Today is: 30 July 2010
David Anderson solicitor and chartered tax adviser and Graeme Perry solicitor both at Sykes Anderson LLP Solicitors and Chartered Tax Advisers discuss a possible escape route for high earners in the UK with a Chief Executive earning £350,000 per annum.
Please note that tax law is a complex subject and you should not rely on this article without professional advice on the facts of your case.
Q: I have heard that changes to UK income tax will come in next year. Will these affect me? I currently have a salary of £350,000 and my wife does not work.
A: Yes this will have a considerable effect on you. From 6th April 2010, a new “additional rate” of income tax of 50% will apply to your earned income over £150,000. In addition you will have no personal allowance at all from the start of the next tax year. This means your income tax bill is likely to increase by more than £20,000 each year.
Q: Are people taking any steps to avoid this tax hike?
A: Yes, we have spoken to a number of individuals whose earnings fall within this bracket who are considering moving to countries which have more favourable tax regimes. There are also other options such as receiving remuneration in the form of dividends. This planning reduces the income tax burden but invariably comes with complications and may be open to challenge by the UK Revenue.
Q: Are people moving to typical tax haven countries?
A: Countries such as Monaco and Switzerland have historically been the tax havens of choice but are not always practical when wishing to continue to work for a UK employer. The cost of living in these countries and the change in lifestyle is also an important issue. In the case of Switzerland the choice of canton is important with tax rates in cantons such as Geneva and Vaud relatively high. The wish to stay on with a current employer, or at least a group company, together with the clamping down on confidentiality in tax haven countries, has led people to consider alternative jurisdictions. These countries may not, on the face of it, have the same tax-free provisions, but can be advantageous when compared to the UK system. Such destinations can found within the EU, one of which is France.
Q: What is the income tax system like in France?
A: Individuals who are resident in France are, generally, liable for French income tax on their worldwide income. By way of a different application to the UK, a husband and wife (or civil partners) will be taxed together so that their combined income is totalled up to form the “taux effectif”. This combined income is divided into two parts each being taxed at banded rates up to a maximum of 40%.
Q: Would this be favourable as my wife is not working?
A: Yes this system is particularly advantageous when this is the position. This is because you will benefit twice from the lower tax rates. As a rough guide you would be paying up to £25,000 less income tax every year than under the new UK tax rates. This will be improved even further if you have children who are under 21 years old, or under 25 and studying, or disabled children of any age, as the total income will be divided into 2.5 parts if you have one such child, 3 parts if you have 2 such children and a further part for each additional child.
Q: Are there any ways to reduce this further, which make it worth moving to France?
A: Yes there is also a total exemption from income tax in France for a specific type of work, which many senior executives’ roles will cover. This is not a loop-hole or tax avoidance scheme but a specific provision in the French tax code designed to promote French business.
Q: Where does this exemption come from?
A: The exemption is provided for in the French Tax Code to encourage individuals to carry out this type of work. It is set out in Article 81A of the French Tax Code (“Le Code Général des Impôts”) and covers the scenario where French tax residents are sent by their employer for more than 120 days per year to third party countries (i.e. not France or the country in which the employer is established). Your employer must be in France or in any other EU country. It is possible to obtain a clearance letter from the French Revenue confirming you are not liable to income tax on your salary. This covers employees as well as company directors.
Q: Could my 120 days work be outside the EU say in the USA?
A: Yes.
Q: Will I fall within this exemption?
A: For the exemption to apply, the work for which you are sent abroad (i.e. outside France) must be for “prospection commerciale”. This does not have any definition in the French tax code and in all cases it will be advisable to write to the French Revenue to set out in detail your work duties and determine whether or not, in their interpretation, your role would fit with this phrase. It is helpful if your contract of employment spells out your role and duties as this will be required to obtain a tax clearance in France.
Q: Will this work if I have to spend time in the UK?
A: If your employer is a non UK company, but based in the EU, then any time spent in the UK should qualify towards this 120 days per year requirement as long as the work being carried out in the UK fits with the definition. Therefore the key factor is to determine whether your role fits with the need for the job to be “prospection commerciales”. If so it should be possible to receive a clearance from the French Revenue stating that you are exempt from French income tax.
Q: I currently work for a UK PLC and will need to spend time back here marketing the company. What should I do to come within the French exemption?
A: Before you move to France you should seek to be employed by a non UK company within the PLC’s group. This could say be a subsidiary in France or another EU country such as Luxemburg. You cannot claim the 120 days in the UK if your employer is a UK company. You must work in a country in which your employer is not based. If your employer has a subsidiary in the UK which you assist but which does not employ you this is acceptable.
Q: Are there any official steps I need to take regarding my residency?
A: In order to fall within the exemption you will of course need to become resident in France. This will involve becoming non-resident in the UK and then remaining non-UK resident. Careful analysis of the UK-France double tax treaty is required to confirm how this can be achieved and there are a number of documents which will need to be filed in both countries.
Q: Will I still have no income tax if I spend some days in the UK?
A: In terms of employment income, as a French resident you are primarily taxable in France. However, if you continue to carry out work in the UK, your earnings in respect of this work will be taxable in the UK at the usual rates. Under UK domestic law, non-residents are still taxable in the UK on any UK-source income unless the work carried out here is merely incidental to your main employment, in which case the UK will not tax it separately. When both the UK and France tax you on the same income, you will be entitled to a credit in France for the tax levied in the UK.
Even where work is more than merely incidental to your main employment, it is possible for you to be exempt also from UK income tax under the terms of the UK France Double Tax Treaty. Careful consideration must be given to your personal circumstances and the payment structure which you will be subject. Effectively though, if your days spent in the UK are less than 183 days in a year and your salary is paid by a French employer which does not effectively pay this by re-invoicing a UK permanent establishment you will not face any UK tax due to the terms of the Treaty.
You should take local advice when working in any other countries to check whether or not you are taxable there.
Q: Would I be exempt from income tax on any bonus I receive, either an annual one or at the end of a fixed term contract?
A: Yes. The exemption in France will in almost every case cover bonus payments. This can be covered in the clearance from the French Revenue.
Q: What practical issues are there?
A: You need to check with your employer that they will not seek to deduct UK PAYE on your salary especially if you are carrying out some or all of your 120 days work in the UK. This should not pose a problem once situation is explained to them.
Q: What steps should I take before committing to this?
A: There are a number of factors to be considered before deciding whether to become French resident. We would always recommend that clearance is obtained from the French Revenue before committing to a move to France. There are many practical steps you will then need to take if you do decide to move your residency to France and several tax considerations other than income tax (inheritance tax and wealth tax for example) which you should take detailed advice on before moving.
If you are able to plan properly and fall within the exemption the advantages are potentially great as you may be able to benefit from no tax (as opposed to 50% tax in the UK), without having to largely compromise on your lifestyle and employment. It may also be a way of setting up your retirement in France early and using the income tax savings to fund your retirement.