France – Tax News - Summary of the main fiscal changes adopted at the end of the year under the amended Finance Act 2011 and the Finance Act 2012 and applying to individuals

20 January 2012

Laurence Clot, Vaea Pery

An exceptional contribution on high income (Finance Act 2012)

The wealthiest taxpayers will be liable to pay this new contribution as of tax due for 2011, until the overall government deficit has been eliminated.

This exceptional contribution is set up at the rate of 3% on the fraction of benchmark taxable income of between 250,000 Euros and 500,000 Euros for single taxpayers, and between 500,000 Euros and 1 million Euros for joint taxpayers.

The applicable rate rises to 4% for the fraction over 500,000 Euros for single persons, and over 1 million Euros for joint taxpayers.

Benchmark taxable income is constituted of the sum of income subject to the progressive scale or to the levy in discharge, of some income exempt from income tax, and of capital gains subject to the proportional rate.

Particular methods of calculation have been provided for cases of receipt of windfall gains (“smoothing” arrangements).

Declaration shall be made in the same way for both the exceptional contribution and income tax.

New mechanism for taxing capital gains on securities (Finance Act 2012)

The previous fiscal arrangements provided for exemption of capital gains on transfers of securities from 8 years of ownership from 1st January 2006.  The new arrangement removes this exemption and replaces it with a mechanism for carrying over taxation on condition of reinvestment.

Application of this carry-over supposes that the stocks have been held for over 8 years and that they have continuously represented 10% of the voting or financial rights of the company of which stocks are transferred for more than 8 years prior to transfer.

Should these conditions be fulfilled, taxation of capital gains on transferred stocks may be carried over, but only where the taxpayer expressly makes such a request to the tax authorities, and mentions the amount of capital gains on their tax return.

It should be noted that carry-over only applies on income tax due, and not on social contributions which remain due at the current rate of 13,5% as of the first Euro.

Moreover, benefitting from carry-over supposes that:

  • At least 80% of the amount of capital gain (net of social contributions) is re-invested within 36 months in the acquisition of company stocks.

  • Stocks held following the purchase represent at least 5% of the company share capital.

  • The seller  and his family members are not company shareholders before the contribution, nor have exercised functions as executive of the company since establishment of the firm, or for five years after the contribution.

The capital gain carried over shall be tax exempt in fine 5 years after re-investment of the stocks.

It should be noted that the exemption arrangements remain unchanged for executives of SME’s transferring their stocks on retirement.  

Reform of the ISF [Wealth Tax] (1st amended Finance Act 2011)

The threshold for liability to pay Wealth Tax has stood at 1.3m Euros since 2011

From 2012, the progressive Wealth Tax scale is replaced by taxation at the rate of 0,25% for estates amounting to  between 1.3m Euros et 3m Euros net value, and at 0,5% for estates amounting to   over 3m Euros net value.

Filing requirements are amended for taxpayers whose fortune is taxed at 0.25%.

Wealth tax: Amended rules for business assets (1st amended Finance Act 2011)

As of ISF 2012, the notion of exempt business assets is extended where functions are exercised in different companies whether or not they have related activities.

Moreover, the condition regarding a minimum 25% ownership of the company for which the stocks are held to be business assets is relaxed in order to take into account a potential dilution arising from an increase in capital. Thus, a 12.5% ownership could be sufficient, subject to fulfilment of certain conditions.

Wealth tax: Assessment of stocks in predominantly real estate companies (1st amended Finance Act 2011)

As of ISF 2012, the value of stocks held by non-residents shall be determined without taking into account any claims it holds on the firm.  The effect of this new rule is to bring to an end optimisation schemes based on current account financing.

Freezing of the 2010 income tax rate (4th amended Finance Act 2011)

The income tax rate is traditionally revised every year in order to alleviate the tax burden on taxpayers (on the basis of inflation).

From 2011 and until the public deficit falls to under 3% of GDP, the applicable rate shall be that unrevised 2010 rate.

This measure constitutes an automatic rise in the tax burden weighing on taxpayers.

