Following a decision by the European Court of Justice, French tax residents can now apply for a flat rate withholding tax on interest income from all their Europe-based savings accounts.

Some claims will result in substantial tax reimbursements

Since January 2005, tax residents in France have had the option of choosing the most favourable regime for taxation on their interest payments made to accounts held with a bank located in the European Union and in the European Economic area as well as those located in France.

Tax residents in France can also benefit from the reimbursement of excess tax paid on interest income received from investments in European financial institutions since 1999.

Prior to this new ECJ ruling, the flat rate withholding tax regime was only applicable to investment income received from financial institutions in France.

The ruling came about after the European Court of Justice, on 4 March 2004, condemned France for this legislation, which it described as discriminatory and against the European legislation for free provision of services.

The new regime brings France's legislation in line with European Community legislation.

Which types of income are affected?

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 be subject to the 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, with a bank account in another European country, can now choose the most favourable regime for the taxation of their European source interest income 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 earners who are 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 social security contributions.

Reimbursement of excess tax since 1999

An action to request the refund of the tax already paid should enable the tax resident to recover part of the excess tax paid since 2000 and to potentially realise substantial tax savings.

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.

Since 1999, he or she will now, in virtue of Article L 190 of the 'Book of Taxation Procedures', be able to get a tax refund amounting to as much as EUR 16 800.

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