Taxation of Savings Interest and Dividends in France
Tuesday 04 May 2021
There is a single rate ‘flat tax’ for savings interest, dividend income and capital gains on the sale of shares, with the option to use standard income tax bands.
What is the Flat Tax?
The 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 up of two components:
- Income tax at the rate of 12.8%
- Social charges at the rate of 17.2%
As an alternative to the PFU it is possible to opt to be taxed at your marginal rate of income tax, an option which is considered further below and which will be of benefit to those who pay no or little income tax.
The applicable date for the PFU is interest and dividends earned from January 2018, save for any unearned income in 2017 that was not subject to the previous with-holding tax.
Strictly speaking, if you are exempt from the social charges (S1 certificate, private health policy or EEA non-resident) it is only the 7.5% solidarity charge that is applied, although you will find that most in financial institutions are unwilling to apply the lower rate, meaning you will need to reclaim from the tax authority.
Taxation of Bank Savings
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 are tax free. You can read about these schemes in French Bank Savings Schemes.
Taxation of Dividends/Share Sales
The tax applies on all dividend income, without the allowance of 40% against income tax that applied before 2019, or 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.
In terms of capital gains on the sale of shares, the new tax ends the tax allowance for duration of ownership (relief at the rate of 50% or 65%) that was available under the previous tax regime. Only those shares purchased prior to 2018 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 on sales for shares purchased since 2018, but without any allowance for duration of ownership. The social charges of 17.2%, or solidarity tax of 7.5%, 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.
Option for Income Tax Scale Rates
As previously incurred with savings and investment income, a deduction at source (prélèvement fiscal) is made by your bank or financial institution.
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 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 due in 2020 needed to be made by 30th Nov 2019. The request will be assessed on your 2018 income, as notified on your 2019 tax notice.
If you do not consider you benefit from the 30% fixed rate, you have the possibility to later opt to be taxed using the standard income tax bands, on the basis of your marginal rate of tax. In which case, if your liability is lower than the PFU rate you will receive a credit for overpaid tax paid via the deduction at source. If you do so then you benefit from the income tax allowance of 40% against income tax on dividend income and the deductibility of the social charges CSG at the rate of 6.8%.
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; you cannot pick and choose which income to be taxed using the PFU and which income should be taxed using the bands and rates of income tax.
The option for using the income tax scale rates applies at the time you make your annual income tax declaration.
Geraud Nayral, from Cabinet Butiz, an English language French tax advisor, states: "As a general rule, if your marginal rate of taxation is in excess of the 11% tax band, because with the 40% abatement the effective rate of the PFU is 18%. The benefits of the deductibility of CSG are marginal".
He is also cautious about the use of dividends as a method or remuneration for business owners: "Dividends may well be good way for business owners to get paid in the UK, but this is not necessarily the case in France. Corporate tax must be paid before dividends can be paid to the shareholders and on top of that SARL "gérants" would also pay social charges on a part of it."
On their website the French tax authority provide an illustration of how it works for those for whom the 17.2% rate of social charges applies:
EXAMPLE: Take the case of a couple subject to joint taxation with salaried income of €90,000 and dividends of €20,000.
PFU: Tax on dividends, including social charges, amounts to €6,000 (30% of €20,000, or €3,440 for social charges and €2,560 under the PFU), Income tax on salaried income amounts to €12,312, giving a total of €18,312. The marginal tax rate is 30% and the applicable deduction at source charges rate, after discounting, would be 13.7%.
Income Tax scale: Income tax on dividends amounts to €1.504, social charges to €3,440, giving a total tax bill on all income of €18,944. The scale option here is less favourable despite the combined action of the 40% reduction and the 6.8% CSG deduction. The marginal tax rate is still 30% and the post-discount household rate would be 15%.