French Tax Changes 2017
By Spectrum IFA
This article is published on: 3rd January 2017
During December, the following legislation has entered into force:
- the Loi de Finances 2017
- the Loi de Finances Rectificative 2016(I); and
- the Loi de Financement de la Sécurité Sociale 2017
Shown below is a summary of our understanding of the principle changes.
INCOME TAX (Impôt sur le Revenu)
The barème scale, which is applicable to the taxation of income and gains from financial assets, has been revised as follows:
|Up to €9,710
|€9,711 to €26,818
|€26,819 to €71,898
|€71,899 to €152,260
|€152,261 and over
The above will apply in 2017 in respect of the taxation of 2016 income and gains from financial assets.
A tax reduction of 20% will be granted when the income being accessed for taxation is less than €18,500 for single taxpayers, or €37,000 for a couple subject to joint taxation. These thresholds are increased by €3,700 for each additional dependant half-part in the household.
For single taxpayers with income between €18,500 and €20,500, and couples with income between €37,000 and €41,000 (plus in both cases any threshold increase for dependants), a tax reduction will still be granted, although this will be scaled down.
Prélèvement à la source de l’impôt sur le revenu
Currently, taxpayers complete an income tax declaration in May each year, in respect of income received in the previous year. From the beginning of the year, on-account payments of income tax are made, but pending the assessment of the declaration, these are based on the level of income received two years previously. In August, notifications of the actual income tax liability for the previous year are sent out and taxpayers are sent a bill for any underpayment or income tax for the previous year, or in rare situations, there may be a rebate due, typically in the situation where income has reduced, perhaps due to retirement or long-term disability.
Hence, at any time, there is a lag between the tax payments being made in respect of the income being assessed. Therefore, with the aim of closing this gap, France will move to a more modern system of collection of income tax, by taxing income as it arises. This reform will apply to the majority of regular income (including salaries, pensions, self-employed income and unfurnished property rental income), which will become subject to ‘on account’ withholding rates of tax from 1st January 2018.
Where the income is received from a third-party located in France, the organisation paying the income will deduct the tax at source, using the tax rate notified by the French tax authority. The advantage for the taxpayer is that the income tax deduction should more closely reflect the current income tax liability, based on the actual income being paid at the time of the tax deduction.
For income received from a source outside of France, the taxpayer will be required to make on-account monthly tax payments. The on-account amount payable will be set according to the taxpayer’s income in the previous year. However, if there is a strong variation in the current year’s income (compared to the previous year), it will be possible to request an interim adjustment to more accurately reflect the income actually being received, at the time of the payment of the tax.
Transitional payment arrangements will be put in place, as follows:
- in 2017, taxpayers will pay tax on their 2016 income
- in 2018, they will pay tax on their 2018 income, in 2019, they will pay tax on their 2019 income, and so on
- in the second half of 2017, any third party in France making payments will be notified of the levy rate to be applied, which will be determined from 2016 revenues reported by the taxpayer in May 2017
- from 1st January 2018, the levy rate will be applied to the income payments being made – and
- the levy rate will then be amended in September each year to take into account any changes, following the income tax declaration made in the previous May
Taxpayers will still be required to make annual income tax declarations. However, what is clear from the transitional arrangements is that the income of 2017 that falls within the review will not actually be taxed; this is to avoid double taxation in 2018 (i.e. of the combination of 2017 and 2018 income). Therefore, to avoid any abuse of the reform, special provisions have been introduced so that taxpayers – who are able to do so – cannot artificially increase their income for the 2017 year.
Furthermore, exceptional non-recurring income received is excluded from the scope of the reform in 2017; this includes capital gains on financial assets and real estate, interest, dividends, stock options, bonus shares and pension taken in the form of cash (prestations de retraite servies sous forme de capital). Therefore, taxpayers will not be able to take advantage of the 2017 year to avoid paying tax on these types of income.
