The first Finance Bill of President Macron’s mandate was enacted in late December 2017. It includes major changes for corporations and individuals.
Measures targeting individuals
Two main reforms will impact individuals:
- the repeal of the wealth tax and its replacement with a tax targeting real estate assets; and
- the introduction of a 30% flat rate tax on investment or passive income (i.e. capital gains, interest and dividends).
Abolition of wealth tax and its replacement with a new tax assessed on real estate assets
Wealth tax is probably the most controversial tax in France. During his campaign, President Macron claimed that individuals are not encouraged to finance the French economy and, in particular, to create their company in France, because of this tax. An individual was subject to wealth tax if his net wealth exceeded the wealth tax threshold (€1.3 million).
With effect from 1 January 2018, wealth tax has been abolished and replaced by a new tax, the real estate wealth tax (impôt sur la fortune immobilière). This tax will be similar in many respects to the wealth tax (e.g. the same tax rates, the same valuation method and the same payment method). The main difference is that this tax will only be assessed on real estate assets held directly or indirectly by an individual (including through a company which is not a predominant real estate company). Other assets (such as shares) are outside the scope of this tax. Some French MPs have realised that luxury cars and yachts will also benefit from this reform, which leads them to introduce specific taxes for those kinds of goods.
This real estate wealth tax also provides specific rules regarding the deduction of debt which could have some impact on certain structuring notably that put in place by non-French tax residents. For instance, for real estate assets valued at more than €5 million, debt will only be deductible in full up to 60% of this value. This means that owners of high valued properties will have to pay a minimum real estate wealth tax.
Introduction of a flat tax rate on investment income
Since 2013, the French tax regime applicable to investment or passive income (including capital gains, interest, dividends and income from life insurance contracts) has been one of the highest in the OECD, as this income could be subject to income tax at progressive income tax rates (and ancillary taxes) up to 64.5%. During his campaign, President Macron pledged to introduce a 30% flat rate tax applicable to such income (consisting of 12.8% of income tax and 17.2% of CSG/CRDS). Foreign individual investors also benefit from this reform, as the withholding tax on French non-real estate capital gains and dividends has been reduced to 12.8% for individuals. This is also the case for corporate taxpayers as the withholding tax (currently set at 30%) will also be aligned with the corporate income tax rate (from 28% in 2019 to 25% in 2022).
All these measures tend to push individuals to invest money into companies which would then improve their financial situation. The underlying idea of this reform is to reward risk-taking.
Measures targeting corporations
Decrease in corporate income tax
The French corporate income tax (“CIT”) is currently one of the highest within the EU, with the standard rate at 33.33%. The Finance Bill for 2017 has already introduced a progressive decrease in the CIT to 28% for 2022. The Finance Bill for 2018 introduces a further decrease to 25% under the following timetable:
- For fiscal years (FYs) starting on or after 1 January 2018, a 28% CIT rate would apply on the first €500,000 of taxable income of all entities and 33.33% above that amount.
- For FYs starting on or after 1 January 2019, a 28% CIT rate would apply on the first €500,000 of taxable income of all entities and 31% above that amount.
- For FYs starting on or after 1 January 2020, a 28% CIT rate would apply for all entities.
- For FYs starting on or after 1 January 2021, a 26.5% CIT rate would apply for all entities.
- For FYs starting on or after 1 January 2022, the 25% CIT rate would apply for all entities.
One should note that the 3.3% surtax applicable to entities with a corporate income tax exceeding €763,000 will still be applicable.
Finance friendly tax measures
Since the Brexit vote in June 2016, France has been trying to attract financial institutions to relocate from London to Paris. Nonetheless, France first had to improve its tax regime and in particular the specific taxes applicable to this sector such as the salary tax and the financial transaction tax.
Salary tax is assessed on salaries of companies whose turnover which is not subject to VAT exceeds 10%. As most of the transactions of financial institutions are VAT-exempt, they are primarily targeted by this tax. Salary tax cost can be quite significant as it is levied at a progressive rate of up to 20% on the salaries paid to the employees of the company (with the maximum rate applying to salaries exceeding €152,279). In order to reduce such cost for highly-paid employees, the Finance Bill for 2018 abolished the 20% tax rate, which will reduce the marginal rate of this tax to 13.6%.
France is one of the few EU countries to apply a financial transaction tax (similar to a stamp duty) which is equal to 0.3% of the transfer price of a company’s shares whose market capitalisation exceeds €1 billion. The Finance Bill for 2017 extended this tax to intra-day trading transactions which could be seen as a bad sign for the financial industry. In addition, the application of this tax to intra-day transactions seems difficult from a practical standpoint. Thus, the French government decided to abolish this tax for intra-day trading transactions which in effect would have never been applied.