It seems that summer sun stimulates French legislators to ramp up the heat on their constituants (and others) by enacting new laws, as in July, 2011, and this month proposing others, that will keep many — taxpayers and advisors alike — from enjoying a trouble-free summer. This last week saw the publication of a raft of proposed law changes. The ones I chose for listing here are those most likely to affect expats and non-resident investors in France.
The name of the game is clearly Deficit Busting. Its intent is to reduce France’s current deficit. As expected, the onus of the new measures will fall most heavily upon corporations and “wealthy individuals”.
Here are the highlights of key provisions contained in a draft of the proposed new French tax law, which will be debated by parliament in the coming weeks before a finalized version will pass into law. Attention: As indicated in the text below, some provisions, most notably in the wealth tax (ISF) area, are intended to be retroactive.
- The normal TVA rate will remain at 19.6%.
- The “social contributions tax” imposed on investment income, recently increased to 15.5%, will be maintained. Note, this is in addition to normal income tax assessed on such income.
- The wealth tax (ISF), which was lightened in 2011 so that the maximum tax that could be paid is 0.5% (one-half of one percent), will be restored to its former levels. Those who profited from the reduction during 2011 and 2012 will receive a supplemental tax bill in the fall based on the pre-2011 rules.
- Gifts to children, grandchildren, etc: Pre-Hollande changes had raised the tax-exempt amount to €159,325, per parent per child (that is, €318,650 per child if both parents participate in the gift). This amount was renewable every 10 years. The proposed new law would reduce this to €100,000 per parent per child (that is €200,000 per child if both parents participate in the gift). Worse, the period of renewal of the €100,000 exemption will be lengthened from 10 to 15 years.
- Bequests to children, grandchildren, etc. These rules are identical to the gift changes. Obviously, though, the doubling up of transfers from the two parents is not possible in the case of death (except in the rare case of a simultaneous death of the two parents). Where there had been gifts made during the previous 15 years, the total of those gifts would reduce the €100,000 tax-free allotment available at death.
- There is no proposed change in the tax-free treatment of bequests to spouses. Although not mentioned in the this first publication of proposed changes, presumably this would also apply to PAC’d couples.
- The proposal seems to indicate that the above gift and inheritance changes will take effect as of 1 January 2013.
- Of significant importance to non-residents of France, real estate related income, namely, rental income and capital gains, will, as of January 1, 2012, be subject to the social contributions tax of 15.5%, referred to in item 2 above. This “contribution” is added to the income tax on rental profit or capital gain on sale. Applying this rule to U.S. citizens and residents, the capital gain rate, which is currently 33.3%, will effectively become 48.8%. There are reasons to believe that this huge increase will not be passed into law as such. However, that is the proposed change to be aware of for now.
- The 30-year tax-free holding period rules (what used to be 15 years until February 1, 2012) remains unchanged. So, for those who have owned property for at least 30 years, there will be no capital gains on the eventual sale. But, question: would that exemption apply as well to the 15.5% contributions tax? We have to wait and see.
- Stock options will be affected. To suppress the use of stock options, taxes on both the employer and recipient employee are proposed, making the use of stock options much less attractive. These rules will apply to option plans of non-French companies as well, so expat employees of US multinatinals would be hit by the higher cost of options.
- Other forms of compensation, that traditionally received a lesser tax hit, will be brought into the general compensation basket and taxed as ordinary compensation.
Again, I hasten to mention, that these are proposed changes. The final tax bill may be watered down, but of course, there may be other provisions added.
Of particular note is the absence of any mention of the new trust rules that took effect this year. Those rules, enacted in 2011, have yet to be explicated. There are several uncertainties in that law, not the least of which is how, when and where trustees are to report foreign trusts.