2017 Finance bill and amended 2016 Finance bill - Taxation of individuals

06 January 2017

Laurence Clot, Nicolas Bourdon, Antoine Chalal, Sophie Dorin, Ozlem Orakci, Dorian Benchargui

FINANCE LAW FOR 2017

The Finance Act for 2017 (n°2016-1917) was adopted by the French Parliament on December 29th, 2016 and was published in the French Official Journal on December 30th, 2016.

By way of decision n°2016-744 DC of December 29th, 2016, the Constitutional Council didn’t censure any major modification regarding personal taxation.

Personal Income Tax

  • Scale: the entry threshold into the first individual tax bracket applying a rate of 14% is raised to €9,710. Taxpayer’ incomes per unit, not exceeding €9,710, are exempt from income tax for income in the 2016 taxation year. The other individual income tax bracket limits are revaluated by 0.1%.
  • Family quotient: the upper limits of the effects of the family quotient are increased by 0.1% for 2016 incomes. The maximum advantage resulting from application of family quotient is set at €1,512 per additional half-unit. For single parents raising children alone, the tax advantage resulting from the unit corresponding to the first dependent child is limited to €3,566.
  • Income tax reduction: taxpayers whose reference income (increased with certain capital gains) amounts € 20.500 for a single person and €41.000 for a couple, benefit from a income tax reduction up to 20%.

Proposals affecting “impatriates” regime

  • The length of the period during which “impatriates” can benefit from a specific favourable regime (exemption from income tax on the additional compensation paid to the inpatriates) is extended until 31 December of the eighth year (instead of the fifth year, as currently available) following the beginning of their functions in France.

Anti-abuse clause to the French wealth tax ceiling mechanism

  • Taxpayers who artificially reduce their taxable income by capitalizing cash in a financial holding entity, with a view of reducing reportable and taxable income, will have incomes added to back to the computation of the wealth tax ceiling mechanism.
  • The French tax authorities will have to demonstrate that the costs or revenues are artificially provided, directly or indirectly, by the company.

Creation of a system of an incomes’ withholding taxation

  • A withholding taxation system is created for incomes paid to individual taxpayers as from January 1st, 2018.
  • 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 2018 (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 2018 on income for 2017 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.

Allocation of free shares : amendment to the acquisition gain’s tax regime (capital gain)

  • The fraction of the acquisition gain exceeding €300,000 per year will be taxed as employment income, disallowing the benefit from the rebate (from 50% to 85%) based on the length of holding of the shares.
  • The employer contribution is increased from 20% to 30%. Provisions related to the exemption of the employer contribution for small and medium size companies have not been modified.
  • These amendments will apply to free shares who have been granted by a general shareholders meeting that took place after publication of the 2017 Finance bill.

Other

  • The tax reduction “Pinel” related to rental investment is extended for one year, until 31 December 2017.
  • The tax credit for an energy transition is extended for one year, until 31 December 2017.

AMENDING FINANCE LAW FOR 2016

The Amending Finance law for 2016 (n°2016-1918) was adopted by the French Parliament on December 29th, 2016 and was published in the French Official Journal on December 30th, 2016.

By way of decision n°2016-743 DC of December 29th, 2016, the Constitutional Council didn’t censure any major modification regarding personal taxation.

A SME innovation account is created

  • The SME innovation account allows business owners to sell shares of their company with the benefit of a deferred taxation on the capital gain. To benefit from such regime, the capital gain shall be reinvested in less than 7-years old SME shares within 24 months of the sale.

Wealth tax: various clarifications

  • Non-professional incomes are now clearly excluded from the appreciation of the remuneration’s normality. Same solution applies to the computation of the remuneration’s preponderance regarding all taxable incomes.
  • Besides, a restriction on value of shares benefiting from the professional assets regime is created. Is now excluded from the exemption the portion of the shares representing the professional asset for the value of the company’s subsidiaries and sub-subsidiaries corresponding to non-necessary assets for the activity of the company constituting the professional asset.
  • A safeguard cause provides that a taxpayer in good faith who cannot have the necessary documents will not be reassessed.

Strengthening penalties for late payment or declaration

  • Effective January 1st, 2017, the 10% surcharge applicable to late payment is extended to amounts reassessed by way of an “assessment notice”, when these sums have not been paid within 45 days of the notice notification’s date.
  • In case of default or late filing of a personal income tax return, an additional penalty of 10% of the initial tax is now applicable.

Qualification of income from the occasional furnished rental

  • The qualification of income from the furnished rental no longer depends on regularity of the activity (occasional or usual).
  • Any person renting furnished living premises, directly or indirectly, carries out an activity that comes under the category industrial and commercial profits.