8. Taxation of Savings Interest and Investment Income
Since January 2018 a single rate ‘flat tax’ has been in place for savings interest, dividends and the sale of shares.
The aim is to simplify and reduce the level of taxation on capital income, which was previously taxed through standard income tax scale rates, the social charges, and capital gains tax.
In practice, there is an element of plus ça change about the new measure as it will not make a significant, if any, difference to most households.
Inevitably, the main winners are higher rate taxpayers - those whose marginal rate of income tax is at least 30%. If pay little or no income tax you will be worse off, although it is possible to opt out of the flat tax if that is the case.
Coupled with these changes there has also been a change concerning the imposition of social charges, which will affect expatriate households.
8.2. What is the Flat Tax?
The new single rate tax is called the Prélèvement Forfaitaire Unique – PFU, although it is being commonly described in France (even by the French government) using the English language sobriquet of ‘flat tax’.
Imposition of the tax is a uniform and fixed rate of 30%, whatever the level of your income. So, unlike income tax, it is not progressive.
The tax is actually made made up of two components:
Income tax at the rate of 12.8% Social charges at the rate of 17.2%
The latter rate is the result of the general increase that occurred in the social charge CSG of 1.7%, increasing the total level of social charges on investment and rental income and capital gains from 15.5% to 17.2%.
However, as a result of reform of the social charges introduced by the Finance Act 2019, EEA residents who are not affiliated to the French social security system are now exempt from the social charges.
This clearly applies to all non-residents from within the EEA, but it also applies to residents in France who are in receipt of an S1 certificate of health entitlement.
This change was made to bring French law into line with Europeans regulations, which forbids residents in the EEA being liable for social security contributions in two countries.
In January 2022 the French government also accepted that UK non-residents were entitled to exemption from the social charges in the same manner as EEA nationals, which we set out in our article Brexit - Non-Residents and Social Charges.
In order to offset the losses incurred to public finances that would occur as a result of this change, the government introduced a 'solidarity tax' (prélèvement de solidarité), that applies on all investment income and capital gains, at the rate of 7.5%. The proceeds of this tax are allocated to the general budget, not the social security budget, so overcome European regulations.
As a result, those to whom this rule applies will pay 'social charges' of 7.5% instead of 17.2%.
Accordingly, EEA expatriates in France who hold an S1 or equivalent pay a combined rate of 20.30%, whilst those residents who do not have exemption from social charges pay at the combined rate of 30%.
Indeed, if your income is (exceptionally) liable to the Contribution Exceptionnelle sur les Hauts Revenus, you will pay a combined total of 33% or 34%.
At the same time, changes have been made to the minimum rate of income tax for non-residents, which was increased from 20% to 30%, although only for those whose French source income is greater than €27,519.
So the combined rate that applies to non-residents depends on their country of residence and level of French taxable income, ranging from 27.5% to 47.2%. Tax treaty rules enable many non-residents to claim back any deduction of tax in France.
You can read more about the change in the rules in our Newsletter article Reform of Social Charges.
The applicable date for the PFU is interest and dividends earned from January 2018, save for those dividends that were not subject to the previous with-holding tax.
8.3. Bank Interest
The tax is payable on all bank interest received, whether in France or from elsewhere, for anyone who is resident in France.
However, certain regulated bank savings schemes in France that are currently free of income tax or social charges remain exempt.
Thus, the interest earned on Livret A, LDDS (ex-LDD), Livret d'épargne populaire (LEP), and Livret Jeune will continue to be tax free.
Similarly, the taxation of interest earned under a Plan d'épargne logement (PEL) or Compte épargne logement (CEL) remains unchanged, but only provided the account was opened before 1st January 2018, and only up to the 12th anniversary opening date of the account.
8.4. Dividends/Share Sales
The tax applies on all dividend income and capital gains on the sale of shares.
Capital losses suffered during a year are charged exclusively on capital gains of the same kind in the same year.
In the event of a negative balance (overall annual loss), such losses are carried over and charged under the same conditions over the following years to the 10th year.
The tax grants no right to the previous income tax allowance of 40% on dividend income and the partial deductibility against income tax of the social charges CSG.
In the case of company owners who use dividend income as a method of remuneration, the owner (and their family) is liable for the flat tax on such income, with no 40% allowance or deductible social charges. Where the dividends exceed 10% of the share capital of the company self-employed social security contributions are payable on the dividend payments, as presently occurs.
The tax also ends the tax allowance for duration of ownership (relief at the rate of 50% or 65%) that was available under the previous tax regime on the sale of shares. Only those shares purchased prior to 2018 continue to benefit from this relief, but only provided you opt to be taxed using income tax scale rates.
Otherwise, for all new shares purchased since 2018 and for shares purchased prior to this date where you opt for the PFU, no allowance for duration of ownership applies.
It remains possible to opt to be taxed using income tax scale rates for shares purchased since 2018, but without any allowance for duration of ownership. The social charges continue to apply.
Special provision remains up to 2022 for retiring owners of a company who are granted relief of €500,000 on the sale of their shares, subject to conditions.
8.5. Option for Income Tax Scale Rates
As previously incurred with savings and investment income, a deduction at source (prélèvement fiscal) will made by your bank or financial institution. The previous income tax deduction at source rates of 24% for interest and 21% for dividends has now been reduced to 12.8%, plus the social charges.
If your net taxable income is no greater than €25,000 (€50,000 for dividends) for a single person or €50,000 (€75,000 for dividends) for a couple you can request from your bank/financial institution (in a sworn statement) exemption from the 12.8% income tax element of the prélèvement fiscal. You need to do so before 30th Nov of the year preceding payment of the dividend/interest. So a request for income in 2022 needs to be made by 30th Nov 2021. The request will be assessed on your 2020 income, as notified on your 2021 tax notice.
If you do not consider you benefit from the 30% fixed rate (and unless your marginal rate of income tax is at least 30% you will not do so), individuals who are resident in France have the possibility to later opt to be taxed using the standard income tax bands, on the basis of their marginal rate of tax.
You will also pay social charges at the rate of 17.2% or 7.5%, depending on your circumstances. However, many banks are not making the correct deduction, as we indicated in our article Social Charges on Investment Income and Capital Gains.
If you do so then you benefit from the income tax allowance of 40% on dividend income and the deductibility of the social charges CSG at the rate of 6.8%, should you be liable.
This option will normally benefit those whose marginal rate is no higher than 11%, the second income tax band, although the results are not always self-evident.
You also obtain the allowance for duration of ownership on the sale of shares purchased before 2018.
However, if you take this option it applies to all your investment income and capital gains; you cannot pick and choose which income to be taxed using the PFU and which income should be taxed using the income tax bands and rates.
The option for using the income tax scale rates applies at the time you make your income tax declaration.
Unless you have been able to obtain exemption from the deduction at source, banks and financial institutions will automatically use the 30% rate on your investment income. If you consider you would benefit from a lower rate of income tax (and social charges) you need to opt to use income tax scale rates when you make your tax declaration.
8.6. Assurance Vie
There are also implications for the taxation of assurance vie policies, arising from the 2018 changes.
The PFU applies to the gains generated by sums paid out since 1 January 2018, for withdrawals before 8 years, and for withdrawals after 8 years for people with the largest life insurance policies (more than €150,000 per beneficiary of the withdrawal).
For others, the standard system of degressive taxation (35%, 15%, 7.5%) based on the length of ownership continues to apply.
Insurers are obliged to apply a social security contribution charge of 17.2% and a tax of 7.5% or 12.8%, depending on the length of ownership, if the gain relates to payments made since 27 September 2017.
As with interest, it is possible to opt out of the flat tax.
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