November 06, 2017

2018 French President Emmanuel Macron’s Budget – Individual Tax

The substantial tax cut of the abolishment of the wealth tax on financial investment is meant to signal that Macron’s France is a much friendlier environment for business and to reinforce the attractiveness of France for foreign investors.

France’s National Assembly has approved President Emmanuel Macron’s budget proposal to limit the wealth tax exclusively to real estate and to set up a flat 30% tax rate on passive income and capital gains.
The 2018 budget definitively encourages financial investments versus the real estate.

1. Drastic reduction of tax on financial investments

The current wealth tax or ISF will be abolished as from January 1, 2018 on all financial assets including French and foreign life insurance policies.

A 30% flat tax rate will be set up 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.  

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 withdrawal.

2.  Taxation on real property should be higher for wealthy taxpayers

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

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.

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 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.

NewFor 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).

The tax credit (up to 18,000 Euros) concerning the investments in non-quoted companies or new technology investment products will be abolished, except for the IFI 2018. It will be authorized if the investment is made before December 31, 2017.

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

The cap providing that the IFI cannot exceed 75% of the annual income will still be applicable.
Rental income will still be assessed to the progressive French income tax rates which may reach the 45% marginal tax rate plus the social surtax levied at 17.20% as well as the exceptional contribution of 3% and 4% on high income.

Cancellation of the « Taxe d’habitation »
The dwelling tax paid by persons living in the property on January 1, and the owners of secondary residences, will only apply over the next two years to the 20% of taxpayers with the highest incomes.


3. Other tax reforms / recent Court case

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

Caution - 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 move to a withholding tax (PAYE) system has been delayed on January 1, 2019.


Please note that this budget will only be enacted by the end of the year and may be subject to potential amendmends.

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.
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