The draft Finance Bill for 2013 was released on Friday 28 September 2012. It will be examined by tthe French Parliament as from 16 October. Below are the main measures applicable to individuals. A separate eAlert is sent concerning provisions applicable to corporations.
Main provisions applicable to individuals
- Creation of an additional income tax rate of 45%
For income earned on or after 1 January 2012, an additional income tax rate of 45% is created for the portion of taxable income in excess of Euro 150,000 per share in the tax household. Prior to this change, the French top marginal tax rate was 41% for income in excess of Euro 70,830 per share (this tax band is maintained).
- Creation of an exceptional surtax of 75% on very high earned income (75% tax)
This measure provides for the taxation at 75% (all inclusive tax rate) of earned income in excess of Euro 1 million per earner. A married couple with only one spouse working and earning a salary of 1.2 million will pay this tax on Euro 200.000. However, a married couple with both spouses working and earning a salary of Euro 900.000 each will not pay this tax.
In practice, this taxation would take the form of an incremental 18% tax on top of the maximum marginal income tax rate (45%), the exceptional contribution on high income (4%) and the CSG and CRDS surtaxes on earned income (8%).
It is likely that earned income would be widely defined and would include employment income (including the acquisition gain derived from stock options and free grants of shares), industrial and commercial income and non commercial income from self-employment.
This measure is temporary and would apply to income earned in 2012 and 2013.
- Revaluation of the tax rebate for lower income taxpayers (“décote”)
The “décote” is aimed at tempering threshold effects for lower income taxpayers. For 2012 income taxation, it would be increased by 9% (from Euro 439 to Euro 480) to compensate for not adjusting the progressive income tax brackets which normally take annual inflation (estimated at 2% in 2012) into account.
- Reduction of the maximum tax benefit per dependent child
This maximum benefit is reduced from Euro 2,336 to Euro 2,000 per half-share in the tax household. For taxpayers who are married or have concluded a “PACS” (civil union), this means a tax increase of Euro 366 per dependent child for the first two children and then Euro 672 per child starting with the third child.
Ceilings applicable to dependent children for certain specific taxpayer categories remain unchanged.
- Stock options and free shares
Gains resulting from stock options and free shares will be taxed under progressive tax rates as ordinary income.
Under certain conditions, gains used to be taxed at a flat rate of 18%, 30%, or 40%.
In order to mitigate the impact of the progressive tax rates applicable to ordinary income, a quotient system would be implemented if the shares are held for at least a four year period.
These new tax computation methods would apply to gains resulting from stock sales realized on or after 1 January 2012.
Finally, a portion of social surtaxes (“CSG”) would be deductible up to 5.1%.
- Tax shelters
The global tax advantages would be limited to Euro 10,000 per year from 1 January 2013. Certain specific investments (such as SOFICA, Malraux and DOM-COM) and those "contracted" before 1 January 2013 would not be subject to this new ceiling.
- Real estate investments
A new tax credit would be proposed for the acquisition or the construction of rental properties realized between 1 January 2013 and 31 December 2016. (The tax credit granted for 9 years would be 18% on an annual basis of Euro 300,000 per taxpayer). It would only apply to investments made in dedicated areas and cities and under certain rent conditions such as the unfurnished rentals of principal residences or discounted rents in view of market conditions.
- Dividends and interest
Under the proposal, the tax treatment of dividends and interest would be aligned with the tax treatment of professional income; therefore, this income would be subject to French personal income tax at progressive rates.
These provisions would apply to income received starting 1 January 2012.
The election for a flat withholding tax, “prélèvement forfaitaire libératoire”, would be abolished.
Upon receipt, these types of income would be subject to a compulsory withholding tax (at a flat rate of 21% for dividends and 24% for interest) as a type of installment payment against the final tax.
In the year following the receipt of income, income would be subject to tax at progressive rates (after deducting the compulsory withholding tax already paid).
However, for taxpayers who earn less than Euro 2,000 of interest per year, the election for a final withholding tax (i.e., 24%) would remain available.
Regarding dividends, the fixed final tax allowance of Euro 3,500 (for a married couple or a couple who has entered into a “PACS” (civil union)) and Euro 1,525 (for a single person) would be abolished starting 1 January 2012. However, the specific 40% rebate would be maintained.
- Capital gains derived from the sale of movable assets
As for dividends and interest, capital gains derived from the sale of movable assets (taxed until now at a rate of 19%) would be subject to French personal income tax at progressive rates up to 45%, plus social levies at a rate of 15.5% (of which 5.1% becomes deductible) and, if applicable, exceptional income tax for high earners at a marginal tax rate of 3 or 4%.
The progressive taxation would also apply to capital gains due on transfers of tax residency outside of France (exit tax).
These provisions would apply to sales realized on or after 1 January 2012, subject to provisions relating to exit tax which would apply to transfers of tax residency made on or after 28 September 2012.
A rebate on the taxable capital gain would apply depending on the length of holding: 5% for holding between 2 and 4 years, 10% for holding between 4 and 7 years, and 5% per year as from the 7th year capped at 40%. The length of holding would start as of 1 January 2013. The rebate would not apply for the social contributions of 15.5%.
- Real estate capital gains
The real estate capital gains tax regime is not amended except for building lots. However, an exceptional rebate of 20% will apply on the taxable gains for 2013. The rebate would not apply for the social contributions of 15.5%.
- Wealth tax
The wealth tax threshold applicable as from the year 2013 would be adjusted to Euro 1,310,000 and progressive taxation would be re-established (progressive rates from 0.50% to 1.50% and bands starting at Euro 800,000).
- Tax Shield
A ceiling equal to 75% of the income received in the preceding year (including capitalized income) would be re-established.
This notion of capitalized income is unknown in French tax law and guidelines from the Administration are expected on this point. Notably, the inclusion of life insurance contracts undistributed products can be envisaged.
Furthermore, the proposals include reinforcement of the methods the French tax authorities employ to control and impose penalties regarding wealth tax.