2012 French Finance Act
In early July, the French Government presented its revised 2012 French Finance Act Project to the Parliament. It contains several reforms related to French Inheritance Tax, Wealth Tax, and Social Charges.
We have selected the ones which will have a direct impact on non-French residents investing in France. Please note that this project has still to be examined and is not yet adopted. We will follow the process and send a further update in due course.
The project involves primarily:
• lowering from €159,325 to €100,000 the reduction applicable to gifts and inheritances in a direct line on the part of each ascendant and child living or represented;
• increasing from ten to fifteen years, the deadline for tax recall of the donations made between the same persons.
These measures will apply to gifts and inheritances on the date of entry into force of the law.
According to the 2011 French Finance Act, for French Wealth Tax for the year 2012, taxpayers are taxed on only two bands –
a) Net assets from €1.3 million to €3 million are taxed at 0.25%; and
b) Net assets in excess of €3 million are taxed at 0.5%.
According to the 2012 French Finance Act Project, net wealth exceeding €1.3 million taxable to the Wealth Tax for the year 2012, should pay an additional special tax on wealth before 15 November 2012, calculated on a progressive scale identical to that applied for the calculation of the Wealth Tax due for 2011.
This means that the taxpayers will effectively pay wealth tax this year based on last year’s rates. The wealth tax paid by taxpayers with assets worth more than €3 million (the next deadlines for which will be in August for non-EU residents), will be allowed as a tax credit for this “exceptional tax”. The impact of this additional tax will be greater the higher the wealth as the marginal tax rate of 1.8% is now reintroduced.
It has to be noted that assets below €1.3 million remain nontaxable (the previous threshold of €790,000 is not re-introduced).
Social Contributions for Non-Residents
Income derived by non-residents from immovable property situated in France will be subject to Social Charges on capital income, taxable at the standard rate of 15.5%.
This means that for an EU resident, tax on rental income will rise from a lower rate of 20% to 35.5%, and capital gains tax on property sales will rise from 19% to 34.5%. For a non-EU resident, capital gains tax on property sales will rise from 33.33% to 48.83%.
The measure will apply to capital gains realized from the entry into force of the law and to the rents received from 1 January 2012.
Captal Gains Tax
The exemption of Capital Gains Tax for the first sale of a second home is maintained, but additional conditions have to be fulfilled such as the use of the proceeds of the sale to purchase your principal home. The exemption will now be awarded just one time for the sale realized after 1 February 2012.
Social Charges Changes
Whilst it may not be determinant for a foreigner owning a property in France, it has to be noted that various changes will also relate to the social charges due upon the employment of employees in France. This will have a direct impact on our clients employing staff to take care of their property for example. The reduction of social charges on additional hours worked by employees may for example be cancelled.
The proposed increased of the VAT rate of 21.2% has been cancelled by the new government who wish to keep the exiting normal VAT rate at 19.6%.
It has to be remembered that the lower rate of 7% applies to certain works undertaken on properties for example.
Whilst most of these changes have been widely discussed over the last months and were anticipated, they will have an impact on the structuring of French property by non-residents. Various measures are questionable as to their legality (indirect retroactivity of certain measures, total change of the territorial scope of the social contributions) and as to their potential negative effect on investment in France by non-residents and on the establishment of wealthy families in France.
There will still be property purchased in France by foreigners who are attracted to the location and this is fortunate. However, the advice to be given regarding how to hold the property will have to be carefully re-thought: for example considering that the higher corporate tax rate is 33.33% and an individual could be taxed up to nearly 49% upon the gain released on the French property.
For pre-move planning to France, various other measures will have to be considered such as the changes of taxation of stock options and the new life insurance policy regimes.
Fortunately it takes more time to amend a bi-lateral tax treaty than to implement new financial law measures. So tax planning can and should be undertaken more and more making use, in a legitimate manner, of the existing and large French tax treaty network.
These changes need also to be considered in view of the evolution of legislation and taxation in other European countries, and taking into account the comparative advantages of Monaco, and the possibility of effective change of residency to the Principality.