Wealth tax and gift tax; easing of the conditions for a « Dutreil agreement » (1st amended Finance Act 2011)

The fiscal arrangements for a « Dutreil agreement » are relaxed, in particular to allow new shareholders to join a previously agreed Shareholders Pact.

Removal of the « tax shield » (1st amended Finance Act 2011)

The tax shield rule will disappear from 2013.

It will therefore be possible to claim the cap on direct taxation for the last time in 2012 on income from 2010. This mechanism will be exercised by reverse charge on the ISF for 2012.

Increase of withholding tax rates on dividends and interest (4th amended Finance Act 2011)

For all capital income received from 1st January 2012, the withholding rates on dividends and products of fixed income investment are to rise.

Regarding dividends, the withholding rates for dividends paid to residents of the EU, Iceland, Norway or Lichtenstein rise from 19% to 21%.

Regarding interest, the withholding rate rises from 19% à 24%.

Removal of the 40% reduction in tax liability for dividends paid on SIIC and SPPICAV (Finance Act 2012)

As of 2011 income, individual shareholders  will no longer benefit from the 40% reduction in tax liability on dividends paid by different types of property investment company:  SIIC (Sociétés d’Investissement Immobilières Cotées) and SPPICAV (Société de Placement à Prépondérance Immobilière à Capital Variable).

Along with this removal, it becomes impossible for shareholders to opt for withholding tax on dividends paid out by SIIC and SPPICAV, this option being reserved solely for income which attracts the 40% reduction. Dividends are thus subject to the progressive income tax scale, even where the option for the withholding tax was previously taken

From 21 October 2011, moreover, it is no longer possible to register in a PEA [Stock Savings Plan] stock held in a SIIC, SPPICAV or similar European property investment firms.

Reinforcement of exemption conditions on capital gains on property (Finance Act 2012)

Regarding capital gains on property transfers as of 1st February 2012, the new rule limits the conditions under which transfer of a property which is not the seller’s main residence is exempt, providing for exemption after 30 years ownership (against 15 years currently).

However, a specific exemption is provided for transfer of housing other than a main residence subject to the following conditions:

  • Only the first property transfer may benefit from this exemption,

  • The seller must not have been owner of a main residence over the previous 4 years,

  • The sale price must be re-invested in purchase or construction of a main residence within 24 months of the sale.

Extension of application of Exit Tax for taxpayers transferring their residence abroad (4th amended Finance Act 2011)

The purpose of the Exit Tax is to tax capital gains which are unrealised or deferred by taxpayers who transfer their tax residence out of France.

Previously, this concerned only direct or indirect shareholdings of at least 1% of company profit or shareholdings of a value of over 1,300,000 Euros per company.

From 30 December 2011, application of Exit Tax has been widened to cover shareholding by a taxpayer in more than one company where the cumulative amount of these various shareholdings exceeds 1,300,000 Euros.

This change in the rules does not affect the ownership threshold of 1%, which is always assessed per company, and only concerns value ownership overall.

Gift tax (1st amended Finance Act 2011)

The top two tax bands of gift tax and inheritance tax are increased by 5%, from  35% to 40% for the taxable fraction of between 902,838 € and 1,805,677 € and from 40% to 45% above 1,805,677 €.

Moreover, gift tax reductions linked to the age of the donor are withdrawn other than in the case of donation of full ownership of stocks or shares in individual companies or firms fulfilling the conditions required for a Dutreil agreement, by a donor of less than  70 years old.

The reporting period for gifts made previously is increased from 6 to 10 years.

Increase in the deduction from annuities paid under « top-hat pension plans » (4th amended Finance Act 2011)

A new tax band applies to defined benefit pension plans, also known as « top-hat pension plans », under which the highest fraction of the annuity paid to the taxpayer is taxed at 21%.

For pensions paid before 1st January 2011, the rate remains at 7% for the fraction between  500 and 1,000 Euros, 14% from 1,000 to 24,000 Euros, and the new rate of 21% applies to the  fraction over 24,000 Euros.

