The French government have introduced a single rate ‘flat tax’ for savings interest, dividend income and capital gains on the sale of shares.
The introduction of this tax is the fulfillment of a promise made in his presidential election campaign by Emmanuel Macron.
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 in what has taken place, although those who pay little or no income tax are made worse off by the changes, unless they opt for income tax scale rates. Inevitably, the main winners are higher rate taxpayers.
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 has 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%. Non-residents are not liable for the social charges element.
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.
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. The accounts are now of very little interest to savers or mortgage applicants.
The tax applies on all dividend income, without the allowance of 40% against income tax that previously applied, 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 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 on sales for shares purchased since 2018, but without any allowance for duration of ownership. The social charges of 17.2% 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, there will be a deduction at source (prélèvement fiscal) 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%.
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 2019 needs to be made by 30th Nov 2018. The request will be assessed on your 2017 income, as notified on your 2018 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% 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.
There are also implications for assurance vie policies, which we will deal with in a later article.
Rental Income and Property Capital Gains
Rental income and capital gains on the sale of real estate are unaffected by these changes, although both are liable for the general increase in social charges that has arisen, now payable at the rate of 17.2%, up from 15.5%.
: There has been an update to the tax position for income earned in 2018. You can read more on this at Taxation of 2018 Income.