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:
| Income |
Tax Rate |
| Up to €9,710 |
0% |
| €9,711 to €26,818 |
14% |
| €26,819 to €71,898 |
30% |
| €71,899 to €152,260 |
41% |
| €152,261 and over |
45% |
The above will apply in 2017 in respect of the taxation of 2016 income and gains from financial assets.
Tax Reduction
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 |
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% |
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 |
Tax Rate |
| €50,001 – €100,000 |
2% |
| €100,001 – €150,000 |
3% |
| €150,001 to €200,000 |
4% |
| €200,001 to €250,000 |
5% |
| €250,001 and over |
6% |
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.
Changes in tax for International people living in Spain after the EU Referendum. What changes and what does not?
By Barry Davys
This article is published on: 6th July 2016
06.07.16
If the UK leaves the European Union what impact does this have on taxation for international people living in Spain?
The framework for taxation in all countries is based upon the following:
- Are you tax resident according to the laws of that country?
- Which tax authority is the controlling tax authority for your Worldwide income and gains?
- If you have income or gains outside of the country where you are tax resident, is there a double taxation agreement between the country where you are resident and the country where the income or gain is made?
For those of us living in Spain, the simple test is are we in the country for more than 183 days in any calendar year? If yes, then we will be Spanish Tax resident.
If we meet the residency requirement Spain is our controlling tax authority. This means we have to report our Worldwide income and gains to Spain and our main payment of tax is in Spain.
Double Tax Treaties
The OECD, UN and USA have set up model frameworks for Double Taxation Treaties. Most countries use these frameworks. However, the Treaties are between individual countries. Even if the country is in the EU there is NO EU wide double taxation agreements. Therefore, if the UK leaves the EU it will not affect the double taxation agreement between the UK and Spain. As an example, Spain has 88 tax treaties, 66 of them with countries outside the EU and even if the UK leaves the double tax treaty should stay. The tax treaty between Spain and the UK covers both income and gains.
Beckham Rule
It is not expected that there will be any changes to the Beckham rule (Impatriate Tax Regime). It is available to people from around the World. Therefore people moving from the UK to Spain should still be able to benefit from the lower rate of taxation for five full tax years.
Where we do expect changes
There is a potential economic impact in both Inheritance Tax and Exit Taxes if the UK leaves the EU.
Inheritance Tax
In September 2014, the European Court of Justice instructed Spain to change its rules regarding Inheritance Tax where the deceased person or the person receiving the inheritance was in another country in the European Economic Area (EEA). The effect was to allow these people to claim the allowances that are available to inhabitants of Spain, rather than them being taxed on a special “National” rate. This was because the National Rate resulted in higher taxes.
If Britain is now longer a member of the EEA, it is quite possible that we will have to return to paying the national rate of inheritance tax. Please note, it is possible for the UK to leave the EU but not the EEA and therefore will still qualify. Whilst the loss of the local allowances will only put us back to the situation two years ago it will still be a backwards step.
There are several pieces of Inheritance Tax planning that you can do to reduce the burden of Inheritance Tax. HOWEVER, we have not left the EU, there is some debate about whether we will ever leave the EU and we may yet become part of the EEA. We strongly recommend, therefore, that you discuss the possible planning methods now but do NOT implement any planning on the basis of the UK leaving the EU. This is because once taken, many of the planning steps cannot be undone.
Exit Tax
Exit tax is chargeable to all taxpayers that have been in Spain in at least 5 years of the last 10 years whilst Spanish Tax Resident if:
The market value of the shares and collective investments held exceeds a joint value of Euro 4 Million
or
Only Euro 1 Million if the person holds 25% or more of the shares in a company.
However, currently, if the person moves to another country in the European Economic Area with whom an effective exchange of information exists, the gain will only need to be declared and Spanish Exit Tax paid if during the next 10 years the shares are sold or the person loses his residency in the EU or in the EEA.
It the UK leaves the EU and does not get EEA membership, Spanish Exit Tax would become payable on departure.
CRS – Automatic exchange of information between countries
The OECD has also introduced a common framework for the automatic reporting of information from one country to another of the financial affairs of people who live in the second country, for example UK to Spain where a British person lives in Spain. This framework has been updated and common formatting of reporting leads to common software and much easier analysis of the information.
Please be aware that these reports will still take place even if the UK leaves the EU. Currently there are 101 countries using this common software and standards.
Tax cuts in Italy…?
