French 2018 Finance Law for individuals
- Withholding of personal income tax at source
In France, personal income tax is still not withheld at source but paid by French liable persons the year following the year during which they receive the income, with various possibilities of organization of this payment.
On 1st January 2019, a “Copernican revolution” will take place, as the system will change, France falling into the withholding of personal income tax at source, similarly to most of the countries in the world. This change, initially scheduled to take place in January 2018, had been postponed by the new President elected in May 2017.
A large set of revenues, including for instance wages, pensions, real estate income, is concerned.
In the case of wages, employers will withhold as from 1st January personal income tax on their employees’ pay-slips, determined by the French tax authorities that will provide instructions on a monthly basis. Said instructions will have to be followed very strictly by employers.
Self-employed people will have to organize the withholding by the French tax authorities, on a monthly or trimestral basis, on their bank account.
It will be possible for taxpayers, subject to certain conditions, to modify the withholding tax rate applied, depending on either the evolution of their income during the year, changes in their private life impacting the tax rate to be applied (e.g. wedding, divorce, having a baby), or other specific situations. Any change will be made by the tax authorities, but at the only request of the taxpayer through his individual electronic web page.
Attention must be paid to the fact that even if the withholding tax rate will, unless wished differently by the taxpayer, correspond to the effective tax rate applicable to the taxpayer on the basis of his revenues of the previous year(s), the taxation basis will be increased compared to currently. Indeed, for instance, for salaried people, the assessment basis of the withholding tax will correspond to the monthly wage net of employee’s social security contributions, but before application of the 10 % rebate for professional costs and expenses (or before deduction of actual professional costs borne).
Furthermore, tax credits and reductions will be considered not at the time of the withholding, but only at the time of final settlement of the personal income tax of the given year, meaning in September of the following year.
These rules, which suffer some exceptions, imply for taxpayers to manage their cash situation as soon as possible in 2018, to prepare this temporary adverse cash effect that could result for them in a tax credit position towards the French tax authorities, at the time of final settlement of the personal income tax of the given year.
2018 revenues will be declared in May/June 2019, and taxable in September 2019, but in practice, thanks to a specific tax credit applicable only for 2018 revenues, personal income tax will be payable only in consideration of “exceptional” or “excessive” income (i.e., in practice, in most cases, non-recurring income received in 2018).
Attention should be paid to the 2 following keypoints:
- It is extremely important to anticipate this change as from now: indeed, the system is based on the determination by the French tax authorities, on the basis of the previous income tax declaration, of a rate applicable to taxpayers, and this rate will be provided to the French taxpayers for the first time on May/June 2018, when they will file electronically the declaration of their FY 2017 revenues; various actions should potentially be implemented by concerned taxpayers as from this date, to be effective on either September 2018 or January 2019;
- Indeed, new regulations (2017 Amended Finance Law) provide that, on a voluntary basis, French companies will have the possibility to test the new system as from September 2018, without any actual withholding, but with an information of employees on their pay-slips; in such a case, employees of the companies concerned will have to elect between various solutions in May/June 2018, and it will be a key issue for French employers electing for such test to have put their employees in a position to make their choice in due time (having in mind that, according to the French tax authorities, a 3-month period should be considered between a request of the individual taxpayer to change his withholding tax rate to be communicated to his employer and the date this change will be effective): thus, French employers willing to test the system as from September 2018 will have to inform their employees of their decision before end of May 2018 at the latest.
The rate of the CSG (Contribution Sociale Généralisée) payable by all French residents and non-residents (in a limited number of cases) taxpayers, is increased by 1.7 point as from 1st January 2018. As a consequence, the global social contributions rate is increase from 15.5% to 17.2%.
This increase also applies to some categories of revenues earned in 2017 (rentals, capital gains (not real estate)).
