As we approach the start of another new year, what new taxes or changes do we have to contend with in France in 2011?
As we approach the start of another new year, what new taxes or changes do we have to contend with in France in 2011?
French taxation
Depleted tax revenues following the financial crisis and the cost of bailing out banks and quantitative easing resulted in countries around Europe starting to increase taxation or reduce tax breaks in 2010 – and I think we can expect to see more of the same this year.
The French Finance Bill for 2011 includes tax measures which affect high income earners and investors in France ? see our previous article Investors To Pay More Tax In France.
The big tax news for 2011 may be the abolition of wealth tax and, along with it, the Bouclier Fiscal tax shield.
The latter was introduced by President Sarkozy to limit direct taxes to 50% of income. This helps those who are asset rich but cash poor and find it hard to find the cash to cover their wealth tax bill each year. It has however proved increasingly controversial and is seen by many as symbol of fiscal injustice.
France will have a supplementary Finance Bill next spring and in November Sarkozy signalled that both wealth tax (l?imp? de Solidarit?sur la Fortune ? ISF) and the Bouclier Fiscal could be abolished as part of the tax reform.
In a bid to make France more competitive on the world stage, the President said it was simply ?unacceptable? to have a gap in competitiveness with Germany, its principal trading partner which abolished wealth tax in 1997. France is more or less alone in Europe in holding onto this tax and the only member of the G7 to impose it.
Sarkozy emphasised the need to make taxes in France comparable and compatible in order to prevent an exodus of capital, jobs and industry away from France. He said:
?France has long made the mistake of taxing assets, rather than the earnings and capital gains from assets. We?re heading towards abolition of the tax shield and of the ISF and towards the creation of a new tax?.
And there?s the catch. While the abolition of wealth tax would be good news, of course the government is in no position to lose out on valuable revenue at the moment, so it will have to raise tax from elsewhere.
This means that higher earners could see another increase to the highest rate of income tax, perhaps along the lines of the UK?s hike to 50%, and/or the tax levied on capital gains could increase again, as could the social charges. Or Sarkozy could introduce a new tax on assets.
The above tax rises are again likely to impact on those who own assets directly, rather than those who invest via an Assurance Vie.
At the end of November, Budget Minister Fran?is Baroin suggested that one proposal being examined by the government was to increase the wealth tax threshold from ?790,000 to ?1.2 or ?1.3 million. We may hear other hypotheses about how the tax will be reformed before details are published in the spring ? but Sarkozy does seem keen on completely abolishing it.
Savings Tax Directive withholding tax
From 1st July 2011, the withholding tax rate applied by offshore banks under the EU Savings Tax Directive (STD) will jump from 20% to 35%.
The Isle of Man and Guernsey will scrap the withholding tax altogether and instead start to automatically exchange information on bank accounts held by EU residents. This means the French tax authorities will be informed about your account regardless of whether you declare it yourself or not.
Neither of the above should matter, as French tax residents should be declaring their offshore bank accounts and interest earnings in France and paying tax here. Paying the withholding tax does not exempt you from declaring the income in France and paying tax and social charges on it. If the offshore rate is higher than the French rate, no reimbursement is given for the difference.
In France interest earned from local bank accounts is subject to a fixed withholding tax of 19% (2011 rate) or at your marginal rate of tax and you can opt for interest from offshore centres to be taxed at the same rate. Interest is also subject to 12.1% social charges, over and above the tax. The government does have the option of taxing offshore assets at a higher rate than EU ones, so while this is not done at present there is always the risk that tax on offshore income will be increased.
Moving your capital into an Assurance Vie could result in you paying less tax on your income than either the STD or French withholding tax rate. As mentioned earlier in this article, this arrangement also offers a combination of tax benefits which are better than alternative investments. To date, the various taxation changes imposed or proposed have had limited impact on the Assurance Vie.
You should however always take personalised advice from an experienced wealth management firm with offices in France like Blevins Franks before implementing any tax planning strategies to make sure they are suitable for your specific circumstances and objectives.
By Bill Blevins, Managing Director, Blevins Franks
2nd December 2010
