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8 Janvier 2018

2018 French President Emmanuel Act – Individual Tax

The first 2018 Finance Act set up under the President Macron Government has been approved by the Constitutional Council on December 28, 2017.

It will substantially impact both the 2017/2018 income tax and the 2018 wealth tax, as follows:


1. ABOLISHMENT of the French wealth tax on all financial investments

On January 1, 2018, all French and foreign financial assets are fully exempt of French wealth tax.

This concerns the bank accounts, portfolio investments, shares, life insurance policies, ..., owned on January 1, 2018. Therefore, NO 2018 ISF will be due on these assets.


2. NEW WEALTH TAX “IFI” assessed on French and foreign real estate

The existing wealth tax (ISF) will be replaced by a new wealth tax called IFI or « Impôt sur la Fortune Immobilière» which will concern the real estate not used by the owner for business purposes.

The new IFI will concern both tax residents as well as non-residents owning real estate in France.

The current threshold of € 1,300,000 will stay in place and the 2018 ISF tax brackets and rates remain unchanged at progressive tax rates from 0.50% to 1.50%.

For French tax residents, the French principal residence will still benefit from the 30% rebate.

New - The IFI will also concern the real assets owned via investment funds.

Caution – The deductible debts will be drastically reduced.
The interest only mortgages or « emprunt in fine » will not be anymore fully tax deductible. Only the part of the mortgage recalculated using the method of the amortized loan or « prêt amortissable » will be tax deductible.
This also concerns the existing mortgages subscribed by the taxpayers.

Only the French « taxe foncière » will be deductible and not anymore the « taxe d’habitation » neither the French income tax allocated to any rental income deriving from the real estate.

New – For real estate with value over 5M Euros, the total debts exceeding 60% will only be deductible for 50%.

The donations up to 50,000 Euros will be authorized as a tax credit. Please note that the donations can be made until the due date of the tax return which should be next May (2018).

However, the tax credit concerning the investments in non-quoted companies and new technology investments products will be abolished.

For new arrivals in France, the five-year wealth tax holiday providing a full exemption of French wealth tax granted on the real assets located outside of France during the first five years of residence in France will still be applicable.

 


 

3. A 30% FLAT TAX RATE applicable on all financial income

As from January 1, 2018, a 30% flat tax rate (including the social tax or « Prélèvements sociaux » of 17,20%) will be assessed on income deriving from all financial investments including interests, dividends, gains from life insurance policies and capital gains on sale of shares.

The 3% & 4% exceptional contributions will still apply for taxpayers with high income.

Capital gains on sale of shares / stocks
The 50% and 65% rebates for length of holdings will be cancelled except for sale of shares acquired before January 1, 2018, and only if the taxpayer elects for the progressive tax rates.

Dividends
The 40% rebate on dividends will be cancelled except if the taxpayer elects for the progressive tax rates.

Gains deriving from Life insurance policy
The 30% rate will apply to all the gains deriving from investments made after September 27, 2017.

However, the favorable income tax rate of 7.50% granted to policies over than 8 years will still be applicable to investments policies which do not exceed €150,000 per person, or €300,000 for a joint policy.

For investments made before September 27, 2017, the payment of the tax under the « Prélèvement forfaitaire libératoire » to benefit for the income tax rates of 7.50% and 15% is still available.

Policies held for more than eight years will continue to benefit from the €4,600 allowance for single and €9,200 for married couples / PACS partners.

New – The existing system of payment of tax called « Prélèvement Forfaitaire non libératoire » due by French tax residents receiving FOREIGN source dividends and distribution will be extended to the gain of Assurance-Vie deriving from investments made after September 27, 2017. It will be required to file spontaneously a specific Form and pay the 30% flat tax rate by the 15th of the month following the withdraw


4. Cancellation of the « Taxe d’habitation » on the French principal residence
 

The dwelling tax due by French tax residents on their principal residence will be gradually abolished for about 80% of taxpayers until 2020.

 


5. Social surtaxes
will be increased on Jan 1, 2018 by 1.70% to become 17.20% on all investments income including rental income.


6. Furnished rental income received in 2017

The yearly limit to benefit from the simplified regime called micro-BIC on furnished rental income has increased from 33 200€ to 70 000€.

Taxpayers receiving furnished rental income in 2017 are exempt of bookkeeping and filing tax requirements and benefit from a reduction of 50% on their rental income if their rental income received in years 2016 or 2015 do not exceed 70 000€, whatever the amount received in 2017.
 

7. The move to a withholding tax (PAYE) system (Pay As You Earn) has been confirmed to be in place on January 1, 2019. Regulations should be available quite shortly concerning the year 2019: date of payment of the 2018 tax and implementation of the PAYE system.
 

8. Recent development from the highest Court in France for non-residents
The one year delay granted for selling the principal residence should not be applicable anymore to taxpayers who left France and became non-residents.
(Judgment from the “Conseil Constitutionnel” end of October 2017).



The combination of the new 30% flat tax rate on financial income and not having to pay wealth tax on financial investments could make a considerable difference to how much tax you will pay next year.
The 2018 Finance Act provides also possibilities to elect for the progressive tax rates which gives you right to benefit from the 40% allowance on dividends as well as the reduction of the capital gain concerning the holding period. Therefore specific calculations must be realized before the filing of your tax return.

Concerning the implementation of the new IFI on the real estate, it is crucial to measure the tax implications and discuss strategies to optimize your tax situation and mainly concerning the mortgage.

I am at your disposal to assist you to make sure that for your specific situation, you will take the full benefit of this new tax measures.

This summary should not be considered as exhaustive.

 

This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice.
No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, Catherine Terry, Avocat, does not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

This publication (and any extract from it) must not be copied, redistributed or placed on any website, without Catherine Terry prior written consent.


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