At the same time, the benefits of tax reductions and credits for 2017 will be maintained and allocated in full at the time of tax balancing in the summer of 2018, although for home care and child care, an advance partial tax credit is expected from February 2018. Charitable donations made in 2017, which are eligible for an income tax reduction, will also be taken into account in the balancing of August 2018.
WEALTH TAX (Impôt de Solidarité sur la Fortune)
There are no changes to wealth tax. Therefore, taxpayers with net assets of at least €1.3 million will continue to be subject to wealth tax on assets exceeding €800,000, as follows:
|Fraction of Taxable Assets
|Up to €800,000
|€800,001 to €1,300,000
|€1,300,001 to €2,570,000
|€2,570,001 to € 5,000,000
|€5,000,001 to €10,000,000
|Greater than €10,000,000
CAPITAL GAINS TAX – Financial Assets (Plus Value Mobilières)
Gains arising from the disposal of financial assets continue to be added to other taxable income and then taxed in accordance with the progressive rates of tax outlined in the barème scale above.
However, the system of ‘taper relief’ still applies for the capital gains tax (but not for social contributions), in recognition of the period of ownership of any company shares, as follows:
- 50% for a holding period from two years to less than eight years; and
- 65% for a holding period of at least eight years
This relief also applies to gains arising from the sale of shares in ‘collective investments’, for example, investment funds and unit trusts, providing that at least 75% of the fund is invested in shares of companies.
In order to encourage investment in new small and medium enterprises, the higher allowances against capital gains for investments in such companies are also still provided, as follows:
- 50% for a holding period from one year to less than four years;
- 65% for a holding period from four years to less than eight years; and
- 85% for a holding period of at least eight years
The above provisions apply in 2017 in respect of the taxation of gains made in 2016.
CAPITAL GAINS TAX – Property (Plus Value Immobilières)
Capital gains arising on the sale of a maison secondaire and on building land continue to be taxed at a fixed rate of 19%. However, a system of taper relief applies, as follows:
- 6% for each year of ownership from the sixth year to the twenty-first year, inclusive; and;
- 4% for the twenty-second year.
Thus, the gain will become free of capital gains tax after twenty-two years of ownership.
However, for social contributions (which remain at 15.5%), a different scale of taper relief applies, as follows:
- 1.65% for each year of ownership from the sixth year to the twenty-first year, inclusive;
- 1.6% for the twenty-second year; and
- 9% for each year of ownership beyond the twenty-second year.
Thus, the gain will become free of social contributions after thirty years of ownership.
An additional tax continues to apply for a maison secondaire (but not on building land), when the gain exceeds €50,000, as follows:
|Amount of Gain
|€50,001 – €100,000
|€100,001 – €150,000
|€150,001 to €200,000
|€200,001 to €250,000
|€250,001 and over
Where the gain is within the first €10,000 of the lower level of the band, a smoothing mechanism applies to reduce the amount of the tax liability.
The above taxes are also payable by non-residents selling a property or building land in France.
SOCIAL CHARGES (Prélèvements Sociaux)
As has been widely publicised, on 26th February 2015, the European Court of Justice (ECJ) ruled that France could not apply social charges to ‘income from capital’, if the taxpayer is insured by another Member State of the EU/EEA or Switzerland. Income from capital includes investment income on financial assets and property rental income, as well as capital gains on financial assets and real estate.
Fundamental to this decision was the fact that the ECJ determined that France’s social charges had sufficient links with the financing of the country’s social security system and benefits. EU Regulations generally provide that people can only be insured by one Member State. Therefore, if the person is insured by another Member State, they cannot also be insured by France and thus, should not have to pay French social charges on income from capital.
On 27th July 2015, the Conseil d’Etat, which is France’s highest court, accepted the ECJ ruling, which paved the way for those people affected to reclaim social charges that had been paid in 2013, 2014 and 2015. This applied to all residents of any EU/EEA State and Switzerland, who had paid social charges on French property rental income and capital gains, but excluded residents outside of these territories.
