Taxing Times In France

The French taxpayer’s plight has got worse over recent years, with tax reform after tax reform and a variety of tax rises.

France has long had a reputation for being a high tax country and having a complex tax regime. The taxpayer’s plight has got worse over recent years, with tax reform after tax reform and a variety of tax rises

The key change this year is in how investment income is taxed. Previously, you could choose whether your bank interest and dividend earnings were taxed at the scale rates of income tax or at fixed rates. Capital gains on shares and securities were also taxed at a fixed rate.

These fixed rates have now been abolished. With effect from January 2013, your investment income is taxed at the progressive income tax rates. The top rate is 45% for income over €150,000.

Higher earners will pay more tax, unless you move your capital into more tax efficient structures.

British expatriates should note that this also applies to interest and gains earned within ISAs, PEPs and National Savings & Investments, since these are not tax free investments here. You need to declare them in France – the UK authorities share information with their French counterparts.

Tax on capital gains made on the sale of property also increased this year. Gains are taxed at 19%, but now a surtax of up to 6% is added on depending on the amount of gain. At least the taper relief period is being reduced, so you will need to own a property for 22 years, instead of the current 30, for it to be tax free (tax only, not social charges).

Looking ahead, we can expect changes to the taxation of Assurance Vie contracts as part of the 2014 Finance Bill, following a government commissioned report.  They offer significant tax benefits, which currently include:

• Income and gains accumulated within the contract are tax free. Only the growth element of withdrawals is taxed.
• French approved Assurance Vie policyholders can choose to have their withdrawals taxed at the scale rates of income tax or special fixed rates. After eight years, the first €4,600 (€9,200 for couples) of growth is tax free and the tax rate is 7.5%.
• This tax treatment is based on when the contract was established.
• Where a policy is established when the life assured is under age 70, there is a succession tax exemption of €152,500 per beneficiary. Tax is payable at 20% up to €902,838 and any excess up to 25%.

Changes recommended in the report:

• Extend the number of years a policy needs to be held to obtain the tax free allowances and 7.5% rate to 10 or 12 years. 
• Remove the fixed tax rate option in the first four years. 
• Date supplementary payments (tops ups) to the policy, so the tax treatment of withdrawals is based on the date payments are made to the policy. 
• Reduce the tax free exemption for succession tax to €100,000. 

We cannot know which of these recommendations will be adopted, if any. The general view is that any changes will not be retroactive, though this cannot be guaranteed.

Assurance Vie will continue to enjoy favourable tax treatment, even if all the proposed changes are accepted. However, you should consider establishing or adding monies to a contract now, to take advantage of the exceptionally favourable current tax regime.

It is more important than ever to ensure your assets are invested as tax efficiently as possible. Seek specialist advice to ensure you get your tax planning right and save tax wherever possible.

20 August 2013

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 should take personalised advice.