The newly-elected French socialist government is in the process of taking a number of tax measures that will have a significant impact on individuals and companies having investments or doing business in France. These measures have been voted on by the French House of Representatives and are currently pending before the French Senate. It is anticipated that they will be approved by the senate and become applicable immediately for some and possibly retroactively to January 1, 2012 for others. Many of these new measures may be challenged before the French Constitutional Court.
The measures include:
- The revenue generated by overtime performed by employees is no longer exempted from income tax and will be taxed at applicable income tax rates. In addition, employers will have to pay all social charges applicable to overtime, which were suspended under the current policy. This measure will take effect on September 1, 2012.
- The new tax policy establishes an exceptional tax on “wealth,” that is, assets held by individuals, foreign or French, in France. This exceptional tax is due on assets valued at more that 1.3 millions euros. This tax is retroactive to January 1, 2012, and must be paid by November 15, 2012. This exceptional tax will probably be part of the new permanent tax reform that will become applicable in 2013.
- There is a change to the donation and inheritance tax exemption, which is lowered to 100,000 euros per child from 159, 325 euros, and is no longer indexed on inflation. For donations, the tax exemption period is increased to 15 years from the current 10 years. These measures apply to French nationals residing abroad as well as to foreign individuals. These new measures will be applicable as of the date on which the law takes effect (sometime this summer.)
- The increase in value added tax (VAT) voted by the prior government to offset a concomitant decline in certain social charges paid by employers for their workers is abrogated. This was known as the so-called “social VAT.” The VAT rate is reduced to its prior rate and the social charges paid by employers are increased to their prior levels. In addition, the increase of 2% of the social tax raised on revenue from investment and capital, already in effect since January 1, 2012, is maintained. These measures are applicable as of October 1, 2012.
- The tax paid by employers on stock options provided to their employees, French or foreign, increases from 15% to 30%. In addition, the tax paid by the employees on such stock options is increased from 8% to 10%. This measure will become applicable on the date the new law takes effect (probably by September 1, 2012.)
- The intra-company programs providing certain saving benefits to employees, French or foreign, will be taxed at the higher flat rate of 20% (instead of the current 8% rate). This measure will become applicable on the date the new law takes effect (probably by September 1, 2012).
- All non-residents, whether or not they are French nationals, will pay an additional special tax of 15.5% on the rental and capital gain revenue generated from real-estate property held in France. This measure will apply to capital gains achieved after the date the new law takes effect, but will apply to rental revenue generated since January 1, 2012.
- A new corporate tax of 3% will be levied on all French or foreign corporations, calculated on the value of the dividends paid by these companies in France. This measure will become applicable on the date the new law takes effect (probably by September 1, 2012).
- An additional new tax of 0.25% is imposed on lending institutions. This tax will be calculated in proportion to the risks that such institutions take in dealing with certain financial instruments (similar to the current so-called “tax on financial risks”). An additional new tax of 4% is also imposed on oil companies, based on the value of tax-exempted oil stocks held in France as of July 4, 2012. This tax will be paid in one installment on December 15, 2012.
- The tax on financial transactions is doubled from 01% to 0.2%. It is imposed on all financial transactions conducted by corporations quoted on the Paris stock exchange, irrespective of where the buyer or seller are located and of where the transaction takes place (as long as the stock held by the French company is above 1 billion euros). This tax will take effect on August 1, 2012.
- The new law also contains a number of measures destined to limit tax evasion by corporations through the use of tax heaven schemes. These include:
- Companies that control an affiliate located in a tax heaven: the parent will have to demonstrate that the affiliate has a genuine economic activity and is not used to evade French taxation;
- Parent companies that fund/subsidize foreign affiliates to reduce taxable revenue in France will not be able to deduct such transfers from their revenue;
- Capital infusion through undervalued stocks will be taxed as if they were illegal transfer of funds/subsidies;
- Companies that artificially reduce or terminate their economic production activities in France will not be able to account for accumulated losses in the calculation of the corporate tax; and
- Companies that artificially lower the value of an affiliate through massive payment of dividends will not be able to claim capital losses. These measures will become applicable on the date the new law takes effect (probably by September 1, 2012.) Note that a proposal has been introduced in the French House of Representatives to establish a special Tax Heaven Commission that would deal specifically with these measures. This proposal has not been passed as yet.
- Finally, the new law places on the French parent the burden of proving that an affiliate located outside of
France is engaged in genuine economic activities and was not established for the purpose of evading French taxes.
Another measure, which has not yet passed but is seriously being considered, is an increase of the highest tax income rate to 75% for individuals making more than 1 million euros per year. This new tax rate would apply to all individuals, French or foreign, who pay income tax in France. Note that the French government has considered, but, as of now, rejected requiring the payment of income tax based on nationality, that is, requiring French nationals to pay income tax, or at least file an income tax return, for revenue generated outside of France when they reside outside of France.
This is the first set of measures that this new government is planning to take this summer. Others will follow in the fall that will become applicable in 2013. This marks a drastic change in the way France will tax persons and companies for the foreseeable future in order to reduce its budget deficit and bring it in line with the EU-agreed target of 3%.