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PROPOSED CHANGES TO FRENCH TAX INTRODUCED ON SEPTEMBER 28, 2012
Oct 9 2011ADDITIONAL INCOME TAX BRACKET
French income tax brackets currently range from 5.5% to 41% for taxable income above €70,830. A new 45% bracket, which would apply to income received as from January 1, 2012, would be created for taxable income exceeding €150,000.
INCREASED TAXATION OF FINANCIAL INCOME
French resident individuals may currently choose between including their interest and dividend income in their overall income subject to progressive income tax rates (in which case, dividends may generally benefit from a 40% reduction), or being subject to a final withholding tax of 21% on dividends from certain entities and 24% on interest. In all cases, social contributions are payable for a total of 15.5%, 5.8% being deductible for income tax purposes when the income is subject to progressive income tax rates.
Under the proposed finance bill, French resident individuals would no longer benefit from a final withholding tax on their dividend and interest income, which would have to be included in the ordinarily taxable income, and subject to progressive tax rates. In addition, social contributions for a total of 15.5% would be payable, the deductible portion of such contributions being reduced from 5.8% to 5.1%. The 40% reduction on certain dividends would still be applicable.
Income tax on dividends and interest would be paid in two steps: first the 21% or 24% withholding tax would be mandatorily applied on the date of payment; second, the financial income would be included in the basis subject to progressive income tax rates for the relevant year, with a credit for the tax previously withheld.
This measure would be applicable to income received as of January 1, 2012.
INCREASED TAXATION OF CAPITAL GAINS, STOCK OPTIONS
Under current rules, capital gains on shares realized by individuals are subject to a flat tax rate of 19%. Social contributions for a total of 15.5% are also payable. Subject to applicable tax treaties, foreign residents holding a substantial participation in a French company are also generally subject to the 19% tax (but not the 15.5% social contributions).
Under the proposed finance bill, capital gains realized as from January 1, 2012 would be included in the ordinarily taxable income, and subject to progressive rates. In addition, social contributions for a total of 15.5% would be payable, 5.1% being deductible.
Capital gains would benefit from a reduction in basis depending on the holding period of the shares: such reduction would amount to 5% for shares held for at least two years, and would be progressively increased to a maximum of 40% for a twelve-year holding period. The holding period would be calculated as from January 1, 2013.
The tax rate applicable to non-resident individuals holding a substantial participation would be increased to 45% for gains realized as from January 1, 2013. A refund could, however, be claimed if such tax is higher than the income tax resulting from the application of the progressive rates to such gains.
Stock Options and Free Shares
Currently, subject to certain conditions, the acquisition gain on stock options and free share grants (i.e., for stock options, the difference between the fair market value of the shares at the date of exercise of the option and the strike price, and for free shares, the fair market value of such shares at the date of their effective attribution) may be taxed as a capital gain in the year during which the shares are sold, at a flat rate of 18 or 30%.
These reduced tax rates would no longer apply to acquisition gains on shares sold as from January 1, 2012. Such acquisition gain would be subject to the progressive rates of income tax.
75% TAX ON INCOME FROM PROFESSIONAL ACTIVITIES
The 75% tax was a symbolic measure of François Hollande’s electoral campaign. Since his election, the nature and scope of this tax has been the subject of intense discussions within the presidential majority. As it is currently presented in the government’s draft budget, it would take the form of a temporary contribution separate from income tax, which would apply to the 2012 and 2013 income. The rate of this contribution would be 18%, the symbolic 75% rate being the addition of the 45% maximum income tax rate, “CSG” and “CRDS” taxes on compensation income for a total of 8%, and the 4% tax on high income introduced last year. The contribution would apply to professional income exceeding €1,000,000. It would not apply to capital gains and financial income. Consistent with their characterization as compensation income (see above), carried interest income and gains would be subject to the contribution.
INCREASED WEALTH TAX RATES
Wealth tax rates essentially similar to those that were in force prior to 2011 would be introduced: such rates would range from 0.50% for taxable net assets above €800,000 to 1.5% for taxable net assets above €10,000,000.
In order to comply with constitutional principles forbidding confiscatory taxation, a cap would be introduced to limit to 75% of a taxpayer’s net income the total of wealth tax and taxes payable on income (including certain capitalized income).
