The article below has previously appeared in leading market publications or our own booklets or newsletters.

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If you let out French property, the rent you charge might not only cover annual maintenance and other expenses, but also leave you with surplus income to pay for your own holiday. With careful planning, more systematic lettings could also earn you enough to recover your initial capital outlay and borrowings. You may even decide to buy more property to let as a business!

Income generated from French lettings is frequently not declared to the French tax authorities. Many UK residents have wrongly been led to believe that the reporting of their French rental income to the UK Inland Revenue is sufficient and absolves them from any need to declare the rent to the French authorities.

But under Article 5 of the 1968 France-UK double tax treaty France has the principal right to tax French rental income. The French tax paid is then set aside against any UK tax liability arising from the same source. Rental income is always French-source income if it relates to a property in France. It does not matter if both landlord and tenant reside in the UK or where the rent is paid or what currency the rent is paid in.

The widespread failure of UK lessors to declare their French rental income in France has to date been encouraged by the apparent nonchalance of the French tax authorities. But it now seems that the latter are becoming more efficient at collecting tax from UK and other foreign landlords.

The French tax authorities may tax up to three years in arrears and usually add interest and penalty charges on late tax returns.

Rental income profits (or losses) must be reported on the normal French income tax return (Cerfa 2042) and submitted to the Centre des Impôts des Non-Résidents (Paris) before 30 April each year following the French tax year end of 31 December.

Calculation of the net taxable income varies depending on whether the letting is furnished or unfurnished. Furnished lettings qualify as a business for the purposes of French taxation.

The method used to determine the taxable income varies depending on the level of annual turnover from the preceding year. Where this does not exceed (currently) FRF 500,000 income tax is calculated on 30% of the rent. The abatement of 70% is supposed to cover all expenses. If the turnover exceeds FRF 500,000 the “simplified real” regime or “normal real” regime applies. The normal regime requires the preparation of detailed accounts and involves compliance formalities similar to a company liable to French corporation tax. The simplified version, allowed where turnover does not exceed FRF 5 million, follows the same rules but the level of formality is reduced.

Taxpayers can opt out of the regime prescribed by law and choose a more formal one. Elections must be sent in writing to the tax office. The implications of a change of tax regime must be carefully weighed as in many cases the option used is irrevocable.

French income tax is not the only tax charge applicable to French rental income. Some rentals may be subject to TVA (at a reduced rate of 5.5%) and exempt TVA rental income in excess (currently) of FRF 12,000 per annum is usually liable to a local tax on leases called droit de bail at a rate of 2.5% and an additional tax of 2.5% if the property is over 15 years old.

Since 1999 the droit de bail has not applied where the gross rental income is under FRF 36,000. The charge was abolished as of 1 January 2020. The additional contribution of 2.5% does, however, remain applicable.

The supply of food, telephone and other services is subject to TVA at the standard rate of 19.6%. Where an establishment provides accommodation on a full board or half-board basis, the reduced rate of TVA may apply to three-quarters of the total amount charged.

Businesses whose annual turnover is below (currently) FRF 500,000 may trade outside the scope of TVA. Small businesses which exceed the above turnover limits may still benefit from a simplified TVA regime, as long as their turnover does not exceed FRF 5 million. The simplified TVA regime allows these businesses to make one annual TVA return as opposed to one every month.

A business registered for TVA will be in a position to receive, where appropriate, refunds of TVA paid for the running of the lets and any renovations of the letting units. Nevertheless, any payment of this tax cannot be reclaimed if the business was not registered for TVA at the time the liability was incurred.