French Finance Law 2011 and proposed Wealth Tax (impot de solidarité sur la fortune (ISF)) reform – how might the changes affect you?
Like most European governments France is grappling with budget deficits and it is no surprise therefore that the principal objective of the 2011 Finance Law (which came into force on 1st January 2011) is to seek to reduce the deficit from some 152 billion Euro in 2010 to 92 billion in 2011: Still some way to go then if they wish to break a 30 year habit of voting in deficit budgets!
The reduction is to be achieved mainly by the non-replacement of 50% of retiring civil servants and by reducing the so-called “niches fiscales” (tax credits for certain investments) but there are also changes to the rates of capital gains tax.
The rate increases from 16% to 19% and the “social charges” element increases from 12.1% to 12.3%. For French residents this means an effective rate of 31.3%. For non-French residents the rate is 19% providing they are resident in another EU state as such persons are currently exempt from the “social charges” element.
Capital gains tax is essentially a tax on the difference between the purchase price and the sale price of a property although (as is also the case in theUK) there is a total exemption for the sale of your main home. In the case of second homes there is no inflation allowance but once a property has been held for 5 years a reduction of 10% of the gain is applied each year, such that after a further 10 years (15 in total) any gain is reduced to zero and there is no liability.
Unfortunately that may not be the end of the changes so far as capital gains tax is concerned. As part of a reform of the system of taxation of assets (due to become law this Summer) the Government is considering other changes to capital gains tax. One of these would be the removal of the reduction for the number of years held in the case of the social charges element, resulting in French residents being taxed at a minimum rate of 12.3% on any gain irrespective of how long the property has been held. This measure originally appeared in the draft of the 2011 Finance Law but was rejected in the Senate. It may yet see the light of day in the forthcoming reforms.
The impending reforms to the taxation of assets were outlined by President Sarkozy last November. At the time he announced that he was willing to sacrifice one of his flagship reforms (introduced in 2007), the “bouclier fiscal”, which ensures that no-one pays more than 50% of their income in tax but he also indicated the creation of a new wealth tax. He stated: “the idea of the new wealth tax is as follows: the error of the past was to tax the assets whereas it is better to tax the revenue from the assets and the capital gains from the assets. This is the thrust of the reforms that we will undertake”.
After months of speculation the final proposal was confirmed on 12th April 2011 and the reforms do not appear to be as far reaching as initially indicated. The Government is in fact proposing to retain the existing Wealth Tax system (which taxes the assets rather than the revenue from them) but is proposing to raise the level at which the tax applies from 800,000 Euro to 1,300,000 Euro and to simplify the rates applicable from 6 bands to 2. François Baroin, the Finance Minister, confirmed on Tuesday (12th April) that “the purpose of this reform is first and foremost the complete removal of the “bouclier fiscal”. Since its inception, in 2007, the economic crisis has passed. With the “bouclier fiscal” removed, it was imperative to adapt the Wealth Tax so as not to have a confiscatory tax”.
Wealth tax currently affects some 600,000 tax payers in France. If the reforms are adopted it is estimated some 500,000 taxpayers will no longer be subject to Wealth Tax. Following the reforms, Wealth Tax will be imposed on assets between 1.3M Euro and 3M Euro at 0.25% and over 3M Euro at 0.5%. As it currently stands the tax is applied in bands with the first 800,000 Euro tax free. However this will no longer be the case if the reforms are adopted and, by way of example, anyone with assets of say 1.4M Euro will be liable for Wealth Tax at 0.25% on the total value of their assets.
For French non-residents, only assets inFrance are taken into account in calculating any liability to Wealth Tax. However French tax residents are taxed on their worldwide assets.
The reforms should be presented to parliament at the beginning of June with a view to being adopted before mid-July.