However, to circumvent the ECJ ruling, France amended its Social Security Code. In doing so, it removed the direct link of social charges to specific social security benefits that fall under EU Regulations. The changes took effect from 1st January 2016.
Hence, if you are resident in France, social charges are applied to your worldwide investment income and gains. The current rate is 15.5% and the charges are also payable by non-residents on French property rental income and capital gains.
Whilst the French Constitutional Council validated the changes in the French Social Security law, it remains highly questionable under EU law. One hopes, therefore, that this may be censored again by the ECJ, at some point.
EXCHANGE OF INFORMATION UNDER COMMON REPORTING STANDARD:
As of December 2016, there are now already over 1,300 bilateral exchange relationships activated, with respect to more than 50 jurisdictions. Many jurisdictions have already been collecting information throughout 2016, which will be shared with other jurisdictions by September 2017.
However, there are many more jurisdictions that are committed to the OECD’s Common Reporting Standard (CRS) and so it is anticipated that more information exchange agreements will be activated during 2017.
In the EU, the CRS has been brought into effect through the EU Directive on Administrative Cooperation in the Field of Taxation, which was adopted in December 2014. The scope of information exchange is very broad, including investment income (e.g. bank interest and dividends), pensions, property rental income, capital gains from financial assets and real estate, life assurance products, employment income, directors’ fees, as well as account balances of financial assets.
No-one is exempt and therefore, it is essential that when French income tax returns are completed, taxpayers declare all income and gains – even if this is taxable in another country by virtue of a Double Taxation Treaty with France.
It is also obligatory to declare the existence of bank accounts and life assurance policies held outside of France. The penalties for not doing so are €1,500 per account or contract, which increases to €10,000 if this is held in an ‘uncooperative State’ that has not concluded an agreement with France to provide administrative assistance to exchange tax information. Furthermore, if the total value of the accounts and contracts not declared is at least €50,000, then the fine is increased to 5% of the value of the account/contract as at 31st December, if this is greater than €1,500 (€10,000 if in an uncooperative State).
2nd January 2017
This outline is provided for information purposes only. It does not constitute advice or a recommendation from The Spectrum IFA Group to take any particular action to mitigate the effects of any potential changes in French tax legislation.
Common Reporting Standards
By Chris Burke
This article is published on: 13th June 2016
What is it and what does it mean?
Common Reporting Standards is also known as automatic exchange of information (AEI). It originated in May 2014 with 47 countries tentatively agreeing to share information on residents’ assets and incomes automatically as standard practice.
It is the Brainchild of the OECD (Organisation for Economic Co-operation and Development). Previously this information was shared at request, however this was not effective and largely unsuccessful. The main emphasis of this is to battle against tax evasion.
How will it work?
Countries will transfer all the relevant information automatically and systematically including:
- The name, address, TIN (Tax Identification Number) date and place of birth of each reportable person
- Account number
- Name and identifying number of the Reporting Financial Institution
- Account balance or value at end of calendar year, or if closed during that year
- Each country is allowed to determine which accounts are reportable
When will it start?
Most European countries will start reporting in 2017, including Spain and the UK. For note of interest, other countries will report in 2018 including Andorra.
Starting to report in 2017:
Anguilla, Argentina, Barbados, Belgium, Bermuda, British Virgin Islands, Bulgaria, Cayman Islands, Colombia, Croatia, Curaçao, Cyprus, Czech Republic, Denmark, Dominica, Estonia, Faroe Islands, Finland, France, Germany, Gibraltar, Greece, Greenland, Guernsey, Hungary, Iceland, India, Ireland, Isle of Man, Italy, Jersey, Korea, Latvia, Liechtenstein, Lithuania, Luxembourg, Malta, Mexico, Montserrat, Netherlands, Niue, Norway, Poland, Portugal, Romania, San Marino, Seychelles, Slovak Republic, Slovenia, South Africa, Spain, Sweden, Trinidad and Tobago, Turks and Caicos Islands, United Kingdom
Starting to report in 2018:
Albania, Andorra, Antigua and Barbuda, Aruba, Australia, Austria, The Bahamas, Belize, Brazil, Brunei Darussalam, Canada, Chile, China, Cook Islands, Costa Rica, Ghana, Grenada, Hong Kong (China), Indonesia, Israel, Japan, Kuwait, Marshall Islands, Macao (China), Malaysia, Mauritius, Monaco, Nauru, New Zealand, Qatar, Russia, Saint Kitts and Nevis, Samoa, Saint Lucia, Saint Vincent and the Grenadines, Saudi Arabia, Singapore, Sint Maarten, Switzerland, Turkey, United Arab Emirates, Uruguay, Vanuatu
What do I need to do?
