Cookies
We use cookies to give you the best possible experience on our website.
Accept All Cookies
Find out more
Cookie Portal
Manage and find out more about the cookies used on this website.
View Cookie Settings
Read Cookie Policy

Accept All Cookies and Close
Close Without Saving
< Back
This website has 3 types of cookies:
Your preferences will not take affect until the next page loads or this page is reloaded.
Strictly Necessary Cookies
Feature Cookies
Performance Cookies
Save and Close
< Back
< Back
Cookie Policy
< Back
Canadian and UK flag

Residents of France that hold UK pensions can no longer transfer those pensions to any French pension as HMRC considers all French pension schemes incompatible with UK regulations.

The ‘good news’ however, is that French residents have two principal options to consider when consolidating and maximising their UK pension benefits. In brief, they can utilise an International Pension, commonly called a QROPS and EU based, or they can take advantage of the new UK pension rules that offer much greater flexibility.

Care needs to taken in some cases as the UK Government introduced a 25% tax penalty (from 9th March 2017) for those living outside of the EEA (European Economic Area) who transfer a UK pension to an international scheme. France is, of course, in the EEA, but caution is required where you may move outside the EEA after transfer!

I'd like to understand the benefits

Benefits of Transferring To A Personal Pension

Many French residents see the considerable benefits of transfer from frozen UK company pensions to new, more flexible, UK Personal Pensions or International plans. These benefits include:

These benefits include:

  • Transfer plans are Approved Schemes under the HMRC Rules
  • No tax charge or tax penalty for UK or QROPS transfers for residents in France
  • Security of Investment with HMRC approved Trustees
  • The FULL capital value of the fund can be passed to your spouse on death
  • The FULL capital value of the fund can be left as an inheritance, free of UK Inheritance Tax, to children/chosen beneficiaries
  • You have full control over investment, currency and income decisions
  • You can access 25% of the fund as a Pension Lump Sum at age 55
  • French tax rules may allow FULL withdrawal of fund at outset
  • Income can be taken from age 55 WITHOUT early retirement penalties
  • Flexibility of drawdown options including full withdrawal of fund at retirement
  • Amalgamation/consolidation of schemes
  • Total compatibility with UK rules should you return to the UK!

The good news is that you CAN transfer your UK company pensions to a UK recognised and approved alternative that IS suitable for French residents, without any tax penalty, and now is a good time to consider a transfer because the transfer values being offered are still unusually high!

France Tax Position


UK/France DTA

There is a Double Taxation Agreement (DTA) between the UK and France. This provides that UK pensions and other similar remuneration paid in consideration of past employment to a resident of France shall be taxable only in France.

There is separate provision for Government Service pension schemes.


Residency and Income Tax

Individuals that are tax resident in France are taxed on their worldwide income, at progressive income tax rates up to 45%, plus exceptional contributions for high earners. Non-residents are taxed on French source income only.

Based on French domestic rules, an individual is considered a French tax resident if he meets any one of the following conditions:

  • his/her home is in France (by reference to where close family, i.e. spouse and children, live) or the main place of abode is in France; or
  • he/she performs their main professional activity in France; or
  • his/her centre of economic interest is in France.


 


Canada Adventure

Foreign Pension Income

French tax residents are taxable on foreign pension income but French non-residents are only taxable on their French source income. In determining source, one looks at the State where the payer is located. For non-residents, if the foreign pension income is remitted to France, it remains non-taxable in France.

There is no definition under the French law as to what constitutes a pension plan. The majority of French pension provisions are state sponsored, pay-as-you-go systems, whereby current contributions made by participants go towards the funding of pensions for those currently retired.

However, the French tax authorities recognise as pension plans, foreign plans whose main characteristics are as follows:

  • They are generally recognised as pension plans under the laws of the country where they are situated (registered or regulated),
  • The amounts of the benefits must be commensurate with the amounts of contributions and linked to length of service,
  • The object of the plan must be to provide a retirement pension at normal retirement age.

However, the social contributions may not apply where an expat has worked abroad during their entire career.


