update on French tax legislation
from the Spectrum IFA Group
French Tax Changes 2013
During December, the following legislation has been introduced:
- The Projet de Loi de Finances 2013 and the Projet de Loi de Finances Rectificative 2012-III were adopted by the French parliament on 20th December 2012. Subsequently, the bills were examined by the Constitutional Council, in order to determine whether or not the proposed changes conformed to the French Constitution. The Council Decisions were made on 29th December 2012.
Following publication of the final texts in the Journal Officiel de la République Française (JO) on 30th December 2012, the legislation entered into force on the following day.
- The Loi de Financement de la Sécurité Sociale 2013-I was also adopted by the French parliament on 3rd December 2012. The decision of the Constitutional Council on the conformity of the bill was made on 13th December 2012 and the final text was published in the JO on 18th December 2012.
A number of changes originally proposed by the government were rejected or amended by the Constitutional Council. This included the highly debated introduction of an ‘exceptional solidarity contribution’, which would have resulted in a total tax rate of 75% on earnings from professional activities that exceeded €1 million. The proposal was rejected on the grounds of inequality, due to the fact that it would have been levied on an individual basis, rather than at the foyer level that applies for the taxation of income.
The government has vowed to review its proposals, taking into account the comments of the Constitutional Council, with the expectation that a revised proposal will be made during 2013.
The proposed changes to the taxation of gains relating to building land were also rejected by the Constitutional Council. This was done on the grounds that after taking into account all other taxes and the fact that the gains would be taxed according to the barème scale that applies to income (including the new band of 45%), the tax would be punitive. Unfortunately, however, since the article was rejected in its entirety, so too was the proposed discount of 20% for 2013, in respect of capital gains tax arising on the sale of a maison secondaire.
There were also some changes made to wealth tax, both as concerns the entry level and the income that can be taken into account for determining the global income for the capping mechanism.
Shown below is a summary of our understanding of the principle changes.
WEALTH TAX (Impôt de Solidarite sur la Fortune - ISF)
- Taxpayers with net assets of at least €1.3 million will be subject to wealth tax on assets exceeding €800,000, as follows:
Fraction of Taxable Assets Tax rate
Less than €800,000 0%
€800,000 to €1,300,000 0.50%
€1,300,001 to €2,570,000 0.70%
€2,570,001 to € 5,000,000 1%
€5,000,001 to €10,000,000 1.25%
Over €10,000,000 1.5%
- The reduction of €300 per dependent person has been abolished.
- Only liabilities relating to taxable assets can be deducted.
- There will be a discount mechanism for those taxpayers whose net taxable assets are between €1.3 million and €1.4 million.
- A ‘capping mechanism’ will be introduced for French residents.
Basically, where the total global taxes of the taxpayer (calculated before the deduction of any tax credits, as a result of tax paid outside of France) in respect of the previous year, plus the wealth tax calculated according to the above scale, are greater than 75% of global income for the year before, then the wealth tax will be reduced by the amount exceeding the ‘75% cap’.
However, in determining global income, income already received that is exempt from income tax (for example, interest on French tax-free accounts) and income that has been taxed according to a fixed prélèvement rate must be included.
- French resident taxpayers with net taxable assets up to €2.57 million will not be need to make a separate wealth tax return (i.e. the assets will be declared with their income tax return).
- The new rules take effect from 2013.
INCOME TAX (Impôt sur le Revenu)
The following changes are effective from 1st January 2013, i.e. in respect of taxable income for 2012.
- An additional income tax band of 45% is added to the barème scale, in respect of the fraction of income exceeding €150,000 per part in the household.
- There are no other changes to the existing bands and tax rates and therefore, the barème scale will be applied as follows:
Income Tax Rate
Up to €5,962 0%
€5,963 to €11,896 5.5%
€11,897 to €26,420 14%
€26,421 to €70,830 30%
€70,831 to €150,000 41%
€150,001 and over 45%
- The décote, which is the tax deduction granted to households that have an income tax bill of not more than €878 (based on current rates), is increased from €439 to €480.
- The ceiling of the quotient familial is reduced from €2,336 to €2,000 for each half part in the taxable household, except for certain taxpayers (for example, single parents, elderly parents, disabled parents and widowed parents).
- Income from capital (i.e. interest and dividends) will be taxed in the same way as income from work, i.e. in accordance with the barème scale. However, a ‘fixed levy’ will be deducted at source, at the time that the payment is made, which is 21% for dividends and 24% for bank interest.
The levy is considered as an ‘on account’ payment against the income tax due in the following year (i.e. after assessment by reference to the barème scale). Should this result in an overpayment of income tax (because the levy already paid is greater than the actual amount of income tax due), the difference will be refunded to the taxpayer.
