Discussing the 183-day rule

The following question was put to us by a reader of a prominent UK contractor website, and published on October 22^nd, 2008.

If I contract in France less than 183 days [per] year using my U.K. based ltd, can I [be exempt from] French taxes and social security?

You cannot be exempt from French taxes. You can be exempt from French social security only if your employer obtains for you a valid E101 social security detachment from their home country.

The question raises two issues key to the understanding of contracting overseas: (1) that of contractors using their own UK limited companies in other countries, and (2) that of the famous so-called ‘183-day rule’.

1. Perhaps the most important point to note here is that a large majority of contractors working in France using their own UK limited company are non-compliant with French legislation. Indeed, when the director or majority shareholder of a one-man company arrives in France and starts work, the company is deemed to have a permanent establishment in France, and becomes liable for local (French) corporation tax. Thus, unless the limited company is registered in France, the contractor is not compliant with local tax regulations. In addition to corporate tax, individual income tax is due in France from day one. Even an individual whose status in UK remains ‘tax resident’ and whose status in France is ‘non tax resident’ is obliged to pay French income tax on France-sourced income. ‘Non residents’ pay tax on France-sourced income only, whereas ‘residents’ pay tax on their worldwide income. The same principles apply in almost all EU countries.

2. The golden rule of contracting abroad is simple: tax should be paid where money is earned. The only instance where this rule is waived is in the case of a permanent employee (not the director of a one-man company: see above) of a foreign company who has been seconded to work abroad. In this instance, tax may be paid to the authorities of the employer's country for the first 183 days. This scenario can almost never apply to a contractor. In the case of contractors, the ‘183-day rule’ does not therefore serve to allow the contractor to "choose" where to pay tax; instead, it dictates how long an individual may spend in the country before becoming tax-resident, and therefore liable for tax on their worldwide income.

Case study and Conclusion:
In the classic scenario of a UK tax-resident contractor going to work in France for 4 months, his tax liabilities are as follows: he is working in France, has France-sourced income and is therefore liable for French income tax paid directly to the French authorities. Also, as a UK tax-resident, he is liable for income tax in the UK on his worldwide income. In order to mitigate this double tax burden, he must present the UK authorities with evidence that he has paid tax in France, at which point, by virtue of the double taxation avoidance treaty in effect between EU countries, his UK tax bill will be reduced by the amount of tax paid in France.

The final word is that tax is paid where money is earned. If you are doing anything else, you should seek advice from an in-country tax specialist (not a UK tax specialist) and make sure that you are complying with local tax legislation.