HR and tax alert | October 2017
France publishes 2018 Finance bill
On 27 September 2017, the French Government presented the main tax provisions of the Finance bill for 2018, prior to the bill being submitted to the French Parliament.
This bill contains beneficial measures for both individuals and companies. Making good on President Macron’s campaign pledge, the bill contains two main reforms that would affect individuals: the abolition of the wealth tax and the introduction of a final 30% flat tax on capital income (dividends; interests, capital gains, carried interest and director’s fees).
The bill will be discussed by the French Parliament over the following weeks and may be subject to amendments; the final version is expected to be enacted by the end of December 2017.
Replacement of the wealth tax (ISF) by a real estate wealth tax (IFI)
Currently, the French wealth tax (ISF) is assessed on all the assets owned by the taxpayer when net wealth exceeds a certain threshold (€1.3 million). The basis for the wealth tax includes worldwide assets for taxpayers domiciled in France and French real estate for non-resident taxpayers.
The Finance bill provides that the ISF would be repealed and replaced, with effect from 1 January 2018, by a new real estate wealth tax (“Impôt sur la Fortune Immobilière” - IFI), that would be assessed only on the real estate owned by the taxpayer to the extent that the value of the taxpayer’s real estate net assets exceeds €1.3 million.
All other assets (especially financial assets) would no longer be subject to the wealth tax. The aim of the reform is to encourage taxpayers to finance the economy (companies or business activities). Certain real estate or real estate rights (those deemed used for professional purposes, under very strict conditions and criteria) of the taxpayer would be excluded from this new IFI. The progressive rates of the IFI would be similar to those that currently apply for the ISF.
The five year exemption for property held outside of France for new French residents continues. As with individuals domiciled outside of France, those who have not been domiciled in France during the five years preceding their arrival on the French territory will only be taxed on their French real estate assets, until 31 December of the fifth year following the year of their arrival in France.
The IFI will have the same taxation scale as the former ISF and similar rules as for the French wealth tax will apply as follows:
- Real estate used in a trade or business will be excluded.
- The 30% abatement on the main residence continues.
- The tax reduction for investments in small & medium sized companies will no longer apply.
- The tax reduction for eligible gift is retained (which equals 75% of the value of the gift).
Flat tax on capital income (PFU)
Currently, financial income (dividends, interests, capital gains on sale of shares) earned by individuals is subject to social taxes at a cumulative rate of 15.5% plus income tax assessed at progressive rates (up to 45%, but with certain abatements which reduce the amount subject to tax for dividends and capital gains, depending, for the latter, on the length of time during which the taxpayer has owned the investments). Overall, the global rate of taxation of financial income could be up to 46.5% for dividends and 64.5% for capital gains.
The draft finance bill for 2018 introduces a flat tax rate (“PFU”) on income from capital (interests, dividends, capital gains, director fees, carried interests). The rate for the PFU is set at 30%, made up of 12.8% income tax and 17.2% social taxes.
Taxpayers with smaller incomes will be allowed to use the progressive rates for personal income tax by election rather than using the flat tax rate.
However, the exceptional contribution on high income (3% or 4%) remains:
- 3% for taxable income exceeding EUR 250,000 for a single taxpayer and EUR 500,000 for married taxpayers.
- 4% for taxable income exceeding EUR 500,000 for single taxpayers and EUR 1,000,000 for married taxpayers.
The flat rate tax will come into effect on 1 January 2018.
Interest and dividends
Currently, French banks apply a flat, but not final withholding tax on interest (24%) and dividend (21%) income received by individuals. This withholding tax will remain but the tax will now be final, at a rate of 30%.
Where an individual elects to be taxed using the progressive rates, the abatement of 40% should still be applied on dividends, but only for French income tax calculations, not French social surtaxes.
As a result of the implementation of the PFU, the rate of withholding which applies to dividends paid to individual taxpayers domiciled outside of France is adjusted to 12.8% plus 17.2% social taxes.
Capital gains from the sale of shares
Where the taxpayer elects for taxation at flat rates (30%), no abatement for the length of ownership applies. However, if the taxpayer elects for taxation using the progressive rates (45%), the current abatements will apply (50% for shares held for more than two but less than eight years and 65% if held for eight years or more). Such an election is only available for shares acquired prior to 1 January 2018.
Housing tax (“taxe d’habitation”) reform will begin with an initial one-third reduction for 80% of households subject to the dwelling tax (approximately 17 million households). However, the reform will only apply over three years, through three successive decreases of one third of the current amount of tax, with a full exemption from 2020.
This decrease will apply to households whose taxable income does not exceed EUR 27,000 for a single taxpayer, which is increased by EUR 8,000 for each of the two first dependents, and then by EUR 6,000 for each additional dependent.
To avoid the significant disparities once an individual exceeds this limit, the loss of the housing tax reduction is phased for those with incomes between the ceiling and EUR 28,000 for a single taxpayer (increased by EUR 8,500 for the first two dependents). The limit is also increased to EUR 45,000 for a couple (increased by EUR 6,000 for additional dependents).
Increase in CSG and decrease in employee contributions
The CSG increases by 1.7%. This change is implemented alongside a reduction in unemployment and sickness contributions for employees.
As a reminder, because pensioners with the lowest income are exempt from CSG, more than half of pensioners will not be affected by the reform.
Changes to the taxation of acquisition gains for free shares qualified plans
The 2017 French Finance Act introduces a change to the tax treatment of the acquisition gain on the sale of shares depending on the amount of gain and applicable only to qualified RSU (free shares) granted with respect to an authorization given by the shareholders as from 31 December 2016:
- For the portion of the acquisition gain under an annual threshold of EUR 300,000, the gain is subject to standard progressive rates (currently up to 45%) with a reduction to the taxable amount of 50% if the shares are sold more than two years after the date of delivery or 65% if the shares are sold more than eight years after the date of vesting.
- For the portion of the acquisition gain exceeding an annual threshold of EUR 300,000, the gain is subject to standard progressive rates (currently up to 45%) without any reduction in the amount taxable.
- A specific 10% employee social contribution is applied on the portion of the acquisition gain exceeding EUR 300,000.
The 2018 French Finance Bill modifies the way the acquisition gains are taxed when the annual amount does not exceed EUR 300,000 - a reduction of the amount taxable equal to 50% will apply regardless of the actual holding period of the shares. This new regime will applies to grants authorized by shareholders after the publication of the 2018 Finance Act. As a reminder, the capital gain will be subject to the flat tax rate (PFU) at 30%. The 10% contribution on the portion of the acquisition gain exceeding EUR 300,000 continues.
Life insurance contracts
The tax payable on withdrawal of funds from life insurance contracts will be increased. Affecting only premiums paid into a life insurance contract as from 27 September 2017, a 30% flat tax (“PFU”) will be applied on the portion of the income relating to the portion of premiums exceeding EUR 150,000. The current tax rate of 23% will be payable on the withdrawal of funds relating to premiums from before 27 September 2017 and to premiums below EURO 150,000 from 27 September.
Corporate tax rate
The corporate tax rate which is currently 33.33% will be decreased to 31% in 2019, 28% in 2020, 26.5% in 2021 and 25% in 2022.
The cancellation of the wealth tax combined with the significant reduction of the taxation of passive income from shares and the decrease of the corporate income tax rate will increase the attractiveness of France as a place to live, work and do business. Employers who tax equalize the personal income of their high level executives will benefit from a substantial decrease in their tax equalization costs.
EYG no. 05920-173Gbl