by John Lansley

The Project de Loi de Finances 2018 was published on 27th September 2017 and it is no surprise that much of what Macron promised in his election manifesto has been included. With the aim of changing France’s economic model and encouraging growth, the budget proposes some major reforms.

If the proposals are passed, we will see the simplification of the taxation regime of income from capital, wealth tax replaced by a tax levied only on real estate and over a three-year period, the progressive elimination of tax d’habitation for around 80% of households.

Businesses also stand to benefit with gradual reductions in corporation tax and for micro- entreprises, the doubling of turnover limits.

Shown below is a summary of our understanding of the principle changes that will come into effect, if passed by parliament.

INCOME TAX (Impôt sur le Revenu)

It is proposed to increase the income tax bands of the barème scale, as follows:

INCOME…………………………….TAX RATE
Up to €9,807 …………………..0%
€9,808 to €27,086 ……….14%
€27,807 to €72,617 ………30%
€72,618 to €153,783………41%
€153,784 and over…………45%

If passed, the above will apply in 2018 in respect of the taxation of 2017 income, for example, pensions and earnings.

SOCIAL CHARGES (Prélèvements Sociaux)

It is proposed to increase the Contribution Sociale Généralisée (CSG) by 1.7%. This will result in investment income and property rental income being liable to total social charges of 17.2% and where France is responsible for the cost of the taxpayer’s healthcare in France, at a rate of 9.1% on pension income.

FLAT TAX on revenue from capital

It is planned to introduce a Prélèvement Forfaitaire Unique (PFU) at a single ‘flat tax’ rate of 30%, made up as follows:

➢ a fixed rate of income tax of 12.8%; plus

➢ social charges at the rate of 17.2% (taking into account the proposed increase).

The PFU will apply to interest, dividends and capital gains from the sale of shares.
However, for low tax paying households, the option to pay income tax at the progressive barème scale tax rates above will be available, if this is advantageous and in which case, they will also benefit from the existing 40% abatement on dividends.

The reform also proposes the abolition of the taper relief on capital gains from the sale of shares, in respect of gains from disposals from 2018.

The Livret A, Livret Développement Durable and Livret Épargne Populaire accounts remain exempt from income tax and social charges. However, the Plan Épargne Logement account – currently exempt from income tax for the first twelve years – would be subject to the PFU for accounts opened with effect from 1st January 2018.

ASSURANCE VIE & CAPITALISATION CONTRACTS

It is proposed that the current system of withholding tax rates plus social charges will be maintained on gains in amounts withdrawn, where the total amount of the capital remaining invested across all contracts of the insured is less than a threshold of €150,000 per person (so €300,000 for joint policies). Taking into account social charges at 17.2%, this results in gains in withdrawals taken being taxed as follows:

– during the first 4 years at 52.2%
– between 4 years and 8 years at 32.2%
– post 8 years at 24.7%

For taxpayers who invest new premiums from 27th September 2017, where the threshold above is exceeded, the PFU of 30% will be applied to gains generated from the premiums paid from 27th September 2017 but only on the portion of the capital remaining that exceeds the threshold (i.e. on a pro-rata basis), in respect of withdrawals made from 2018. However, the gain generated from premiums invested prior to the reform date will be taxed as per the current system.

The post 8-year abatement of €4,600 for a single taxpayer, or €9,200 for a couple, will be maintained.

All taxpayers will have the possibility to opt for taxation at the progressive income tax rates of the barème scale, plus social charges.

There is no change to the inheritance tax treatment of assurance vie contracts.

Example of how the PFU will work:

A single taxpayer invests €100,000 in an assurance vie contract in 2007 and makes an additional premium of €200,000 in 2018. He decides to fully surrender the assurance vie in 2019, when the value of the contract is €360,000. €50,000 of the gain is attributed to the 2007 premium and €10,000 to the premium invested in 2018. Our understanding is that the tax on the total gain of €60,000 would be calculated as follows:

– 2007 premium: (€50,000 – €4,600) x 7.5% = €3,405.00

– 2018 premium: as he has only ‘used’ €100,000 of the €150,000 threshold against the 2007 premium, the balance of €50,000 can be applied to the premium paid after the date of the reform, which is 25% of the €200,000 invested. Therefore, 25% of the gain of €10,000 relating to the 2018 premium will be taxed at 7.5% and the balance at 12.8%, as follows:

-(€10,000 x 25%) x 7.5% = €187.50
– (€10,000 x 75%) x 12.8% = 960.00
– Total tax = €3,405.00 + €187.50 + €960.00 = €4,552.50 plus social charges.

For amounts withdrawn from contracts that have been held for less than 8 years, the gain generated by premiums invested after 27th September 2017, which exceeds the threshold, will be taxed at 12.8%. For other cases, it is proposed that the current withholding tax rates of 35% for redemptions during the first 4 years of the contract, and 15% between 4 and 8 years, will continue to apply. Social charges will also be payable.

WEALTH TAX (Impôt de Solidarité sur la Fortune)

The government proposes to abolish the current wealth tax system and replace this with Impôt sur la Fortune Immobilier (IFI).

IFI would apply only to real estate assets and the principal residence would still be eligible for the 30% abatement against its value. Therefore, taxpayers with net real estate assets of at least €1.3 million would be subject to IFI on taxable assets exceeding €800,000, as follows:

FRACTION OF TAXABLE ASSETS ………………..TAX RATE
Up to €800,000…………………………………………………. 0%
€800,001 to €1,300,000 ………………………………..;..0.50%
€1,300,001 to €2,570,000…………………………………0.70%
€2,570,001 to € 5,000,000………………………………1%
€5,000,001 to €10,000,000…………………………….1.25%
Greater than €10,000,000 ……………………………..1.5%

ENTRY INTO LAW

The bill will now be debated by the National Assembly and the Senate, during the weeks ahead and so it cannot be ruled out that some changes may take place before the final text of the draft law is agreed. Indeed, there are already some protests being made about the idea that luxury goods, such as yachts and gold bullion, should be exempt from wealth tax!

The final bill will then be referred to the Constitutional Council for review before entering into law. 11th October 2017