- Implementation of a flat tax on several categories of revenues
The 2018 Finance Law introduces a flat tax at an effective rate of 30% (including personal income tax (“Prélèvement forfaitaire unique”, PFU) at a rate of 12.8% and social contributions at a rate of 17.2%), that applies to several categories of revenues (mainly, dividends, interest, capital gain from transfer of shares) earned by individuals as from 1st January 2018.
Certain allowances, applicable until now, for instance, to the taxable basis of dividends (40% rebate) or capital gains on transfer of shares (depending on the shareholding duration), will no longer apply with this flat tax.
Nevertheless, taxpayers will have the possibility to choose, under certain conditions, to apply the taxation regime in force until Dec. 31, 2017, meaning application of the progressive income tax scale and rates, with various allowances (in practice, however, the election for the former regime will not allow the application of exactly the regime provided formerly, as some adjustments will have to be made, such as, for instance, in the case of managers transferring their shareholding in their company when retiring). Such an election for the former regime will have to be made expressly, and will be global, i.e. will apply to all the revenues earned by the taxpayer for the concerned year that are in the scope of this flat tax (e.g. dividends, interest, capital gain, mainly): for these revenues, the rule is “all or nothing”.
Such an election for the former regime will be definitive: no possibility for the taxpayer to change his mind and cancel the election once made.
Given that, the withholding tax applicable on dividends and certain capital gains earned by a non-resident individual taxpayer is also reduced (subject to the application of relevant tax treaties) to 12.8 %. The former 75% rate remains applicable to the beneficiaries of dividends established in non-cooperative states or territories.
Furthermore, the Finance Law reduces the rate of withholding taxes assessed on dividends received by foreign corporations and capital gains related to the sale of substantial shareholdings by foreign companies, to rank it with the new rates of corporate income tax.
- Changes to long-term capital gains
The tax on professional capital gains of companies subject to the French personal income tax (“impôt sur le revenu”, IR) is lined up with the flat tax, and consequently reduced from 16% to 12.8% (plus 17.2% of social contributions, that being, a global rate of 30%).
The French wealth tax (ISF) is abolished and a new real estate tax (‘Impôt sur la Fortune Immobilière”, hereafter, IFI) is applicable as from January 1st, 2018. In a nutshell, its assessment basis will mainly consist in the net fair market value of real estate assets (i.e., lands, buildings, or shareholdings in companies holding indirectly lands and/or buildings) that, typically, will not be used for business purposes.
Most of the rules known for ISF will continue to apply (in particular, valuation rules (subject to exceptions), current threshold of M€ 1.3, progressive rates from 0 to 1.5%, annual filing, payment rules and a 75% cap), but the assessment basis will be limited to:
- real estate assets…
- … that are not dedicated to operational activities.
The main specificities of the IFI (especially concerning its scope) are the following:
- Real estate and shares held in companies holding, directly or indirectly, real estate assets / rights will be excluded from the IFI scope as long as they will be mainly used to carry out an industrial, commercial, artisanal, agricultural or self-employed activity; if not excluded because of the new set of rules implemented, said assets will be expressly exempted when used by the individual (i.e. the taxpayer) to carry-on his/her professional activity (as said assets are in this case characterized, as under the ISF regime, as “professional” assets);
- New restrictions are set-up to limit the inclusion, either for the purpose of valuing the shares of a company held by the taxpayer or of determining debts to be offset against the gross value of the taxable patrimony, with, however, safeguard clause that could be opposed by taxpayer justifying the normality of the situation giving rise to the debt concerned and justifying to take it into consideration in the determination of the net taxable patrimony of the concerned taxpayer.
- In case of taxable patrimony having a gross fair market value exceeding 5 million euros, the offset of debts exceeding 60% of said gross fair market value will be limited to these 60%, increased by 50% of the difference between the actual amount of debts and this 60% threshold.
Declaration of the net taxable patrimony will have to be made in the personal income tax declaration, including proper appendices, meaning that in practice, timing is shorten (3 weeks approx.) to value and prepare related appendices compared to ISF 2017.
Comments of the French tax authorities concerning these new, and complex, regulations, are expected in the next few weeks.