Taxing Times: Key Developments in French Tax Law

Recent changes to French tax law could have serious repercussions for high net worth individuals who don’t incorporate the new legislation into their tax planning strategies.

On 20 December 2018, the French Parliament approved the Finance Bill for 2019. The bill contained significant alterations that will impact a range of taxes, including income tax, investment income, life insurance, wealth tax, inheritance tax and the parameters around tax avoidance.

Income tax

A Pay as You Earn (PAYE) scheme was introduced in France for the first time on January 1st 2019. Before 2019, French tax residents paid their income tax one year in arrears, after the tax return for the relevant year had been submitted. Now, a withholding tax system (‘Prélèvement à la source’, PAS) is applicable to all French tax resident individuals, and employers are legally responsible for collecting the wage taxes.

In order to avoid paying income tax twice in 2019 (i.e. payment of income tax due on 2018 income and withholding tax on 2019 income), French taxpayers will each receive a tax credit (‘credit d’impôt’) to cancel out the 2018 French income tax due on non-exceptional income.

Investment income

Dividends, interests and capital gains are now taxed at a flat tax rate of 30 per cent including income tax and social charges (‘Prélèvement Forfaitaire Unique’). The 30 per cent flat tax does not apply to rental income.

Special expatriate tax regime

A special expatriate tax regime was completed last year, giving expatriates several very interesting tax benefits (tax exemption on 50% per cent of total income from investments, up to 100 per cent tax exemption on expatriation bonus, etc.) for a period of eight years. This applies, under the condition that they have not been tax resident in France for five calendar years prior to taking up their duties in a company based in France.

Life insurance (‘Assurance-vie’)

Life insurance policies one of the most commonly-used inheritance tax planning vehicles for French private clients. This is because life insurance policies are not liable to inheritance tax in France unless the amount received by the beneficiary exceeds EUR 152,500.

There are no changes to this in the Finance Bill, meaning premiums paid by an insured person aged over 70 years old, in respect of a policy taken out since 20 November 1991, are still subject to inheritance tax on proceeds above EUR 30,500. subsequent proceeds are taxed at a rate of 20 per cent on the fraction of taxable share of each beneficiary not exceeding EUR 700,000 and 31.25 per cent beyond that.

Wealth tax

A big wealth tax reform took place in 2018 reducing the scope of the wealth tax from the ‘worldwide assets’ of French tax residents to specifically worldwide real estate assets. Savings and investments (including life insurance policies ‘assurances-vie’) are no longer subject to this tax. The current threshold of EUR1,300,000 remains in place. Tax rates start at 0.5 per cent for assets between EUR 800,000 and EUR 1,300,000, rising progressively to 1.5 per cent for assets over EUR 10,000,000. Considering that rental income does not benefit from the 30 per cent flat tax, the French wealth tax system now clearly dissuades property investments over EUR 1,300,000 and encourages capital investments in order to boost the economy.

Social charges

There is very good news in regard to French Social Charges. Even though the main social charge rates remain the same as last year at 9.7 per cent for employment income, 9.1 per cent for pensions and 17.2 per cent for investments income (including rentals), the social security budget for 2019 has introduced one main change: private clients who are covered by the health system of another EU/EEA country, no longer have to pay the full 17.2 per cent social charges on investment income and capital gains, but instead only pay a new lower flat rate of 7.5 per cent.

Inheritance tax

The inheritance tax regime remains unchanged this year, since, in comparison to other European countries, inheritance taxes are often considered to be high. Transfers of wealth between spouses and civil partnerships (PACS) are exempt from inheritance tax, but successions between parents and children are taxed up to 45 per cent from a band of the value of EUR 1,805,677 upwards with a tax-free allowance per child of EUR 100. Transfers to unrelated beneficiaries and/or concubines are taxed at 60 per cent on the whole amount received, with a tax-free allowance of EUR 1,594. Inheritance tax might become more punitive next year (following the Yellow Vest (Gilets Jaunes) demonstrations, since a committee has been set up in order to review the inheritance tax in France. Knowing this, private clients might want to review their estate planning this year. Also, the application of the new General Anti-Avoidance Rule from 1 January 2020 (article L 64 A of the Tax Procedure Code) will counter certain tax arrangements that are still possible in 2019.

French GAAR (general anti-avoidance rules)

Another big change results from the introduction of article L. 64 A of the French Tax Procedure Code by the Finance Bill for 2019. Article L 64 currently allows the French Tax Authorities to counter any ‘abusive tax arrangements’ by proving that the obtaining of a tax advantage was the ‘one and only purpose’ of the arrangement (‘motif exclusivement fiscal’). From the 1st of January 2020, article L 64 A of the Tax Procedure Code makes it easier for the tax administration to counter abusive tax arrangements by only proving that obtaining a tax advantage was ‘one of the main purposes’ (‘motif principalement fiscal’).

To read more about our French members, please click here