A decision by the European Court of Justice has changed the French tax code for interest income in a way particularly favourable to expatriates. A French law firm explains here how you may be able to benefit from the new regime.

Tax residents in France in 2005 now have the option of choosing the most favourable regime for taxation on interest payments made to accounts held with a bank located anywhere in the European Economic area.

The European Court of Justice came through for French taxpayers

Expatriates are, for obvious reasons, highly likely to keep accounts in more than one European country, such as France and the UK, and so they may particularly benefit from the new law, which brings France's legislation in line with European Community legislation.

What's more, the new provision is retroactive: taxpayers in France are eligible for reimbursement of excess tax paid since 1999, that is taxes paid on interest income received from investments in European financial institutions outside France.

Prior to this European Court of Justice ruling, the flat rate withholding tax regime in France was only applicable to investment income received from French financial institutions.

The court made the ruling, decided in March 2004 and applicable as of January 2005, after condemning France for its previous legislation, which the court described as discriminatory and against the European legislation for free provision of services.

Which types of income are affected?

Flat rate withholding is particularly beneficial to high earners

Types of income the new tax ruling will affect are interest payments, arrears, government stocks and bonds and other types of investment,  bonds and other loan notes, deposits, securities and current accounts (Article 125 A 'CGI') and products connected with bonds or capitalisation contracts, and to investments of a similar type (Article 125-0 A 'CGI').

Who can benefit?

Private individuals residing in France who receive income from investments and contracts covered by Articles 125 A and 125-0 A of the French Tax Code can opt to apply the new withholding tax regime.

This means that expatriates in France will be one of the key groups to benefit.

For instance, an expatriate who has become a French tax resident but who maintains a bank account in another European country can now choose the most favourable regime for the taxation of all their European source interest income; they can now and either continue being subject to progressive income tax rates, ranging from 0 to 48.09 percent, or opt for a withholding tax regime at a flat rate of generally16 percent.

The flat rate withholding tax is particularly beneficial to high wage-earners subject who would normally be subject to income tax at a high marginal rate.

It makes sense for a taxpayer receiving interest income to opt for the withholding tax regime when, had the progressive income tax rates been applicable, he/she would have been taxed at a higher rate than 16 percent.

Although the withholding tax rate ranges between 7.5 percent and 60 percent, it usually reaches 16 percent (15 percent for the years prior to 2004) and excludes Sécurité Sociale contributions.

Reimbursement of excess tax since 1999

Taxpayers can potentially realise substantial tax savings by requesting a refund of part of the excess tax paid since 2000.

The table below shows how the reimbursement of excess tax has been calculated according to the new regime for an unmarried tax resident of France who receives a net taxable annual salary of EUR 100,000 and annual interest payments from a British source of EUR 8,000.

As shown in the table, this hypothetical taxyper would now be able to get a tax refund amounting to as much as EUR 16,800. [See Article L 190 of the 'Book of Taxation Procedures']

August 2005

For more information you can contact:

Patrick Tyrrel
International Assignment Services Practice Leader
Paris at Taj
Tel: +33 (0)1 40 88 22 14.
Email : ptyrrell@taj.fr 

Marie-Caroline Mieg de Boofzheim
International Assignment Services Practice Partner,
Paris at Taj
Tel: +33 (0)1 55 61 54 84.
Email : mmiegdeboofzheim@taj.fr

Taj, Société d'Avocats based at 181 avenue Charles de Gaulle, 92524 Neuilly sur Seine Cedex,  is a French law firm working in association with the global Deloitte network.

Subject: Tax, tax in France, expatriates in France, Taj, Ask the Experts