As part of proposed pension reforms which could raise the legal retirement age in France from 60 to 62, the government has announced a series of tax rises to help finance pensions.
The tax increases are intended to target more wealthy individuals, particularly those with investment income, stock options and assets to sell.
The measures will be take effect from 2011 and are expected to generate €3.7 billion for the government.
At the time of writing, the final text of the pension reform bill has yet to be completed and it will then be presented to parliament in September where all the provisions will be voted on.
While the government will face opposition to the reforms, this is likely to centre on the changes to the pension age, rather than the proposed tax increases.
Under the proposals, the top rate of income tax is set to increase by 1% from 40% to 41%. This will affect individuals whose income is above e69,783 (or e139,566 for a married couple or pacs partners), estimated to be 1% of the population.
Capital gains tax will also increase by 1% across the board, with the rate for gains on shares, securities and other financial assets increasing from 18% to 19%, and the rate for real estate increasing from 16% to 17%.
In addition, the capital gains tax exemption for share gains will be abolished. This currently applies where the sale proceeds are less than e25,830 per year. This allowed investors to dispose of small amounts of share holdings each year tax free. From 2011, the entire gain will be taxed regardless of how much is received.
The fixed tax rate for dividends, bank interest and other investment income is to be increased from 18% to 19%.
The taxpayer can elect for the fixed rate, instead of paying tax on such income at the normal scale rates, if this is more favourable. The fixed rate can also apply to overseas investment income arising in the EU, if demanded.
The small tax credit available on French and foreign dividends will be abolished (this is currently up to e115 for a single person and e230 for a married couple or pacs partners).
Finally, there will be an increase in the social security contributions on stock option gains. The employer’s contribution is to be raised from 10% to 14% and the employee’s contribution increased from 2.5% to 8%.
The above increases will not be taken into account when calculating the bouclier fiscal (the tax shield which limits your combined income tax, wealth tax, social charges, and local taxes on your main home, to 50% of your taxable income). It is not clear how this will work in practice; the finance bill will,one hopes, clarify it when it is published.
It may be that these tax increases will not be considered when looking at the total amount of combined taxes paid under the bouclier fiscal and, in this case, the increases would affect only a minority of people.
Alternatively, it may be that these increases are added to your tax bill after the 50% limitation has been calculated, in effect increasing the bouclier fiscal threshold. This would increase the tax bill of anyone whose taxes are currently restricted by the bouclier fiscal.
So far, no increases have been announced in relation to the social charges, which are payable in addition to the tax rates mentioned above at a total rate of 12.1% on investment income and capital gains.
Despite these tax increases, there remain some very tax efficient solutions for residents of France. The assurance vie is still a particularly attractive option, since no announcement has been made to increase the fixed rates applying to these investments.
With an approved assurance vie, the fund rolls up tax free. Tax is only ever payable when a withdrawal is made and then only the growth element of the withdrawal is taxed.
So, for example, if the whole portfolio of assets has grown by 7%, 93% of the withdrawal is tax free.
The taxpayer has the option to elect for the fixed rates of tax, which reduce the longer the investment has been held, or for the scale rates to apply.
The option is available each time a withdrawal is made, so you can choose whichever method results in the lowest tax bill in your circumstances.
An assurance vie can also be an effective means of avoiding or reducing French succession tax and French succession law.
Raising income tax on high earners and increasing levies on capital gains and stock options marks a departure for President Sarkozy, but the biggest shock for French workers will be in the increase in the legal retirement age.
Under the proposals, it will rise progressively from 60 to 62 by 2018. This starts next year, when workers will have to work an extra four months before they can claim their pension.
The reforms apply to both the public and private sector.
France has one of the highest life expectancies in the world but, even with the reforms, it will still have one of the lowest retirement ages in the developed world. The government has no choice but to take steps to secure financing for its pension system.
There are many well established opportunities for expatriates living in France to reduce taxation. Most of the tax planning structures have been left unaffected by the latest round of tax changes. It makes even more sense now to take full advantage of tax breaks that will save tax for the longer term.
However in order to reduce the impact of the tax rises, and tax planning in general, you should take professional advice to ensure that the methods you use are approved in France and are suitable for your personal circumstances and objectives.
This column is written by Bill Blevins of Blevins Franks financial advice group (www.blevinsfranks.com) who has written for the Sunday Times on overseas finance for the past 10 years. He is the co-author of the Blevins Franks Guide to Living in France. This column is exclusive to Connexion.