Technical Update - Finance Bill 2018
The Finance Act 2018 (Loi de finances 2018) has been passed into law and includes measures which affect clients of James Howes & Co.
Investment income flat tax
For investment income arising after 1 January 2018 (dividends, interest, capital gains), a flat tax of 30.0% will apply unless the taxpayer opts for the sliding scale (barème). This 30.0% comprises 12.8% tax and 17.2% social charges.
The option to use the sliding scale is irrevocable for the tax year concerned and applies to all investment income. The taxpayer has to make an express option on submission of their tax return. In other words, the flat tax will be applied by default unless the taxpayer opts otherwise.
In practice the 30.0% rate is best for all taxpayers whose marginal rate of income tax is higher than 0%. See below the effective rate of tax when the sliding scale is applied vs the new 30.0% rate.
| 0% | 17.20% | 30.00% |
| 14% | 30.25% | 30.00% |
| 30% | 45.16% | 30.00% |
| 41% | 55.41% | 30.00% |
| 45% | 59.14% | 30.00% |
There will be no more taper relief for years of ownership of shares under the flat tax system. For taxpayers who opt for the barème, taper relief will be applicable only to shares purchased prior to 1 January 2018.
Similarly, the 40% tax-free allowance for certain qualifying dividends will no longer be applicable except to taxpayers opting for the barème.
Wealth tax
Wealth tax (ISF) is to be discontinued and replaced by a new annual tax on the value of land and property only (IFI or impôt sur la fortune immobilière). This includes shares in property-holding companies (SCIs or equivalent). Non-residents will be liable on their French properties while French residents will be liable on their worldwide real estate holdings.
The same rates and tax bands will apply as for ISF. Assets which will no longer be taxable under ISI include stocks and securities, cash, furniture, cars, yachts and jewellery.
The taxe d’habitation will no longer be a deductible debt as at 1 January, but the taxes foncières will as that relates to the ownership of the land as opposed to mere occupancy.
Loans repayable on maturity only (loans in fine) will be reduced by notional depreciation on a straight line basis over the life of the loan, for the purposes of the IFI return.
For French resident taxpayers, the declaration of taxable real property assets will henceforth be made on the ordinary annual income tax return n° 2042 (as opposed to the present separate wealth tax return) with some additional supplementary schedules.
Other changes
Corporation tax is being progressively brought down from 33.33% to 25.0% and this is expected to be fully achieved by 2022.
The income limits for sole traders to be classed as micro-entreprises and benefit from a flat-rate deduction from revenue in lieu of expenses have been approximately doubled and will now stand at €170,000 for those trading in goods and €70,000 for those providing services.
The introduction of the French version of PAYE (prélèvement à la source) on all sources of income has been delayed by one year and is now expected to become operational on 1 January 2019.
Download: Technical Update - Finance Bill 2018