French Tax Changes 2015
By Spectrum IFA
This article is published on: 5th January 2015
During December, the following legislation has entered into force:
- the Loi de Finances 2015;
- the Loi de Finances Rectificative 2014(I); and
- the Loi de Financement de la Sécurité Sociale 2015.
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 €9,690||0%|
|€9,691 to €26,764||14%|
|€26,765 to €71,754||30%|
|€71,755 to €151,956||41%|
|€150,957 and over||45%|
The above will apply in 2015 in respect of the taxation of 2014 income and gains from financial assets.
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)
There are no changes in respect of the taxation of capital gains arising from financial assets. Therefore, gains arising from the disposal of financial assets will continue to be added to other taxable income and then taxed in accordance with the new 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 2015 in respect of the taxation of gains made in 2014.
CAPITAL GAINS TAX – Property (Plus Value Immobilières)
With effect from 1st September 2014, the taper relief applicable to gains arising from the sale of building land has been brought in line with that applicable to other property gains, 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 exceptional reduction of 30% of the taxable capital gain, arising from the sale of building land only, has also been introduced, subject to the following double condition that:
- a compromis de vente has been signed between 1st September 2014 and 31st December 2015; and
- the completion of the sale of the land must take place by 31st December of the second year following the signing of the compromis de vente.
The exceptional reduction applies for both the capital gains tax and the social contributions liabilities. However, it is not available for land transferred between spouses and PACS partners, nor to ascendants or descendants.
It should also be remembered that there is still an additional tax applicable for property sales, 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. However, at some point during 2015, the European Court of Justice (ECJ) will most likely rule on the outcome of the European Commission’s infringement procedures against France, regarding the application of social contributions on income and gains arising in France for non-residents. Following the delivery of the legal opinion of France’s Advocat General to the ECJ, it is widely expected that non-residents will become exempt from social charges on gains and income arising from French property.
One other point worth mentioning concerns the rate of capital gains tax for non-residents. To date, this has been at the rate of 19% for residents of EU/EEA countries and at 33.33% for non-residents of other countries, except for those of ‘non-cooperative territories’, who have been liable to a 75% capital gains tax rate.
In October 2014, the French Conseil d’Etat, which is the highest court in France for tax matters, decided that the higher rate of capital gains tax for non-residents is illegal, in certain circumstances. The basis for its decision was that it considered this to be a disincentive for non-residents from outside of the EU/EAA to purchase property in France. As such, the court considered this was a restriction on the free movement of capital and thus, contrary to EU law.
Arising out of this decision, the government proposed to harmonise the capital gains tax rate at 19%, but not for those residents of ‘non-cooperative’ States, for whom it decided that the 75% rate should be maintained. However, when considering the proposed legislative changes, the Constitutional Council ruled that a capital gains tax rate of 75% is excessive, when taken into account with the social contributions of 15.5% and so ruled that this is contrary to France’s Constitution.
The Constitutional Council’s decision is somewhat of a surprise, since the 75% tax rate plus social contributions has already been the practice. One assumes, therefore, that as and when France is instructed not to apply social contributions to gains arising for non-residents, then the 75% capital gains tax rate will no longer be considered unconstitutional!
Finally, one other good point for some non-residents is that for those who are resident in the EU (and in some cases in the EEA), it will no longer be necessary to appoint a tax representative in France to deal with the calculation of the capital gains tax, when the property is sold.
GIFT TAX (Droits de Mutation à Titre Gratuit)
In order to promote the release of building land and revive housing construction, a temporary exemption from gift tax has been introduced for donations made in the following situations:
- for full transfers of building land (i.e. the donor cannot retain life use), for which the acte authentique is signed between 1st January and 31st December 2015, on the condition that the recipient builds a new property destined for housing, within four years of the date of receiving the gift.
- for full transfers of new residential properties, for which a building permit is granted between 1st September 2014 and 31st December 2016, on the condition that the deed evidencing the gift must be signed no later than three years of the date of the building permit and that the building has never been used or occupied at the time the gift is made.
In both of the above situations, the following exonerations from gift tax will be given, limited to the declared value of the asset:
- €100,000 for transfers between descendants or ascendants in direct line, or between spouses and PACS partners;
- €45,000 between siblings; and
- €35,000 between any other person
It is also indicated that the total of the donations made by the same donor cannot exceed €100,000. However, what is not clear from the drafting of the legislation is whether or not this limit applies separately for each of the above situations or if this limit is applied globally. Therefore, we will have to wait for further precision on this.
- Charitable Donations & Bequests:
France exempts from inheritance duties donations and bequests made to certain charities that are registered in France. However, charities established in other States of the EU are generally subject to a 60% tax (after an allowance of €1,594) on the value of the gift or bequest received.
The European Commission considers the above to be an unjustified obstacle to the free movement of capital and so referred France to the European Court of Justice (ECJ) in July 2014. Anticipating a condemnation by the ECJ to be almost inevitable, France has changed its law so that there is no discrimination between the charities registered in France and those in the rest of the EU/EEA.
- Additional Tax on Second Homes:
With the objective of reducing the housing shortage in areas where there is a marked imbalance between supply and demand, provision has been made within the law for an additional tax on ‘second homes’, i.e. for furnished properties not designated as a principal residence.
The decision as to whether or not the tax will be applied will be made by the municipal council of the municipality concerned. The rate has been fixed as 20% of the municipality’s share of the taxe d’habitation and the revenue from the additional tax will be allocated to the municipality.
Tax relief should be given from the additional tax in the following situations:
- by those who need a second dwelling near to their place of work because their principal residence is too far away; and
- if the owner is living permanently in a nursing home or other care facility and the property was their former principal residence.
Others may also receive the tax relief where they can no longer designate the property as their principal residence for circumstances outside of their control.
EU Directive on Administrative Cooperation in the Field of Direct Taxation:
Although not directly related to France’s tax changes, it is worth mentioning that with effect from 1st January 2015, under the terms of the above EU Directive, there will be automatic exchange of information between the tax authorities of Member States for five additional categories of income and capital. These include income from employment, director’s fees, life insurance products, pensions and ownership of and income from immoveable property. The Directive also provides for a possible extension of this list to dividends, capital gains and royalties.
2nd January 2015
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.