Following the election of Emmanuel Macron as President of the French Republic, you will find below a few examples of expected tax changes of potential importance to our clients.
During the French presidential campaign, which has just ended, tax-related issues were at the center of the debates.
Some measures proposed by Emmanuel Macron have already been extensively commented on -- such as the abolition of the housing tax concerning 80% of households or the 1.7% increase of the general social contribution (CSG) among others -- but particular attention should be paid to other announced measures as well. These measures indeed reflect the newly elected President’s clear ambition to return to a “European average” in terms of taxation, i.e. effective tax rates similar to the ones applied in other European countries.
This intended tax competitiveness is aimed at executives, managers and companies as illustrated in the three examples below.
1) Investment income taxation reform (capital gains, dividends and interest)
As from 1 January 2018, dividends, capital gains on securities and interest should be subject to flat-rate taxation expected to be around 30%, including social contributions, which are taxed at the marginal rate of 63.5% as of today (45% with respect to income tax, 4% with respect to high income tax and 15.5% with respect to social contributions).
The above said 30% rate would come close to the European average amounting to circa 27% according to the type of income.
However some major questions about income tax remain pending:
- Would a flat rate tax of around 30% ultimately result in a rate close to 27% or to 33/34% ? Based on our 20 years of experience, a 27% overall tax rate is completely accepted by individuals, businesses and investors, whereas a 33/34% rate on that kind of income is not so well received.
- Would tax relief based on a specific holding period under capital gains taxation be maintained? So far no clarification has been provided.
- Lastly, would the 40% decrease of the dividend tax basis be maintained or abolished? Implementing such a 40% decrease would result in a 18% fixed dividend taxation, a rather competitive rate in comparison to our European neighbors. We therefore look forward to more information!
2) Replacing wealth tax (ISF) by property wealth tax (IFI) or property income tax (IRI)
Wealth tax, known in France as ISF is largely perceived as a competitive disadvantage by individuals, businesses and investors in comparison to other European countries. It is therefore planned to have it abolished.
ISF would however be replaced by property wealth tax (IFI) or property income tax (IRI) which would not include the market value of securities held in companies.
At present, the tax basis of this proposed new taxation regime remains unknown: would it include the value of all property assets held by the taxable household or only the value of property assets generating income (i.e. rents)? This is obviously a key question as, in the first instance, the principal residence and the secondary residence(s) would be included in the tax base, which should not be the case if this new tax only applies to assets “generating income”. Lastly, would property assets which are held both directly and indirectly be within the scope of the charge? Clarification on these two matters are eagerly awaited.
3) Lowering corporate income tax and “sanctuarizing” research tax credit, innovation tax credit and the start-up (Jeunes Entreprises Innovantes) status
Changes in corporate income tax would first of all consist in a drastic decrease of the corporate income tax rate which would be lowered from 33.33%/34.43% to 25%. A 25% rate would bring French corporate income tax close to its main neighbors’ and competitors’ rates, some of them being however lower than 20%: 12.5% in Ireland and 19% (but due to fall to 17% from 2020) in the UK, for example.
Also, research tax credit, innovation tax credit and the start-up status would be maintained, but it has not yet been stated if the scope or rate of those “special schemes” would be reduced. We are led to believe that this would not happen, but once again clarifications would be more than welcome, even though it is worth mentioning that these reliefs would remain!