Wealthy Hit By Higher Taxes In France

There have been a number of tax reforms in France this year, with changes introduced in both the supplementary Finance Bill for 2011 which was finalised at the beginning of summer and

There have been a number of tax reforms in France this year, with changes introduced in both the supplementary Finance Bill for 2011 which was finalised at the beginning of summer and the austerity budget measures announced in late August. France?s wealthier residents have been particularly hit as the government looks to higher earners to help bring down the budget deficit.

One of the measures announced in August, and which comes within the framework of the 2012 Budget Bill, is a new, top rate of tax for high earners. This is referred to as an ?exceptional contribution? and is currently scheduled to be levied until the government succeeds in reducing the public deficit to 3% of gross domestic product, which it is aiming to accomplish in 2013.

When the tax was announced in the summer, the tax rate was 3% and it was to be charged on income over ?500,000 per part. After opposition parties denounced the tax as merely ?cosmetic?, the government reached a compromise with the parliamentary majority and the new tax rates are now as follows:

? Income between ?250,000 and ?500,000: 3%

? Income over ?500,000: 4%

More than twice the number of households are affected than would have been under the original proposal, and the tax will now generate around ?410 million for the state budget. When the exceptional tax was first mooted it was for 1% or 2% on income over ?1 million, so it has significantly increased since then.

This applies to all income which is subject to the scale rates of income tax, so employment income, pension income, rental earnings and some investment income.

The top income tax rate is therefore now 45% in France, and this is before you add social charges of 8% (salaries), 7.1% (pensions) or 13.5% (investment income). It applies to income earned/received in 2011.

The latest austerity budget also included other tax increases.

The social charges rate applied to income from capital (investment income, bank interest, annuities, rental income and capital gains) taxed at the fixed rates increased from 12.3% to 13.5%, with effect from 1st October. Where such income is taxed at the scale rates, the increased rate of social charges applies from 1st January 2011.

The fixed rate of withholding tax applied to interest and dividends is increasing from 19% to 25%. This is a 32% tax increase! The same rate of tax applies to bank interest earned outside France, including in offshore centres.

A number of tax breaks have also been scaled back by another 10%, and taxes increased on alcohol, sugared drinks and tobacco.

French residents who have a trust could also be hit by the new tax treatment of trusts in France, which were introduced as part of the supplementary finance bill for 2011 which came into force on 30th July. The key changes are to wealth and succession taxes and many people will find that their trust assets are now liable to these two taxes, and the tax rates for both can be punitive.

Trustees also now have to follow strict reporting requirements to the French authorities. If you already have a trust you need to seek specialist advice on the best way forward for you.

These are taxing times in France, but with the right arrangements it is often still possible to reduce tax on your savings, investments and pensions. French taxation is rather complex, so it is important to seek professional guidance from a firm such as Blevins Franks to make sure you get it right and avoid paying more tax than necessary.

By David Franks, Chief Executive, Blevins Franks

25th October 2011

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 must take personalised advice.