French tax residency, the myth of the 183 days
The dangers of assessing French tax residency by solely considering whether an individual is spending more than 183 days in France.
Contrary to a popular belief, the French tax authorities and French tax courts do not uniquely assess French tax residence by considering the number of days spent in France; they also take into account the economic and social ties with France, potentially leading to significant tax exposure.
1. Assessing French tax residence
Pursuant to article 4B of the French tax code, an individual is considered to be a French tax resident if he/she has in France his/her (i) home (“foyer”), (ii) main place of abode, (iii) place of principal working activity or business (such criterion being deemed to be fulfilled by all managing executives of a French company whose turnover exceeds 250 million euros) or (iv) center of economic interest.
Nevertheless, when an individual is deemed to be a resident of two States (because he/she meets the domestic criteria of two Countries), tax residence must be directly assessed by looking at the criteria set forth in the relevant double tax treaty. In this respect, most French double tax treaties include the OECD model type clause according to which the residence is determined through the following alternative tests: (i) one’s permanent home, (ii) one’s center of vital interest, (iii) one’s habitual abode and (iv) one’s nationality.
As most of these domestic and international criteria are subjective and up to interpretation, most people only focus on the habitual abode one and consider that if an individual does not spend more than 183 days in France, this individual would escape French tax residence and thus French taxes.
This is however not true in practice and the 183-day rule must be referred to with caution:
- This rule is not universal: it can only apply if a double tax treaty applicable to the situation at hand contains such 183-day rule. In some cases, a treaty can exist but may not be applicable (e.g., LOB clause when the individual is not taxed on any income in one of the concerned State, remittance basis in the UK, 10-year exemption in Israel, etc.);
- This rule may not capture all taxes at stake: it definitely applies to income tax but this may not be true for social security contribution, wealth tax, gift tax, etc.;
- Attention should be paid to the period retained to assess the 183-day rule: calendar year, 12-month rolling period, etc.
Even when relevant, this rule is not the sole tie-breaker and generally not the first one considered by French tax authorities and Courts.
Indeed, as illustrated by several recent decisions, French courts often rule that an individual is a French tax resident despite the fact that one spent less than 183 days in France by focusing on one’s economic and social ties with France. On the contrary, spending more than 183 days in France does not systematically triggers the recognition of French tax residence. Even more, in particularly complex scenarios where the balance of interests of any kind binding an individual to France and another State is delicate, both the French tax authorities and French tax courts tend to use two or more criteria at the same time to strengthen their position considering every piece of connection with France.
For instance, French tax courts have recently ruled that a retired couple whose only source of income was a French retirement pension should be deemed French tax residents under French domestic law regardless of evidence supporting that they had been living in Madagascar for several years. Similarly, where there were evidence supporting the effective presence of a couple both in France (e.g., secondary residence, spending 153 days in France, several French bank accounts, significant gas and electricity consumption) and in Switzerland (e.g., main residence with home staff, residence state of the couple’s daughters, regular running costs), it was finally ruled that they were residents of France on the ground that all their investments were French-sourced since they directly and indirectly owned several French operational and real estate companies.
In view of the diversity of factual criteria used by the French tax authorities and French tax courts to determine one’s tax residence, it is therefore necessary to pay particular attention to all the elements that would make it possible to demonstrate the existence of a connection to France and not to only focus on the 183-day criterion. This is especially important considering the different consequences resulting from being a French tax resident.
2. Consequences arising from French tax residence
Subject to the provisions of French double tax treaties, French tax residence triggers several distinct consequences relating to (i) income tax, (ii) wealth tax, (iii) inheritance tax and, as the case may be, (iv) trusts related filings.
Indeed, French tax residents are taxable in France on their worldwide income, contrary to foreign tax residents who are solely taxed in France on their French-sourced income.
French tax residents may also be liable to the French real estate wealth tax on all their real estate assets, and not only the ones located in France as for foreign tax residents, to the extent that the overall net value of said assets exceeds €1,300,000 as at 1 January of the given year.
Additionally, when a donor or a deceased or a beneficiary or heir is a deemed a tax resident, inheritance duties are payable on all movable or immovable property located in France or outside France which are transferred by him or to him.
Finally, trustees have a filing obligation for trusts related to France by the French residence of their settlor or beneficiary, or if any asset held by trust is located in France.
To avoid this kind of extended French tax liability alongside with its numerous regular filing obligations, and given the complexity and factual nature of the analysis establishing one’s tax residence, it is advisable to seek professional advice. In particular, when someone has ties to France but has not yet considered to be a French tax resident, we strongly recommend performing such analysis to (i) confirm one’s opinion and, as the case may be, regularize one’s situation, but also to (ii) assess any tax exposure that may result from reassessment in case of a French tax audit.