The following taxpayers will be exempt from the payment of the levy:
As regards interest:
- Single, divorced and widowed tax payers whose revenue fiscal de reference is less than €25,000; and
- Couples whose revenue fiscal de reference is less than €50,000.
As regards dividends:
- Single, divorced and widowed taxpayers whose revenue fiscal de reference is less than €50,000; and
- Couples whose revenue fiscal de reference is less than €75,000.
The revenue fiscal de reference, used to determine exemption from the levy, will be that applicable two years before. For example, for 2013, the revenue fiscal de reference arising from 2011 income, on which income tax is paid in 2012, will be the benchmark.
In order to claim exemption from the levy, the taxpayer must provide a sworn statement to the establishment making the payment of the interest or dividends, by 30th November preceding the year that the levy is due. In turn, the establishment must provide a copy of the attestation to the tax authorities.
Furthermore, for simplification, taxpayers who receive less than €2,000 of bank interest in the year may request that the income is taxed at the flat rate of 24%, rather than being assessed by reference to the barème scale.
- The fixed allowance allowed against dividends (€1,525 for a single taxpayer or €3,050 for couples subject to joint taxation) is abolished. However, the allowance of 40% against dividends of European companies has been maintained.
CAPITAL GAINS TAX (Impôts sur les Plus-Values)
- The fixed rate of capital gains tax of 19% is increased to 24% for gains arising from disposals made in 2012.
- With effect from 1st January 2013, the fixed capital gains tax rate is replaced by taxation at the progressive rates as determined by the barème scale. This applies to gains arising from disposals made with effect from 1st January 2013.
However, a proportional reduction in the progressive tax rate will be applied, which is dependent upon the holding period of the assets, as follows:
Holding Period Reduction
2 – 3 years 20%
4 – 6 years 30%
7 years plus 40%
The percentage reductions above do not apply to the social taxes rates (currently 15.5%).
As a reminder, the capital gains tax regime relating to the sale of second properties and building land was already reformed in February 2012. Hence, under the current regime, the property must now be owned for 30 years before it is free from capital gains tax and social contributions. For ownership of any lesser period, a system of taper relief applies, as follows:
- 2% per annum for each year of ownership beyond the 5th year;
- 4% for each year of ownership beyond the 17th year; and
- 8% per annum for each year of ownership beyond the 24th year.
An additional tax has now been introduced in respect of gains made from the sale of a maison secondaire (and so does not apply to building land), for cases where the gain exceeds €50,000. The tax will also payable by non-residents selling a property in France.
The additional tax rate is as follows:
Amount of Gain Tax Rate
€50,001 - €100,000 2%
€100,001 - €150,000 3%
€150,001 to €200,000 4%
€200,001 to €250,000 5%
€250,001 and over 6%
Where the gain is within the first €10,000 of the lower level of the band, a smoothing mechanism will be applied to reduce the amount of the tax liability.
The tax will be due in respect of disposals made after 1st January 2013, unless a compromis de vente had been signed by 7th December 2012.
- The current ceiling of ‘€18,000 plus 4% of revenue fiscal de référence’ will be replaced by a fixed amount of €10,000.
- However, for certain investments, for example, in the film industry and outre-mer, the ceiling of €18,000 has been retained, but the ‘4% of revenue fiscal de référence’ has been abolished.
- If the taxpayer invests in both of the above, the overall limit is €18,000.
- The changes apply from the taxation of 2013 revenue.
SOCIAL TAXES & CHARGES
- The total social taxes applying to income from investment and capital gains remain at a combined rate of 15.5%.
- A new Contribution Additionnelle de Solidarité pour l’Autonomie (CASA) is introduced on pensions. The rate will be 0.3% in respect of pensions paid from 1st April 2013, however, pensioners who are exonerated from income tax will be exonerated from the CASA.
In theory, pensioners who are the holders of a Certificate S1, whereby their French health costs are funded by another EU Member State, should not be required to pay the CASA.
- For Auto-Entrepreneurs, the micro social security rates are increased as follows:
o Sales – from 12% to 14% of turnover;
o Services – from 21.3% to 24.6% of turnover: and
o Profession Libérale – from 18.3% to 21.3%.
Updated 2nd January 2013
This outline is provided for information purposes only. It does not constitute advice or a recommendation from The Spectrum IFA Group to take any particular action to mitigate the effects of any potential changes in French tax legislation.
If you would like to discuss how these changes may affect you, please do not hesitate to contact your local Spectrum IFA Group adviser.