Foreign Tax Credit

A foreign tax credit may be claimed on the Canadian tax return by a Canadian resident for tax paid in respect of the foreign pension to the foreign jurisdiction in accordance with the DTA.


Where the foreign pension income falls within the definition provided by the commentaries to Article 18 (i.e. Pension Article) of the OECD model treaty, it will be taxable as pension income. Income from non-occupational pension plans will depend on the plan structure and the qualification of the income that is distributed.

In addition to French income tax, French social contributions may also be levied on foreign source pension income. The global rate of 7.4% applies only if the tax resident is covered on a compulsory basis by the French social security system.

QROPS

The regular pension payments made from a QROPS to individuals resident in France will generally be regarded as a purchased annuity (“rente viagère à titre onéreux”), on the basis that the income could be analysed as being acquired directly by the member from capital that has not been funded from an employment pension scheme, even if the fund is built up in a UK employment pension scheme.

The “rente viagère à titre onéreux” is built up based on a contract freely subscribed by the beneficiary who accepted to pay an amount of money in exchange for later payment of annuities by the contract provider.

Annuities are considered as taxable income and must be reported in the annual income tax return. However, annuities are only partially taxable. This is because a part of the annuity payment is considered to represent the underlying capital and not income. The taxable fraction of the income is calculated based on the age of the member at the time the pension payments start. For example, the taxable fraction is 30% if the member is more than 69 years old.

The income is taxed at normal progressive tax rates. Moreover, the income will also be subject to social contributions at a rate of 15.5% whether the individual is covered by the French social security system on a compulsory basis or not.

Canada Adventure

If your pension fund is transferred to a QROPS in:

GIBRALTAR

GIBRALTAR does NOT have a DTA with France, therefore the QROPS pension payments to you would be taxable in Gibraltar, currently at a rate of 2.5%. No UK income tax if you are non-UK resident for 5 full tax years irrespective of the amount; or less than 5 years if the total withdrawals in the non-resident period are below £100,000.

No Gibraltar Inheritance Tax.

Protection from UK IHT.

Protection from UK death benefit charges, if non-UK resident in the 5 tax years before payment.

MALTA

MALTA has a DTA with France, this provides that Maltese pensions and annuities paid in consideration of past employment shall only be taxable in the country of residence, i.e. France. Pensions not paid in consideration of past employment should also only be taxable in France under the Other Income Article. This is important as we understand that the Maltese tax authorities do not treat pensions from QROPS as “paid in consideration of past employment”. Therefore, the QROPS pension payments should not be taxable in Malta. There is separate provision for social security pensions and Government service pensions.

No UK income tax if you are non-UK resident for 5 full tax years irrespective of the amount; or less than 5 years if the total withdrawals in the non-resident period are below £100,000. 

No Maltese Inheritance Tax.

Protection from UK IHT.

Protection from UK death benefit charges, if non-UK resident in the 5 tax years before payment.


LUMP SUM TAXATION

Since January 2011, lump sum pension benefits received by a French tax resident individual are subject to French income tax in the same way as regular pension income if contributions, including employer contributions, were wholly or partly deductible from taxable income in the country in which the individual was present during the build-up phase.

The lump sum is therefore taxable at the progressive tax rates.

However, there are three ways to potentially optimise lump sums:

  • The beneficiary may opt for a flat rate of 7.5% taxation (taxed as “pension et retraites en capital”) instead of the progressive income tax rates, provided that the lump sum represents a one-off payment and the contributions paid during the build-up phase must have been tax deductible or related to a tax exempted income in the state that had the right to tax this income. This specific treatment is only available if the beneficiary withdraws at once all the funds accumulated in the plan.
    If none of the contributions paid during the build-up phase gave rise to a deduction, the lump sum payment is treated as investment income and taxed at normal progressive rates. However, only the growth in the pension is taxable. The growth is equal to the difference between the amount paid to the beneficiary and the amount of premiums paid during the build-up phase.
  • “Système du quotient”: If the lump sum received is over the average net income taxed in the three previous years, the paiement on quotient ensures that the member stays in their current tax bracket and does not pass into a higher bracket because of the lump sum.
  • “Etalement”: The lump sum is divided by four, ¼ taxable the year of payment and each other quarter are taxed in the three following years (i.e. 1/4 per year).

