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France has a reputation for being a high tax country, so reforms that could reduce taxation are very welcome. The Finance Law for 2018 introduced two significant changes, which particularly affect those with higher investment income and/or wealth.

What do these reforms mean for you?

Income tax and social charges

First the bad news (though it is not too bad). Social charges have increased by 1.7% for all types of income. So the rates for this year are 9.7% for employment income; 17.2% for investment income, and 9.1% for pension income (you are exempt for pension income if you have Form S1 or do not have access to the French healthcare system).

The income tax rates remain the same as last year, though the income bands have increased slightly with inflation.

New flat tax for interest, dividends, capital gains on the sale of shares and securities

Over recent years you will have been paying income tax on your investment income, but now a brand new tax has been introduced. Officially called the Prélèvement Forfaitaire Unique (PFU), it is more commonly referred to as the ‘flat tax’. The same rate applies to everyone, regardless of how much you earn.

The rate is 30%, and the good news is that this includes both income tax and social charges.

Whereas this could be a significant tax saving for higher earners, if you do not earn much investment income (i.e. less than €150,000 per individual/€300,000 for a joint investment for married/PACS couples) you may pay more tax with the flat tax. In this case, you can opt to use the progressive rates of income tax instead (as you did last year), plus 17.2% social charges. Beware, however, that once you make this election it applies to all your income; you cannot, for example, pay income tax on your interest and the flat tax on your capital gains.

When it comes to selling shares, the tax relief for holding them for a number of years is no longer available under the flat tax system. The relief now only applies if you opt for the income tax rates, and only for shares bought prior to 2018.

The flat tax does not apply to rental income, or real estate gains.

Assurance-vie

The flat tax does apply to assurance-vie policies, but only where the policy was set up after 26th September 2017 (and withdrawals occurred after 1st January 2018).

If your policy was set up before 27th September, you can opt for the old fixed rate system. For any top ups after this date, the proportion of the gain element relating to the top-up will be subject to the 30% flat tax.

The allowance for policies held for more than eight years stays in place for all policies (€4,600 for individuals and €9,200 for married/PACS couples).

Need personalised advice?  Contact our local advisers

Wealth tax now only applies to real estate assets

The second big change was the wealth tax reform. Impôt sur la Fortune (ISF) which applied to your household’s total wealth (including property, investments, jewelry, art etc) was repealed and from 1st January 2018 replaced by a new real estate wealth tax – Impôt sur la Fortune Immobilière (IFI).

This means that your savings and investments (including assurance-vie policies) are no longer liable to wealth tax, regardless of the total value. The exception is for financial assets of a real estate nature.

These reforms make this an excellent time to review your tax planning. Establish what the changes mean for you, and whether you should re-structure your assets to take full advantage. Seek personalised, specialist advice to ensure your tax planning is designed around your circumstances and objectives, and you are not paying any more tax than necessary.

The tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; an individual is advised to seek personalised advice.