Proposed French Tax Changes
The Project de Loi de Finances 2014 was published on 25th September 2013. The proposals aim to create economic growth and reduce unemployment.
Shown below is a summary of our understanding of the principle changes that will come into effect, if passed by parliament. Noticeably, there are no proposals to change the wealth tax regime (Impôt de Solidarite sur la Fortune) or social contributions.
INCOME TAX (Impôt sur le Revenu)
The following is proposed:
*The barème scale, which is applicable to the taxation of income, to be revalued as follows
|Up to €6,010||0%|
|€6,011 to €11,991||5.5%|
|€11,992 to €26,631||14%|
|€26,632 to €71,397||30%|
|€71,398 to €151,200||41%|
|€150,201 and over||45%|
* To increase the décote – which is the tax deduction granted to low taxpaying households – from €480 to €508.
It is proposed that the above provisions will apply in 2014 in respect of the taxation of 2013 income.
Reform of the Plan d’Epargne en Actions (PEA)
The following is proposed:
* To increase the maximum amount that can be invested in a “classic” PEA from €132,000 to €150,000; and
* To encourage more households to invest in small and medium enterprises, it is intended to create the “PEA-PME” into which the maximum amount that can be invested would be €75,000.
CAPITAL GAINS TAX – Financial Assets (Plus Value Mobilières)
As announced by President Hollande earlier this year, it is proposed to reform the taxation of capital gains arising from the sale of securities held by individuals. The proposals aim to encourage investors to take more risk and to save for the long-term.
If passed, gains arising will be taxed at the progressive rates set out in the barème scale above, after the deduction of an allowance, 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.
The above allowances would also apply to gains arising from the sale of shares in ‘collective investments’, including investment funds, providing that at least 75% of the fund is invested in shares of companies.
Furthermore, to encourage investment in new small and medium enterprises, higher allowances against capital gains for investments in such companies will be 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.
It is proposed that the above provisions will apply in 2014 in respect of the taxation of gains made since 1st January 2013.
CAPITAL GAINS TAX – Property (Plus Value Immobilières)
There has already been considerable media reporting on the proposed reform of the capital gains tax regime for property sales, as if this had already been enacted into law. In part, this is understandable since the forms for reporting the property gains – calculated in accordance with the regime proposed below – have been available via the French government tax website since the beginning of September. However, the text of the budget indicated that the reason that this had been done was to encourage immediate activity in the property market – in other words, to discourage people from further delaying property sales until the proposals are actually implemented into law.
One can only guess that the government has a high level of confidence that the proposal will go through. However, only time will tell whether or not this has been a prudent step, i.e. to allow the proposed regime to be applied before actually being enacted into law.
The proposals are shown below, which will benefit the majority of people, but not all. In the event that these are not enacted, we have to assume that any adjustment to the taxes, in respect of properties sold between now and the end of the year, will be addressed at a later date.
FOR SALES OF PROPERTY (i.e. maison secondaire):
If the budget proposals are passed, gains arising after the deduction of an allowance (taper relief), will be taxed at the progressive rates set out in the barème scale above. The taper allowance would be 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 property will become free of capital gains tax after twenty-two years of ownership.
However, for social contributions (currently 15.5%), it is proposed to apply a different scale of taper relief, 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 property gains will become free of social contributions after thirty years of ownership.
Finally, in order to further enhance activity in the property market, it is proposed to allow an exceptional reduction of 25% against the taxable capital gain, for sales completed during the period from 1st September 2013 to 31st August 2014. Thus, this exceptional reduction would reduce both the capital gains tax and the social contributions liabilities.
FOR SALES OF BUILDING LAND:
With effect from 1st January 2014, the capital gain on land sales will be calculated without taking into account the period of ownership (i.e. the taper relief will be abolished).
However, there is no mention in the budget of whether or not the taper relief will still apply to sales whereby a compromise de vente has been signed before 1st January 2014, which was widely expected to be the case.
It is also noticeable that the budget does not make any provision for taxation of the gain at the barème scale rate. Therefore, unless there is an amendment to the text of the proposed law, we have to assume that the gains will remain taxable at the fixed rate of 19% (plus social contributions, currently 15.5%).
The exceptional reduction of 25% of the capital gain will not be applicable to sales of building land.
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. The final bill will then be referred to the Constitutional Council for review before entering into law.
26th September 2013
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.
If you would like to discuss how these changes may affect you, please do not hesitate to contact your local Spectrum IFA Group adviser.