2011 is turning out to be an excessively taxing year in France, with its seemingly endless and less welcome tax changes. No sooner had the Finance Bill for 2011 been passed than the
2011 is turning out to be an excessively taxing year in France, with its seemingly endless and less welcome tax changes. No sooner had the Finance Bill for 2011 been passed than the government began discussing the supplementary budget. And then, almost immediately afterwards, even more tax rises were announced.
When the supplementary Finance Bill for 2011 was approved by parliament at the end of June, Budget Minister Fran?is Baroin said it was the largest fiscal reform for over 20 years. Here?s a brief summary of the July 2011 tax reforms.
For a start, the bouclier fiscal is abolished from 2012.
The key changes were to wealth tax. With effect from this year, if your total chargeable wealth is below ?1.3 million you do not pay any wealth tax. Other changes start next year, when there will be just two tax rates: 0.25% for households with wealth between ?1.3m and ?3m and 0.5% for those with wealth over ?3m. Tax will now be charged at the relevant rate on your entire wealth, from the first Euro. Most people are better off under the new system, unless you own high value assets but have relatively little income.
If you leave France you may get caught by the new exit tax on investments, levied at 19% plus social charges (now 13.5%) on the portion of share gains accrued while resident in France. The gain remains exempt once the shares have been held for eight years.
The Finance Bill introduced a definition for trusts and made them subject to French tax law and reportable even if located in an offshore jurisdiction. Income distributed by a trust is subject to income tax, and trusts will be subject to wealth and succession taxes if the settlor or beneficiary is tax resident in France, or the assets in question are French assets.
There is a specific exemption for pension scheme trusts set up by a company.
If you have a trust, or want to set one up, you will need specialist advice.
The Bill also included changes to succession tax. The top rates have increased from July this year, so that, for spouses, partners and direct line family, inheritances between ?902,839 and ?1,805,677 are taxed at 40% and above ?1,805,677 at 45%. There were also changes specifically to the taxation of gifts.
There were also last minute changes to succession tax on assurance vie policies. These policies offer various tax advantages in France, and despite some changes to the very advantageous existing regime they are still likely to offer help with succession tax planning in addition to income tax planning.
The tax rate on payments to beneficiaries (spouses are exempt) where the policy was set up before the life assured is 70 increased from 20% to 25% – but only where the amount received by each beneficiary (after deducting their allowance of ?152,500) is more than ?902,838.
Previously, whether tax was payable on the death of the life assured depended on their residence status when the policy commenced, and not at death. Now a tax charge will arise where either the life assured or the beneficiary is tax resident in France. In these cases, if your policy was set up before you were 70 the above 20%/25% rates apply. If you were older than 70, one allowance of ?30,500 is available (shared amongst all beneficiaries) and the normal succession tax rates and allowances apply to the balance of capital invested. Any growth is free of succession tax.
All the above are the tax changes in July?s Finance Bill? but there?s more on the way.
With the economy slowing, the need to safeguard France?s AAA credit rating (crucial for the whole Eurozone and not just France) and the imperative to achieve tough deficit reduction targets, we couldn?t really be surprised when on 25th August the government announced its plans for another austerity package. The measures were voted on by MPs on 6th September and approved by the S?at on 8th September. They include ?
(1) The fixed withholding tax rate on interest and dividends to increase from 19% to 25% from 2011.
(2) From October 2011, social charges to increase from 12.3% to 13.5% for all investment income, including dividends, bank interest, annuities, rental income and capital gains.
(3) Again from this year, a new top tax rate (?exceptional contribution?) for high earners, charged at 3% for income over ?500,000 per part. This additional tax had been expected, but at 1% or 2% on incomes over ?1m.
(4) New rules for capital gains tax on the sale of second homes, rental properties, development land and empty properties. Total exemption from tax and social charges will only be available after 30 years, and not 15 as currently. Deductions will be 2% per year for years 6-17; 4% for years 18-24 and 8% for years 25-30. This will apply to sales where the acte de vente is signed after 1st February 2012.
The sale of the main residence remains tax-free. The ?main home? is defined as the place of habitual residence, i.e. where you work, declare your taxes, children go to school, etc. If you have a country home but rent a flat in town for work, the country home is your second home and subject to CGT.
(5) A number of tax breaks to be scaled back by another 10%.
(6) Partial reversal of 2007 law exempting overtime pay from taxation.
Proposals (3) and (6) will remain in place until the budget deficit is back to 3%, which should be in 2013 if all goes to plan. It is a challenging target date!
This is unlikely to be the end of the tax reforms as Sarkozy seems quite determined to fix France?s economy. As part of the Finance Bill for 2012, parliament will be discussing further tax increases, including the creation of a new 46% income tax band.
Tax planning in France is never easy at the best of times, and the recent changes certainly mean that for most expatriates skilful, expert, guidance on how to keep taxation to a minimum is now more necessary than ever.
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.
By Bill Blevins, Managing Director, Blevins Franks
8th September 2011