All you need to know about the Draft of the French Finance Act 2018

Wealth tax reform (ISF), progressive abolition of the council tax or unique fixed levy on certain financial incomes… all these measures are registered in the first Draft of the French Finance Act of the President Emmanuel Macron, whose the revenue section has been adopted on Ocotber 24th, 2017 by the National Assembly.

Table of contents:
1. The Wealth tax (ISF) is becoming the Wealth Tax on Real Estate (IFI)
2. Abolition confirmed of the council tax
3. Suppression of The Tax Credit for the Energy Transition (CITE)
4. Introduction of a “flat tax”
5. The generalized social taxation increases

1. The Wealth tax (ISF) is becoming the Wealth Tax on Real Estate (ISI)

After nearly a week of debate, members of the National Assembly decided to remove the wealth tax (called ISF in France) which will be replaced by a new
wealth tax on real estate (called ISI in France).

With this new tax, securities are not subjected on the wealth tax any more. The project consists in keeping the Wealth tax only for
wealth holders leaning on real properties. Thereby the French government wishes to develop company’s investment, and therefore to finance the economy.

The Wealth tax reform does not have an immediate impact and only foresees exemptions, no additional fees or charges. Indeed, as for Wealth tax, the new tax would be due if the net value of the taxable real estate assets exceeds the threshold of €1,300,000. The progressive tax rates would remain unchanged between 0.5% and 1.5%.

The principle should remain that taxation would apply on the market value of the real estate: with a 30% reduction for the main residence of the French resident taxpayer (which is not available for non-French tax residents). The exemption on professional real properties is also kept. Finally, taxpayers can keep reducing their taxes through donations to general interest organizations.

So Wealth tax rules are unaltered but
basic investments, which were subjected, are exempted, except real estate and property assets. Life insurance contracts, bank accounts and saving books, shares and other securities will be exempted from the Wealth tax on real estate (IFI).

On the other hand, doubts remain on the fate of real estate investments, as
Civil Societies Estate (called SCI in France) and Civil Societies of Real Estate Investments (called SCPI in France).

What about outward signs of wealth?
Faced with the abolition of the Wealth tax, lawmakers from Emmanuel Macron’s party proposed an amendment to France’s 2018 budget to tax outward signs of wealth (luxury yachts, supercars and precious metals).

Indeed, the members of the National assembly have decided to tax, from €30.000 to €200.000 per year, French residents who owned boats higher than 30 meters.

They also changed from 10% to 11% precious metals’ transfer (as gold, …).

Finally, they have created an additional tax, reached a ceiling of €8.000, on supercars, starting from 36 fiscal horsepower.

2. Abolition confirmed of the council tax

The council tax will be removed for 80% of taxpayers (so more than 17 million of households), in the coming three years.

The exemption will be granted to households, for a single person, who do not have at their disposal more than €30.000 of annual incomes, so around €2.500 of real taxable income per month. Furthermore, from now on, the French Finance Act authorizes retirement homes to transmit this exemption on the inhabitants’ subscriptions, which will be reduced as much.

The Council tax reform will start by a first reduction of 3 billion euros. Two similar steps will follow in 2019 and 2020, with 6.6 billion euros and 10.1 billion euros reductions, leading to the removal of this tax for concerned households.

3. Suppression of The Tax Credit for the Energy Transition (called CITE in France)

The Tax Credit for the Energy Transition (CITE), which offered a 30% bonus to expenses related to energy saving made in the principal residence, has not been kept during the Draft of French Finance Act’s vote. In fact, it will be interrupted in December, 31st 2017.

The effectiveness of the Tax Credit for the Energy Transition, aimed for stimulating energy renovation works in properties, is controversial. So the French government planned to replace it by a bonus in 2019. Before then, the article 8 of the French Finance Act extended the CITE to one year, while excluding windows’, shutters’ and doors’ renovations from the tax credit, its effectiveness evaluated « low » considering the amounts invested (38% of 1.7 billion euros from the CITE).  But, facing critics, the government has finally decided to remove, at this stage, the article 8.

The question will reappear when the National Assembly will investigate, in November, the second part of the state budget (expenses and measures which will have an impact on public finances in 2019). Before then, the government is responsible for defining measures in order to guide the sector in 2018.

4. Introduction of a « flat tax »

At the same time as the Wealth tax reform, henceforth applied on the property assets only, the French government has created
a fixed levy (PFU), also called « flat tax », of 30% on certain capital incomes, effective for January, 1st 2018.  The PFU’s rate will stand in for the current rate of 50.5% (less than four years) and of 30.5% (between four and eight years). The aim is to standardize and simplify the capital taxation, and so that to bring the level forward European countries.

all the incomes are not affected: saving books A, saving accounts, young person’s savings accounts and sustainable and solidarity savings, savings plan in shares (PEA) keep their current exemption.

On the other hand,
for those which are submitted to the progressive grading scale on the income tax or to the withholding tax are concerned by this debit: saving books B, Term Accounts, saving plans and books, incomes from shares or life insurance contracts (not all of the contracts). 

For home ownership saving schemes
, the « Flat tax » will applied on the interests of schemes opened from January, 1st 2018. Before this date, the interests of the scheme’ first twelve years are exempted – but those from previous years will be submitted. 

The “Flat tax” will also strike
incomes from shares, dividends, but the taxpayer will be allowed to opt for either the progressive scale on income tax, augmented with social contributions, or for the new tax, more interesting if the taxpayer is taxed at 30% or more.

concerning life insurance contracts, only transfers made after September, 27th 2017 (applying date) are concerned, beyond €150.000 amounts outstanding (€300.000 for a couple), all contracts combined. The current tax scheme is kept for lower amounts outstanding, with withholding taxes or the income tax, depends on the saver’s choice. Likewise are kept tax allowances of €4.600 (€9.200 for a couple) on withdrawals made after eight years.

5- The generalized social contribution (CSG) increases

The Members of Parliament have approved the article 7 of
the French Finance Act of the Social Security System which foresees to remove in two times in 2018 Health and Unemployment Contributions for employees in the private sector, representing 3.15% of the salary for 20 million people.  As compensation, the generalized social contribution’s usual rate (called CSG in France), which weigh on all income categories (salaries, superannuation’s, capital incomes) will increase of 1.7%, from 6.6% to 8.3%.

This key measure of the French Finance Act of the Social Security System makes one of Emmanuel Macron’s commitment concrete : to give purchasing power again to workers by making their contribution to the social care financing. 

For employees in the private sector
, the suppression will be done in two times and will be on Health and Unemployment Contributions, which represent 3.15% of the gross remuneration. For self- employed people, the modification will affect family allowance contributions, health and maternity contributions and will come out as a purchasing power gain for three quarters of them.

These measures are financing by the 1.7% increased of CSG’s rate, which applied on earnings, replacement incomes and capital incomes except unemployment contributions and daily allowances. 

Unlike employees in the private sector, civil servant will benefit from
a counteraction of the CSG’s increase – via the suppression of the contributions and the creation of a compensatory premium – without a purchasing power profit.

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