For pensions paid from 1st January 2012, the rate of 7% applies to the fraction between 400 and 600 Euros, 14% to the fraction between 600 and 24,000 Euros, and the new rate of 21% applies to the fraction over 24,000 Euros.

Limitation of the income tax reduction provided by the Madelin rules to apply only to firms in initial growth phase (4th amended Finance Act 2011)

For payments made from 1st January 2012, the rules for income tax reduction due to cash subscription in the share capital of an SME, known as the Madelin rules, are limited to cover only SME’s in seed stage, start-up stage or in the expansion stage.

The SME must also fulfil the following conditions:

  • Firstly, have fewer than 50 employees and annual turnover or a balance sheet total of less than 10m Euros

  • also, have existed for less than 5 years,

  • finally, not qualify as a firm in difficulty, nor as a shipbuilding firm, or a firm in the coal or steel industry.

Moreover, the annual payment ceilings are raised to 50,000 Euros for single taxpayers and 100,000 Euros for joint taxpayers. The maximum tax reduction which may be obtained at the rate of 18% is respectively of 9,000 Euros and 18,000 Euros.

Lower overall ceilings for tax “niches” and 15% reduction in certain tax advantages (Finance Act 2012)

As of 2012 income (on the tax advantages granted from 1st January 2012), the cumulative amount of certain tax advantages may not exceed a ceiling fixed at 18,000 Euros plus 4% of taxable income (previously fixed at 6%).

Moreover, a 15% reduction on tax reductions and credits covered by the overall ceiling on tax “niches” also applies to income from 2012. This reduction does not apply to tax reductions and credits for employment of domestic help and for childcare expenses for infants.

Trusts (1st amended Finance Act 2011)

Tax arrangements for trusts set up abroad are provided under French law. The object of these provisions is to foresee the terms of taxation of transfers through trusts, as well as the taxation of the assets included in the trust.

A trust is characterised by an ensemble of legal relations set up under the law of a foreign State. New legislative definitions specify the capacity of the persons involved and their legal relationships.

These new provisions cover, on the one hand, transfers without consideration made through a trust which may be considered, under French law as a gift, or inheritance. In such a case, should the beneficiary or the settlor of the trust reside in France or the assets be situated in France, transfer duties are due on the whole of the net assets of which the trust is composed.

On the other hand, should the transmission not qualify as a gift or inheritance, it will be subject to specific tax rules arising from the new tax arrangements, which are close to the common law on inheritance.

By way of exception, gift and inheritance tax are due at the marginal rate of 60% where the trustee is subject to the law of an NCST (Non Co-operative State or Territory, a non-EU member state, which has not concluded a tax administration assistance agreement with France with the intention of fighting fraud and tax evasion ), or where the trust was set up after 11 May 2011 by a settlor residing for tax purposes in France.

Moreover, the new law poses a general principle of subjecting assets placed in trust to Wealth Tax and sets up a specific tax of 0,50% which may be considered as the penalty where the wealth tax rules are not respected.

Finally, new filing requirements are imposed on trustees, and it is specified that failure to carry out these requirements shall be subject to significant financial penalties.

These new provisions oblige individuals to review the organisation of their holdings via foreign trusts.

Contacts :

For any further information, please contact:

Laurence Clot, Partner, Tax Law
laurent.clot@twobirds.com

Vaea Pery, Associate, Tax Law
vaea.pery@twobirds.com

Bertrand Biette, Partner, Corporate
bertrand.biette@twobirds.com


Arnaud Larousse, Partner, Corporate
arnaud.larrousse@twobirds.com

Gildas Louvel, Partner, Corporate
glidas.louvel@twobirds.com

David Malcoiffe, Partner, Corporate
david.malcoiffe@twobirds.com

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Biette-Bertrand

Bertrand Biette

Partner, Head of restructuring
France

Call me on: +33 (0)1 42 68 6000
Pery-Vaea

Vaea Pery

Senior Associate
France

Call me on: +33 (0)1 42 68 6000