French Taxation in 2018 – New Rules for Investment Assets and Income

From 2018 French residents no longer need to pay wealth tax on savings and investments, and investment income benefits from a new tax rate.

The French tax reforms which were first announced in September came into effect on 1^st January 2018. The main measures remain unchanged from the initial draft budget, which is good news as it included significant tax cuts for investment assets and income.

Here is a summary of the key changes affecting expatriates living in France.

Income Tax Rates

There are no changes to French income tax rates for 2018 (payable on 2017 income). The income tax bands for each rate have, however, been indexed for inflation. For example, last year’s €9,710 nil rate band has increased by €97, and the income threshold for the top 45% rate is up €1,523 to €153,783.

NET INCOME SUBJECT TO TAX	TAX RATE
Up to €9,807	Nil
€9,807 to €27,086	14%
€27,086  to €72,617	30%
€72,617 to €153,783	41%
Over €153,783	45%

The ‘exceptional tax’ remains in place for 2017 income. This charges an extra 3% or 4% for income over €250,000 and €500,000 respectively, with higher thresholds for families.

Income tax is payable on salaries, self-employment income, pensions and rental income (see below for investment income) and you are taxed as a household rather than as an individual. Take advice to make sure you are taking advantage of available tax-efficient structures in France.

Social Charges

All income is subject to social charges as well as income tax. The contribution sociale généralisée (CSG) part of social charges increases by 1.7% this year for all types of income, so the rates for 2018 are: 9.7% for employment income; 9.1% for pension income and 17.2% for investment income (including rental income).

You do not need to pay social charges on your pension income, including lump sums, if you have EU Form S1 and/or do not have access to the French healthcare system.

Flat Tax on Investment Income

Over recent years, investment income was subject to the income tax scale rates, but this has now changed.

From 1^st January 2018, investment income is liable to one fixed rate of 30%, regardless of the amount earned.  This 30% flat rate includes both the income tax and the social charges – so the income tax part is equal to 12.8%.

This new flat rate applies to investments over €150,000 per individual (i.e. €300,000 for a joint investment for married/PACS couples).  Households in low-income brackets will keep the option for progressive income tax rates (otherwise they would pay more tax with the new system). The current abatements on dividend income and gains on share sales (only for small and medium-sized companies) remain in place if the taxpayer opts for the scale rates.

Assurance-vie Policies

This new system also applies to assurance-vie, but note that in this case, it applies to all policies set up on or after 27^th September 2017, although the flat rate only applies for withdrawals made after 1^st January 2018. This can actually be more beneficial for individuals with a higher marginal rate of tax.

For policies set up before 27^th September 2017 the old fixed rate system will still be available. If you top it up after this date, the proportion of the gain element relating to the top-up will be subject to the new flat rate of tax.

The allowance for policies held for more than eight years stays in place for all policies (€4,600 for individuals and €9,200 for married/PACS couples).

Wealth Tax

This is perhaps the biggest tax reform President Macron has made so far. From 1^st January 2018, the scope of wealth tax is limited to real estate assets.  

Therefore, Any Savings and Investments, Including Assurance-vie Policies, Are Now Exempt from Wealth Tax.

The previous threshold of €1,300,000 stays in place and the scale rates of wealth tax remain the same as before. The 75% limitation will also stay in place.

Other Measures

The limits for the micro-regimes for business income have increased significantly. The limit for income taxed under the BIC-regime (including income from gîtes) has increased to €170,000 from €82,800. For income taxed under the BNC-regime (unfurnished rental income etc.) the limit has increased to €70,000 from €33,200.

Changes to the calculation of taxe d’habitation will mean that, from 2020, 80% of French households will be exempt from this tax. The changes are being phased in gradually so that in 2018 30% of households will be exempt, increasing to 65% in 2019.

The main corporation tax rate remains 33.33% for 2018, but will reduce to 31% in 2019 and then reduced further to reach 25% by 2022.

These reforms make this an excellent time to review your tax planning. Establish exactly what the changes mean for you, and whether you need to consider re-structuring your assets so that you can take full advantage. Seek personalised, specialist advice, so you can ensure your tax planning is designed around your circumstances and objectives, and you are not paying any more tax than necessary.

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