Make sure you have ALL your assets:
- Reported correctly
- Tax compliant i.e. not in investments/properties that will mean you pay more in tax
- Understand your personal situation, and what your options are.
Offshore Disclosures Facility
By Peter Brooke
This article is published on: 25th May 2015
This month I had the opportunity to sit down with Patrick Maflin from Marine Accounts for a Q&A session on the Offshore Disclosures Facility.
Patrick, Firstly what is the Offshore Disclosures Facility?
The Offshore Disclosures facility is an amnesty for UK citizens who have undeclared offshore earnings. It is directly aimed at targeting offshore tax evasion. The G20 have now opted similar schemes such as the Offshore Disclosures Program (ODP) in the US & Project Let’s Do It in Australia.
What is offshore evasion?
Offshore evasion is using another jurisdiction’s systems with the objective of evading UK tax. This includes moving, not declaring or hiding (via complex offshore structures) any income, gains or assets out of the site of HMRC.
When does the amnesty end & what happens if I do not declare?
The UK disclosure facility ends on 30th September 2016. Individuals who choose not to declare their earnings can face fines of up to 200% of the tax evaded and possible imprisonment as it is now a criminal offence. Project Let’s Do It in Australia came to an end in December 2014 and the IRS have not stated when ODP will end.
How can I declare my earnings through the facility and what are the benefits?
UK seafarers can declare their earnings under the Seafarers Earnings Deduction (SED) providing that they spend more than 183 days out of the UK and work onboard a ship. If you declare now before becoming subject to investigation you will not face fines and will not have to pay tax on your earnings. However if you owe tax through work days in the UK or not qualifying for the SED exemption you will only pay 10% on top of your tax bill as opposed to 200%.
What happens if HMRC contact me first?
If they do contact you first you are faced with possibility of a tax investigation into your financial affairs and will not qualify for any penalties at the lowest rates and will have to pay the taxes you owe for up to 20 years. You could also face criminal prosecution.
What if I move my funds to the Cayman Islands, surely it is safe there?
The UK signed ten more automatic exchange agreements in 2014 including many of the classic ‘offshore centres’. The new global standard developed by the OECD has been endorsed by the G20 and now 44 jurisdictions in total. This will lead to greater tax transparency and the ability for governments to clamp down on those who evade tax.
What exactly will the new global exchange mean? What type of information will the G20 access?
The 44 jurisdictions are going to share if you have a bank, investment or custodial account and will be able to see your name, address, account number, balance and income.
When I browse the yachting forums I still see crew asking where the best place is to open an account to avoid paying tax! What do you think of this?
It surprises me that people choose to openly broadcast that they are looking to avoid paying tax and that they believe that today with the open exchange of information that this is still possible and the right course of action.
HMRC contacted over 20,000 people in 2013 about their offshore assets. In 2014 offshore banks in the 44 jurisdictions started collecting information about UK & US residents. This information will reach HMRC by the start of 2016.
Are Offshore accounts still permitted under the Offshore Disclosures Facility?
Of course, there is nothing wrong with having offshore accounts & investments as long as you declare the income and gains on your tax return. This is not designed to stop people banking offshore, but to allow individuals to bring their tax affairs up to date if they have worldwide undeclared income. The principle benefits of using an offshore account is currency flexibility.
This article is for information only and should not be considered as advice.