French income tax brackets currently range from 5.5% to 41% for taxable income above €70,830. A new 45% bracket, which would apply to income received as from January 1, 2012, would be created for taxable income exceeding €150,000.
INCREASED TAXATION OF FINANCIAL INCOME
French resident individuals may currently choose between including their interest and dividend income in their overall income subject to progressive income tax rates (in which case, dividends may generally benefit from a 40% reduction), or being subject to a final withholding tax of 21% on dividends from certain entities and 24% on interest. In all cases, social contributions are payable for a total of 15.5%, 5.8% being deductible for income tax purposes when the income is subject to progressive income tax rates.
Under the proposed finance bill, French resident individuals would no longer benefit from a final withholding tax on their dividend and interest income, which would have to be included in the ordinarily taxable income, and subject to progressive tax rates. In addition, social contributions for a total of 15.5% would be payable, the deductible portion of such contributions being reduced from 5.8% to 5.1%. The 40% reduction on certain dividends would still be applicable.
Income tax on dividends and interest would be paid in two steps: first the 21% or 24% withholding tax would be mandatorily applied on the date of payment; second, the financial income would be included in the basis subject to progressive income tax rates for the relevant year, with a credit for the tax previously withheld.
This measure would be applicable to income received as of January 1, 2012.
INCREASED TAXATION OF CAPITAL GAINS, STOCK OPTIONS
Under current rules, capital gains on shares realized by individuals are subject to a flat tax rate of 19%. Social contributions for a total of 15.5% are also payable. Subject to applicable tax treaties, foreign residents holding a substantial participation in a French company are also generally subject to the 19% tax (but not the 15.5% social contributions).
Under the proposed finance bill, capital gains realized as from January 1, 2012 would be included in the ordinarily taxable income, and subject to progressive rates. In addition, social contributions for a total of 15.5% would be payable, 5.1% being deductible.
Capital gains would benefit from a reduction in basis depending on the holding period of the shares: such reduction would amount to 5% for shares held for at least two years, and would be progressively increased to a maximum of 40% for a twelve-year holding period. The holding period would be calculated as from January 1, 2013.
The tax rate applicable to non-resident individuals holding a substantial participation would be increased to 45% for gains realized as from January 1, 2013. A refund could, however, be claimed if such tax is higher than the income tax resulting from the application of the progressive rates to such gains.
Stock Options and Free Shares
Currently, subject to certain conditions, the acquisition gain on stock options and free share grants (i.e., for stock options, the difference between the fair market value of the shares at the date of exercise of the option and the strike price, and for free shares, the fair market value of such shares at the date of their effective attribution) may be taxed as a capital gain in the year during which the shares are sold, at a flat rate of 18 or 30%.
These reduced tax rates would no longer apply to acquisition gains on shares sold as from January 1, 2012. Such acquisition gain would be subject to the progressive rates of income tax.
75% TAX ON INCOME FROM PROFESSIONAL ACTIVITIES
The 75% tax was a symbolic measure of François Hollande’s electoral campaign. Since his election, the nature and scope of this tax has been the subject of intense discussions within the presidential majority. As it is currently presented in the government’s draft budget, it would take the form of a temporary contribution separate from income tax, which would apply to the 2012 and 2013 income. The rate of this contribution would be 18%, the symbolic 75% rate being the addition of the 45% maximum income tax rate, “CSG” and “CRDS” taxes on compensation income for a total of 8%, and the 4% tax on high income introduced last year. The contribution would apply to professional income exceeding €1,000,000. It would not apply to capital gains and financial income. Consistent with their characterization as compensation income (see above), carried interest income and gains would be subject to the contribution.
INCREASED WEALTH TAX RATES
Wealth tax rates essentially similar to those that were in force prior to 2011 would be introduced: such rates would range from 0.50% for taxable net assets above €800,000 to 1.5% for taxable net assets above €10,000,000.
In order to comply with constitutional principles forbidding confiscatory taxation, a cap would be introduced to limit to 75% of a taxpayer’s net income the total of wealth tax and taxes payable on income (including certain capitalized income).
