Tax Alert January 2018 - 2018 Finance bill and 2017 amended Finance Bills - Taxation for individuals

Finance Bill for 2018

The Finance Bill for 2018 (#2017-1837) was adopted by the French Parliament on 21 December 2017 (published in the French Official Journal on 31 December 2017).

By way of decision #2017-758 DC of 28 December 2017, the Constitutional Council did not censor any major provisions regarding personal taxation.

Abolition of the Wealth tax and creation of a new tax based on real estate assets (Article 31)

Wealth tax is abolished and a new real estate tax is applicable as from 1 January 2018 due on real estate assets not used for business purposes.

The main rules of the old Wealth tax continue to apply but will be limited to real estate assets: current threshold, scaled rates, annual filing, valuation rules (subject to exceptions), payment rules and a 75% limit.

The filing rules would likely be the same as the ones for the old Wealth tax.

The specificities of the new regime will apply as follow:

• Taxable base including real estate property held directly by individuals as well as shares of companies (whatever their legal form) up to their value representing the real estate or real estate rights;
• Specific rules will limit deduction of debts exceeding 5 million euros when such debts exceed 60% of real estate assets value (except when the taxpayer can justify that his indebtedness is not mainly tax driven);
• Various exemptions notably related to real estate and shares in real estate companies when such assets are mainly used to carry out an industrial, commercial, artisanal, agricultural or self-employed activity.

The new real estate tax is applicable from 1 January 2018. Gifts to general interest bodies and investments in certain companies’ shares carried out between the 2017 Wealth tax filing date and 31 December 2017 could still benefit from a tax allowance and be offset against the new real estate tax for 2018.

Amendment to taxation of capital gains, life-insurance proceeds, dividends and interest (Article 28)

A new 30% flat tax (12.8% of individual income tax plus 17.2% of social contributions) is introduced for investment income as from 1 January 2018.

The following tax regimes are amended: taxation of capital gains, dividends, interest and life-insurance proceeds. Rates applicable to non-residents are also adjusted.

The exceptional contribution (3% or 4%) on high revenues remains applicable.

Progressive exemption up to 2020 of the residential tax due on main residence for a portion of taxpayers (Article 5)

This exemption will come into force by steps between 2018 and 2020 and will apply to middle and working classes.

The exemption threshold will not be identical for each taxpayer; it will depend on the composition of the taxable household according to the criteria chosen by the government.

Strengthening of the "Madelin" tax allowance (Article 74)

Following the abolition of the wealth tax allowance provisions, the tax allowance for individual income tax for investments in SME has been strengthened.

As of 1 January 2018, the rate of individual income tax allowance is increased from 18% to 25%. The tax advantage remains subject to the EUR 10,000 global cap.

Increase of the CSG rate (Article 8 of 2018 LFSS)

As a consequence of a reduction in employee contributions, the CSG rate increases by 1.7%. The rates are now 9.2% for business income and 17.2% for capital incomes as of 1 January 2018.

The historical rate method will continue to apply for certain investments (PEA, life insurance, PERCO, PEE, etc.) under specific conditions for each investment.

In addition, the deductible CSG is increased by 1.7%.

Withholding tax rate of certain non-salary incomes (Article 84)

The withholding tax rate mentioned in the Article 182 B of the FTC is now assessed by reference to the CIT rate. As a consequence, it is going to progressively decrease from 33,1/3% to 25% in 2022.

Extension of the “Pinel” regime (Article 68)

This regime (i.e. tax allowance for investment in new housing intended for rent) is extended until the 31 December 2021 in certain geographic areas.

Extension of “Censi-Bouvard” (locations meublées non-professionnelle; Article 78)

This regime (i.e. tax allowance for investment on housing acquired in order to be rent to seniors, disabled persons or students) is extended to all acquisitions realized until the 31 December 2018.

Second Amended 2017 Finance Bill

The amended 2017 Finance Bill (1) (#2017-1775) was definitively adopted by Parliament on 21 December 2017 (published in the Official Journal on 29 December 2017).

It has been validated by the Constitutional Council, in its decision #2017-759 DC of 28 December 2017.

Creation of a system of an incomes’ withholding taxation (Article 11)

Some technical adjustments have been made to the withholding taxation system which will come into force as of 1 January 2019.

For information, the withholding tax system will be applied on a monthly basis, avoiding the one year interval between the perception of the revenue and the payment of the corresponding income tax.

With a few exceptions, are subject to the new regime salaries, pensions, investments incomes, life annuities, self-employed workers’ incomes, land incomes and some other social contributions (e.g. social contributions on land incomes).

Are not subject to the withholding tax regime the damages for moral prejudice, stock-options, free shares or BSPCE revenues.

The withholding tax rate and the instalment would be based on the average income tax rate that applied for a tax household during the previous year. Such information will be provided to the paying entity. However, each member of a tax household could elect to apply an individual tax rate. Besides, individual perceiving salaries could elect for a “neutral rate” that would be based on a specific scale.

To avoid a double tax burden in 2019 (since the income tax is currently paid in France during the year following the year during which it was earned), the income tax normally due in 2019 on income for 2018 would be “cancelled,” except for the tax due on “exceptional income.” A special tax credit will be created equal to the amount of tax due for 2017 revenues.