By Gareth Horsfall
This article is published on: 14th June 2016
Before you have to steady yourself at the mere thought of tax cuts in Italy, I have to warn you, (sorry, I am so used to warning people about tax increases that it comes naturally to use the word, ‘warn’), or I am pleased to inform you that if you can hang in there a little longer they may be on their way.
And ‘I am’ talking about ‘Income tax Cuts’ (IRPEF)!
Renzi and Padoan have realised that the way that the tax rates are structured in Italy basically choke the sector of society which provides the most, the middle earners i.e any income from €15000 upto €55000p.a
Therefore, proposals to restructure the current tax bands are currently on the table. The proposals are as follows:
1. Lower the tax rates by 1% on the tax bands of gross income from €15000 – €28000 and €28001 – €55000p.a. The bands would effectively lower to 26% and 37% respectively.
On an income of €35000 p.a, this would equate to an annual saving of €210 p.a.
That doesn’t sound very interesting does it? Although it would cover my 6 monthly TARES bill.
The other proposal which is also on the table is to radically alter the existing tax bands from 5 tax bands to only 3, as follows:
- The first €15000p.a of income to be taxed at 23%
- Between €15001p.a and €75000p.a taxed at 27%
- Over €75000p.a. at 43%
Certainly the savings would be much more interesting. Using the same example above, someone with an annual income of €35000p.a would make an annual saving of €770p.a.
In reality the first option, a 1% reduction in the 2 tax bands, is likely to be introduced in ‘la Legge di Stabilità 2017’ and to be actioned from January 2018.
At the end of 2016 a proposed cut in corporation tax and a freeze on IVA is expected to be introduced.
Obviously, we should not hold our breaths because all these cuts are Renzi’s proposals and should the public not vote in favour of his Constitutional Reform in October this year, then he has already stated that he would stand down as Prime Minister and then I would imagine the proposed tax reforms would go ‘out of the window’.
In the meantime let’s all get through the BREXIT vote and take one step at a time.
Declaracion De La Renta
By Chris Burke
This article is published on: 25th May 2016
25.05.16
Impuesto Sobre La Renta De Las Personas Fisicas (IRPF)
Declaracion de la Renta, also known as IRPF is the annual income tax return that individuals have to submit/pay to the state/region of Spain where you are tax resident. In Spain the tax year is from 1st January to 31st December and you have to declare all your worldwide income. This is essentially very similar to the annual tax return you have to complete every year in the UK.
The period to submit your tax return is from the beginning of April to the end of June depending on whether you are self employed, employed or retired. During April you can submit your tax return only if your income is from a salary or a state or private pension from Spain. In May and June you can submit all other returns.
The procedure to submit your Declaracion De La Renta is as follows:
You can ask for a draft of your tax return from the tax office, check it and if needed change the details and then submit it. All this can be done online and this system can also be used if you declare a salary.
If you have a professional activity or a business you cannot get a draft, but you can ask for your fiscal information, that is all the information the tax office already have for you. You should always check this information is correct.
If you want to prepare the tax return yourself, in the tax administration web site (www.aeat.es) you can download a program to prepare and submit it (programa PADRE).
If you are a professional or have a business/self employed (what in Spain we call an “autónomo”) it is strongly advisable that you have a digital signature. It will be useful to submit your Income Tax Return and other paper work with the tax office, for both Taxes and Social Security.
Not everybody has to submit a tax return. If you have a salary under €22,000 paid by a Spanish company or income from capital/interest under €1,600 annually, you don’t need to submit it. Nevertheless it could be advisable to check if you are entitled to have some money back, which can happen.
If you are self employed, you don’t have to submit a tax return if your annual income is below €1,000 including income from all sources. As there are other higher limits for income from capital and capital gains only, the key thing here is being self employed.
No matter what, if your capital losses are above €500 you also have an obligation to declare. This, for, example would mean if you disposed of an asset and made a €500 loss on it. Therefore, if you have a salary of €20,000 and capital losses of over €500 you have to declare it/submit a tax return.
If you receive income from outside Spain you have to submit a tax return no matter how much you have earned in one year. So, if your income is below all the limits said before, and you have monies from a bank outside of Spain that has been subject to retention or withholding tax (see EU savings directive) no matter the sum, you have to submit a tax return even if there is no tax to pay.
It might be easier and safer for you to submit a tax return via a Gestor (accountant/tax adviser) so that it is done correctly, on time and perhaps most importantly hassle free.
