French taxes: pay flat rate or none at all?

We have, for a long time, had the option of fixed rates of tax on investment income in France, known as PFL or prélèvement forfaitaire libératoire , or the choice of having the income taxed at income tax scale rates.

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These flat rates may be applied to certain kinds of savings; such as savings accounts, life insurance bonds (known as assurance vie) and some dividends.

Under the first budget of President Macron’s new government, this has been “simplified” (his words not mine).

Fixed rates have now been altered (or extended, depending on your point of view).

The headline on its release was that the new flat tax rate would be 30%! Simple or simply horrific? It begs the question: does PFL now stand for Punitive Financial Liability?

The good news is that the actual tax rate for the prélèvement forfaitaire unique is 12.8%, not 30%; the remainder coming from social charges, which are now 17.2% (... and as any French national will comment, there is nothing at all ‘social’ about them).

Is this better or worse? It really depends on your situation but for many it will even out, it may make little or even no difference.

If we look at the rates previously applied to assurance vie investments, these started at 35%, reducing to 7.5% after eight years.

So switching to the new 12.8% tax rate looks like a 5.3% increase for the long-term investor.

Again, it very much depends on the income situation. Take a couple who draw an income of, let’s say, €60,000 from an assurance vie and it is their only income, the taxable income on this may be very much less than the sum withdrawn.

Much of any withdrawal is “deemed” as return of your capital and not taxed. It may be that the taxable income is just €20,000. The marginal tax rate on this for a couple would be 0% as they do not pay tax below €27,530, including the allowance called the décote. So, as you have a choice, why pick tax at source?

This is where a bit of financial planning, foreseeing when and how you take income, can have a significant impact on how much tax you pay.

Of course, people with other significant income may be pushed into the higher bands and so 12.8% starts to look good, especially at the higher end, but even against 20%, as it produces a significant saving.

Is it as simple as Mr Macron claimed?

Let’s just say that I view it as a missed opportunity, as unnecessary complications remain:

With relation to assurance vies – those with below €150,000, for an individual, or €300,000, for a couple, must (there seems to be no choice) continue on the old system, thus 35%, 15% and 7.5%.

Those with above €300,000 who invested prior to September 2017 also continue on the old system but only for funds added before that date. If the policyholders add money after September, then that gets assessed under the new system.

Are the investment companies who are going to have to manage and explain this mess happy that Mr Macron was so kind as to make life simple for them? C’est simplifié à la Française! This is a typical French way of ‘simplifying’ things but it is still possible to pay low tax in France.

You can see why I see it as a missed opportunity to actually make it simple.

For new investors, the new fixed rate means nothing to fear, as it is actually simple (if you invest €150,000 / €300,000) as the 12.8% is an easy choice.

Of course, how you pay social charges is different and they can be avoided / delayed, depending on another set of overly complicated rules, but this is not an article about social charges, so I will not cover the topic here.

This is where some illustrations / projections of expected income are essential when planning income and how and where you take it; avoiding any kind of fix!

This column was written by Robert Kent of Kentingtons financial advisers.