a long-term rental where most costs are covered by the tenant.

Let’s look at furnished property first.  Around 75% of our non-resident clients come under this category, with property in France that they let out for holiday rentals as well as for their own personal use.   If your property produces rental income of less than 32,900 Euros in a year, then you can opt to declare under a special tax regime called Micro-BIC. Under this regime, you need only declare the gross rental income in Declaration 2042C, and the Tax Office gives you a 50% allowance for expenditure.

So, for instance, if the rental income from your French property in 2013, before any expenditure, was 20,000 Euros, then:

Your taxable income is 10,000 Euros. This is subject to income tax at 20% and Contributions Sociales at 15.5%. The total tax payable is therefore 3,550 Euros.

Of course, the Micro-BIC regime is optional and if your actual expenditure is higher than 50% of your rental income, then you will save tax by declaring your actual expenditure under the regular tax regime, for which you should complete Declaration 2044. Pleasesee the section below on unfurnished property income for further details.

Note that if your property is run as full-time accommodation such as a gîte ruralmeublé de tourisme or chambres d’hôtes then the tax treatment under the Micro-BIC regime is even more favourable, with a deduction of 71% for expenditure and a maximum allowable income of 82,200 Euros per year.  Note that in order to be eligible for this, it is necessary to register your rental business formally at the nearest Chamber of Commerce and pay the corresponding local taxes due.

Now onto unfurnished property.  If you rent out your property unfurnished and you have annual rental income of less than 15,000 Euros, then you can opt to declare your gross income under the Micro-foncier tax regime, in Declaration 2042. This gives you a 30% allowance for expenditure.

So, for instance, if the rental income from your French property in 2013, before any expenditure, was 20,000 Euros, then:

Your taxable income is 14,000 Euros. This is subject to income tax at 20% and Contributions Sociales at 15.5%. The total tax payable is therefore 4,970 Euros Euros.

This regime is optional and if your actual allowable expenditure is greater than 30% of your income, then you will save tax by declaring under the normal tax regime. As with furnished lettings, the additional form to complete is Declaration 2044 and the following expenditure is allowable:

  • Management and agency costs;
  • Accountancy charges;
  • A fixed allowance of 20 Euros per property;
  • Maintenance, repairs and improvement costs;
  • Property tax paid;
  • Insurance costs;
  • Mortgage interest paid. Mortgages with foreign banks are also eligible.

Note that certain tax regimes cannot be changed within a fixed period, so it is important to plan ahead.  For further help and advice, please visit our website .

Modelo 720- Declaration of Foreign Assets (Declaración informativa sobre bienes y derechos situados en el extranjero).

“In this world nothing can be said to be certain, except death and taxes”.

Benjamin Franklin, 1789

Even Benjamin Franklin could never have forseen Modelo 720,  this unpopular, perplexing and even frightening tax declaration that has been in force in Spain for a year now.

This is not a tax declaration as such because no tax is payable. It is a requirement for all residents of Spain to declare their foreign assets which exceed 50,000 Euros in any of three categories.

Why, you might ask yourself ? Is it meant to target those naughty rich tax evaders who hide their assets in offshore accounts and other complex structures ?

Well, I can’t see how. With a low declaration threshold of 50k Euros, it would seem to be targeted at the tens of thousands of more modestly-endowed residents of Spain who have savings, life insurance or a property abroad, normally in a country which an information-sharing agreement in Spain.

The real tax evaders won’t be scared by this declaration. They with the help of their well-paid tax advisers will find a way to hide their assets in an offshore structure where the Agencia Tributaria will never find them.

Meanwhile, the common law-abiding citizens will make this tax declaration including full details of all their assets, in fear of making even the slightest unintentional error, knowing that this could lead to a fine of thousands of Euros.

Whether Modelo 720 is a clumsy attempt to raise government revenue in tax penalties or a misguided effort to target tax evaders, it is unfortunately here and we have to deal with it.

This blog post is about the general requirements of this declaration.

For further information and specific guidance please visit our website .

Obligation to declare

Spanish residents with foreign assets or income in any of the following categories exceeding 50,000 Euros on 31st December.

  1. Accounts in any kind of financial institution e.g. banks, building societies.
  2. a) Investments/ rights of representation in foreign companies or other entities.                                                                                                                   b) Investments in foreign collective investment institutions (e.g. unit trusts).                                                                                                                         c) Foreign life/ invalidity insurance; income from foreign annuities.
  3. Property and rights to property.

Note that the threshold is for the total value of each of the three categories.

Where assets are jointly held (e.g. with a spouse), it is the total value of the asset which is relevant. A separate return must be submitted for each person.

Presentation deadline

This tax return must be submitted by 31st March following the end of the year in which the taxpayer is obliged to declare.

Frequency of declarations

The Agencia Tributaria guidelines state the following:

After the initial return is presented, a new return must be filed when the total of any category of assets/ income increases by 20,000 Euros or more, either at 31st December or during the last quarter of the year.

Valuation of assets

Property: purchase price;

Investments which are traded on the open market: market value as at 31st December;

Other investments: value on last published balance sheet.

Penalties for non-disclosure

The guidelines mention “minimum” penalties of 30,000 Euros for non-disclosure ! I can’t envisage how such big penalties could be applied, or even if they would be enforceable if challenged under EU law.

Information is, in principle, shared very easily between financial institutions and Tax Offices in both EU and non-EU countries these days; this means that, in theory at least, the figures that you declare can be checked by the Agencia Tributaria.

The Agencia Tributaria FAQ’s imply that even the slightest error, even unintentional (e.g. in a bank account number) will be punished by a minimum fine of 10,000 Euros !

This would appear to be nothing more than scaremongering.  But the fact is, we don’t know.  To date we have not heard from any prospective clients who have received a fine,  so at this point we can only conjecture.

For more information and guidance, please visit our website.