Additional measures aimed at helping to tackle the public budget deficit were announced on Monday by the French government. The key measures which have been proposed are set out below.

1. 5% Corporate Income Tax surcharge for large companies

Corporate income tax payable by companies with annual turnover in excess of €250m is proposed to be increased by 5%, resulting in an effective corporate income tax rate for these companies of 35%. The additional 5% “surcharge” will be applied to the gross corporate income tax liability of such companies, before application of any available tax credits.

This measure is proposed to apply to corporate income tax payable in the 2012 and 2013 calendar years, in respect of corporate income tax liabilities relating to the 2011 and 2012 fiscal years, respectively. It is not yet clear whether this measure would apply to the fourth advance payment for 2011, which becomes payable in principle from 15 December 2011.

It should be noted that the 3.3% social contribution, which is applied to companies whose turnover exceeds €7.63m is retained. The method of calculating this social contribution is not affected by the new 5% surcharge.

We understand that the threshold for application of this surcharge would be considered at the level of the French tax group, rather than at entity level, as is already the case with the existing 3.3% social contribution payable by some French companies / groups.

2. Increase of the reduced VAT rate

The reduced rate of VAT (currently 5.5%) is proposed to be increased to 7% - this measure will not apply to food, energy and products and services for handicapped people, which will continue to benefit from the previous 5.5% rate, where applicable.

This measure is proposed to apply from 1 January 2012. In principle, the rate of VAT to be applied is that which is in force at the date of supply (i.e. date of delivery of the goods or provision or services). However, EU Member states are entitled (in the event of a change of rate) to retain the VAT which was in force at the date on which the VAT is due (i.e. date of delivery of goods or, in the case of services, on the date of payment for the services). As a result, the new increased rate of 7% could apply not only to goods and services supplied after 1 January 2012, but also to those services which are provided before 1 January 2012 but where payment for the services is made (in whole or in part) after 1 January 2012.

If this measure is introduced, France would become one of only two countries in the EU (the other being Ireland) to have four different rates of VAT.

3. Personal taxation

  • Increase in the rate of fixed levy at source

Taxpayers may currently opt, under certain conditions, for dividend and interest income to be subject to a fixed levy at source (charged at 19%, before social contributions), rather than declare this income on their tax return and have it assessed to income tax at the progressive rates.

The rate of this fixed levy at source is proposed to be increased to 24%, resulting in an overall effective rate (levy and social contributions) for this income of 37.5%.

Taxpayers who are subject to the top marginal rate of income tax on dividend income may no longer find it beneficial to opt for the fixed levy at source, since the current overall effective rate (income tax and social contributions) for such individuals is 35.7%.

  • Freezing of tax bands

For 2012 and 2013, it is proposed that personal income tax, wealth tax and inheritance tax bands and thresholds will cease to be automatically adjusted in line with inflation.

  • Personal income tax credits to be reduced

It has been proposed that the Scellier regime (a real estate investment incentive) should be cancelled as of 2013. The regime currently provides for a tax credit of 15% to 25% of the investment, depending on the date on which the investment was made. The tax credit is available to offset income tax to be paid during the nine years following the investment.

In addition, the overall cap applicable to investment-based tax credits is proposed to be reduced.