Expat
update on French tax legislation
from the Spectrum IFA Group
FRENCH TAX CHANGES 2012
On 28th December 2011, the Constitutional Council approved both the Project de Loi de Finances Rectificative 2011-IV and the Project de Loi de Finances 2012. After publication of both texts in the Journal Officiel de la République Française on 29th December 2011, each of the bills was enacted into law on 30th December 2011.
Shown below is a summary of our understanding of the principle changes.
INCOME TAX
- There will be a freeze on the income tax barème scale and so the 2011 scale will continue to apply for 2012 and 2013.
- There will be an “exceptional contribution” on high incomes, which will continue to be applied until the budget deficit has been reduced. The exceptional contribution will be collected with income tax and will be calculated as follows:
Contribution Rate |
Revenu Fiscal de Référence |
| |
Single, widowed, separated or divorced taxpayers |
Taxpayers subject to joint taxation |
3% |
> €250,000 and
<= €500,000 |
> €500,000 and
<= €1,000,000 |
4% |
< €500,000 |
> €1,000,000 |
However, if the revenu fiscal de reference for the tax year in question is greater than or equal to 1½ times the average of the revenus fiscaux de reference of the previous two tax years, there will be a mechanism to soften the impact of the exceptional contribution.
The rate of the prélèvement forfaitaire libératoire, in respect of income from capital earned from 1st January 2012, is increased from 19% to:
- 24% for bank interest; and
- 21% for dividends.
WEALTH TAX
Despite the fact that the upper house of the Senate, in which there is a socialist majority, proposed that the entry level for wealth tax should be reduced again to €800,000 and that the Bouclier Fiscal abolished immediately, these proposals were defeated.
However, the current wealth tax bands will be frozen until the public deficit is below 3% of GDP, which is anticipated to be by the end of 2013. Hence, the bands will remain at:
- €1,300,000 to €2,999,999; and
- €3,000,000 and above
.
INHERITANCE TAX & GIFT TAX
There was also a proposal made to reduce the level of the inheritance and gift allowances to those that were in force prior to the introduction of the TEPA law. Fortunately, however, this was defeated.
Hence, the current allowances will be maintained until the public deficit is below 3% of GDP.
CAPITAL GAINS TAX
The capital gains tax (CGT) rate remains at 19%.
CGT & property
As concerns the sale of a second property, unfortunately, there is no change to the reformed CGT regime, which comes into effect on 1st February 2012. Hence, under the new law, the taper relief will be 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.
Thus, the property will be free from capital gains after 30 years and as is currently the case, the principal residence remains exempt from CGT (and social contributions) - although there were discussions around the idea of restricting the relief to a certain amount.
There are, however, two new cases of exemption from capital gains tax for property sales. The first case concerns the sale of a property that is not the seller’s principal residence:
- where it is the first sale of the property; and
- the seller has not been the owner of his/her principal residence (either directly or through intermediaries) during the last four years; and
- the proceeds of the property sold are invested, within twenty four months of the sale date, in the acquisition or the construction of a property, which will become the principal residence of the seller.
The above might be difficult to perceive and on the face of it, appears to be aimed at French nationals who are living outside of France. Typically, the person would be living in rented property or perhaps accommodation provided by their employer and hence, would not own their principal residence.
However, there is no reason why the reverse cannot apply. For example, a foreign national coming to live in France, who rents a property for at least four years and then sells a property (either in France or outside of France, with the only condition that it is the first sale of the property) and invests the proceeds into a principal residence.
The second case concerns the sale of the principal residence by an older person, who leaves this to move into a nursing home (maison de retraite médicalisée). Until now, the person would only be exempt from capital gains tax providing that the former principal residence is sold within twelve months of the date of entering the nursing home (i.e. under the standard principal residence exemption rules). For the future, the person will be exempt from capital gains tax for up to two years from the date of entering the nursing home providing that:
- the proceeds of the sale are used to fund the nursing home costs; and
- the person is not liable to wealth tax; and
- his/her revenue fiscal de reference is within a certain income threshold (this is basically the same income threshold that applies for exoneration from taxe foncièr and taxe d’habitation).
CGT & direct share holdings
The taper relief, applicable to the sale of direct share holdings that have been owned for at least eight years, which was due to come into effect in 2012, has been replaced by a system of ‘tax deferral’.
The conditions of the new system are fairly detailed and only apply to cases where the taxpayer (either alone or with members of his family) own at least 10% of the shares in the business. In addition, the taxpayer is required to re-invest the proceeds into a new business venture for at least five years.
NEW RATE OF VAT
The existing lower rate of VAT of 5.5% is increased to 7%, except for certain goods and services, for example, food, provision of school meals, goods and services for the disabled, etc.
CORPORATION TAX
For 2012 and 2013, there will be an exceptional contribution of 5% of the corporation tax due (before deduction of any tax credits and reductions), from companies with a turnover exceeding €250 million.
FISCAL NICHES
The overall ceiling on fiscal niches is reduced by 10%, as follows:
- with effect from 1st January 2012 (i.e. in respect of income for 2011), the maximum overall limit for tax reductions, tax deductions and tax credits is €18,000 plus 6% of revenue fiscal de reference for 2011; and
- with effect from 1st January 2013 (i.e. in respect of income for 2012), the maximum overall limit for tax reductions / deductions / credits will not be greater than €18,000 plus 4% of revenue fiscal de reference for 2012.
In addition, there will be a cap of 15% on the total amount of any income tax benefits.
As concerns investing in Small & Medium Enterprises - whether directly or in specially designated funds - there is no change to the ISF-PME Scheme. However as concerns IR-PME, the range of companies in which the investment can be made, to obtain the income tax deductions, has been limited.
The Scellier Scheme, which is not included in the overall ceiling for fiscal niches, will be abolished at the end of 2012. In the meantime, the tax deductions are as follows:
Year of property purchase Properties classed as “BBC” (bâtiments basse consummation) Properties classed as “non-BBC”
2009 & 2010 25% 25%
2011 22% 13%
2012 14% 8%
Donations to political parties are capped at €15,000 per annum for the taxable household.
WHAT LIES AHEAD
It is clear from all of the above that “austerity” is still at the forefront of the French government’s mind. What is also coming across strongly is the government’s belief that these measures will bring the deficit under control – i.e. to within 3% of GDP - by 2013.
2012 is a presidential election year and who knows whether or not the latest round of changes will still be in place post-election or whether we will be faced with yet more proposals for change. After having had a total of five budgets during 2011, it would seem rather odd to have only one budget in 2012, particularly since there are no proposals to further increase social contributions beyond the current rate of 13.5%!
However, discussions have already commenced on the idea of merging income tax and social charges. Should this take place, this would be beneficial for those people living principally on investment capital, but would be detrimental for those living mainly on pension income, since pension income is not liable to social contributions providing the recipient is a holder of a Certificate S1 (formerly E121).
On a final note, however, it may make you feel better to know that the President and the politicians are also on a pay freeze until the country’s deficit is within 3% of GDP!
5th January 2012
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.
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