French Tax Changes 2011/2012
The amended Budget for 2011 has been adopted by the French Government and will
be debated in Parliament in June-July.
There was some recent discussion as to the possible abolition of Wealth Tax widely
reported in the press. This will not happen, but changes have been proposed
together with some amendments to Gift and Succession Tax as well as other taxes.
Further changes may result from the Parliament debates so the following should be
regarded as conditional.
The “fiscal shield”
The so-called Bouclier Fiscal limiting the total amount of your taxes to 50% of your
income is to be abolished. (Please note that this only concerned French tax
residents).
Wealth Tax – Impôt de Solidarité sur la Fortune (ISF)
The threshold at which liability for ISF arises will be increased from €800,000 to
€1,300,000.
The number of tax bands will be reduced from six to two – 0.25% if assessable wealth
between €1.3m and €3m, and 0.50% if above this figure. However, ISF will now be
levied on the full amount, not merely that part above the threshold.
For those with wealth of less than €3m, there will no longer be a requirement to file a
separate wealth tax return. It will be included in their French income tax return.
It is anticipated that the ISF reforms will be effective retrospectively from January
2011.
Gift and Succession Tax
It has been possible to give away €159,325 to a child and €80,724 to a spouse tax
free with a cumulation period of six years. This is to be extended to 10 years.
The top two Gift and Succession Tax rates between parents and children and
spouses/civil partners will be increased from 35% to 40% and from 40% to 45%. Capital Gains Tax
There is to be an “Exit Capital Gains Tax” on those ceasing to be resident in France,
but the details are not yet clear and the compliance of the tax with EU regulations is
questionable. Non-residents may remain liable for CGT on later disposal, but only for
the portion of the gain that accrued whilst they were resident.
French second home
French second homes owned by non-residents should be subject to an annual 20%
charge on their deemed rental value. Again the details are not yet clear and the
compliance of the tax with EU regulations is questionable.
French expats
Finally the French income of French nationals living abroad will be subject to Income
Tax at the normal rate instead of the current 20% withholding tax. This however will
require to be amended most of the double tax treaties signed by France with its
neighbouring countries.
Trusts
The other major changes proposed relate to the taxation of assets held in Trusts.
These proposals have yet to be approved by the French Parliament in June 2011, so
that there may yet be further changes.
Generally there is no recognition of trusts under the French civil code and therefore
their tax effects have been uncertain. The proposal is to define the taxation effects of
lifetime transfers and transfers on death through trusts and the Wealth Tax rules for
assets held in trusts.
- Wealth Tax – Impôt de Solidarité sur la Fortune (ISF)
From 1 January 2012 French situs assets held in trusts and all assets worldwide held
in trusts of which the settlor or the beneficiaries are French resident will be subject to
ISF at 0.50% (the new top rate) with no de minimis level or nil rate bands. The ISF
would be payable by the settlor or beneficiaries who would have a right to reclaim
from the trustees.
ISF would not be due if the settlor or beneficiaries are subject to ISF and have
included the assets in their income tax or ISF return for ISF purposes.
- Gift and Succession Tax
These changes will be effective from the date the Finance Bill comes into force -
June or July 2011.
If beneficiaries are individually identified and their share in the trust is fixed, then they
will be liable for gift or succession tax in the usual way on distributions or on the
share of the trust depending on whether the settlor is alive or dead.
In other circumstances, tax is payable on the death of the settlor.If beneficiaries are not individually identified but are descendants of the settlor and
provided that the settlor was not French resident at the time of creation of the trust
and provided that the trust is not governed by the law of a “non co-operative state”,
they will be liable to tax at the marginal rate of 45%.
In other cases, the beneficiaries will be liable to gift or succession tax at 60%. The
implication is that these higher rate taxes will be due whether assets remain in trust
or are distributed and payable again on the subsequent death of beneficiaries.