WEALTH TAX

Net wealth tax (Impôt Sur la Fortune) is imposed in France. Households pay wealth tax if the net worth is more than EUR 1,300,000 per household (rather than per individual). Some types of assets are exempt. Wealth tax rates are progressive, up to 1.5%.

For new residents to France (not French tax resident in the five prior years), assets held outside of France are not assessed to wealth tax until 31 December of the fifth year following the year they become French tax resident.

Annuity contracts concluded with pension institutions are subject to wealth tax. The value of the contract (i.e. the capital value representing the annuity) is considered a taxable asset.

However, French and foreign pension annuities that are based on previous employment are exempt from wealth tax under the following conditions:

  • The contributions have been made on a regular basis during a period of at least 15 years;
  • The pension is payable, at the earliest, at the expiry of the policy or at retirement date.

Unfortunately, this provision will not be applicable in relation to a QROPS as there is at the outset only one single contribution.

Employer-Sponsored Retirement Trusts are not subject to Wealth Tax according to the French tax administration. However, there is currently no possibility under French law for a QROPS established by an individual to be treated as an Employer-Sponsored Retirement Trust.

A pension scheme could possibly qualify if it is set up in a DTA country (e.g. Malta) and is employer- sponsored with value principally comprised of funds transferred from another occupational scheme (possibly in the UK).


INHERITANCE TAX

Where a pension member dies tax resident in France, all worldwide assets are within the scope of French inheritance tax. Accordingly, even though a beneficiary may not be resident in France, the entire member’s estate is liable to French inheritance tax.

In order to determine the French tax treatment of any regular pension or lump sum payments received by the designated beneficiary upon the death of a member, it will be necessary to analyse such payments from a French legal standpoint.

However, payments made to a surviving spouse should be exempt from inheritance tax in any case.


TRUST REPORTING

Reporting requirements apply to Trusts as of 31 July 2011. This obligation remains on the trustee of a Trust which has a “connection” to France. This includes, potentially, members of pension plans set up in the form of trusts where the Trust includes French residents as beneficiaries. There are penalties for failure to report.

Guidance from the French tax administration states that “Retirement Trusts” established in a country with which France has signed an agreement to prevent tax evasion and fraud are exempt from the requirements. Retirement Trusts are those established to manage the pension rights acquired by the beneficiary because of professional activities, under a plan set up by a company or group of companies.

The text however makes no mention of plans set up by individuals. This means that personal pension plans or QROPS set up under a Trust, may not be considered exempt from the regulations and must be reported. A consideration could therefore be to use a Contract based pension rather than Trust based pension as this would be outside the scope of such reporting.


TAX PLANNING PRIOR TO BECOMING A FRENCH TAX RESIDENT

Any individual who wishes to retire to France should consider transferring their UK registered pension to a QROPS prior to retiring in France.

In such circumstances where:

  • the pension would not undergo any French tax on the transfer,
  • the individual can take the 25% lump sum free of French tax.

Of course, the tax position in your country of residence would need to be considered, but once resident in France for tax purposes, pension income payments would be taxable as outlined above and France has signed approximately 125 DTAs including the UK and Malta.

The information contained in this Site is intended solely to provide general guidance on matters of interest for the personal use of the reader, who accepts full responsibility for its use. The author is not giving direct legal or tax advice and the information contained on the site should not be acted upon without seeking professional advice.

Contact us

Find out more about how your personal data is used in our privacy policy.

Contact details

Rue Arnold-Winkelried 6 (4th floor), CH-1201, Geneva,Switzerland

+41 (0)79 89 151 34

info@ukpensionguru.com

Contact us

Get in touch now by sending us a message below or by calling us on
+41 (0)79 89 151 34

Find out more about how your personal data is used in our privacy policy.