Previously income from capital-based sources, namely interest, dividends and capital gains on the sales of shares, was subject to the household progressive rate of income tax and social taxes.
The government has implemented, starting from January 1, 2018, what is called a ‘flat tax’ on these investment incomes, as well as other gains such as from as Assurance Vie and Plan Epargne Logement etc. The flat tax – officially called Prélèvement Forfaitaire Unique (PFU) – consists of 12.8% of income tax plus social income taxes, which are now 17.2% (15.5% in 2016). The flat rate tax will apply automatically to all earnings from investments taken out from January 1, 2018.
The intention is to provide greater transparency and simplicity, so the investor can anticipate the tax effects on their eventual investment income – and this may be the case in a number of situations and result in more capital being invested in France.
But what about (local and foreign) investments taken out before 2018 – could the new system result in a higher income tax than would have been suffered under the previous system? In response to this, taxpayers can choose the previous ‘progressive’ income tax system if the investment was held prior to 2018 and should this option result in a more favourable taxation (on the household’s investment income) than the flat rate tax.
The same rate of social taxes (17.2%) will apply under either option. As a general rule, the flat tax will be more advantageous for households whose marginal rate of income tax is below the 14% tax bracket. However, in many cases, the only way to anticipate this is to simulate the household’s tax results under both options.
The flat rate system will apply automatically. However, if the progressive rate system is chosen it will exclude the flat rate system meaning you cannot choose the flat rate for some items and the progressive rate system for others.
This question was answered by Olaf Muscat Baron who is a Fellow of the Chartered Association of Accountants UK, a French expert comptable and an International tax advisor. He is the principal accountant of Fiscaly, an accountancy firm based in the Dordogne.
See www.fiscaly.fr or call 09 81 09 00 15