On Wednesday September 27, 2017, the French Government has unveiled the draft budget for 2018 which will be submitted to the French parliament in the next few days.
In conformity with President Macron’s platform, the draft budget includes a few tax measures aimed at increasing the competitiveness of companies established in France and at encouraging, through targeted measures decreasing their tax burden, individuals to invest their savings in the economy and in companies (thus reinforcing the latters’ financial situation).
Certain measures are also aimed at putting French legislation in conformity with European Union legislation and at avoiding potentially costly litigations at the European level.
Finally, other tax measures of a technical nature (not yet disclosed) might be included in a rectified budget for 2017 yet to be published. The main tax measures of the 2018 draft budget are as follows:
For companies:
1 - Progressive reduction of the corporate tax rate to 25%
The reform voted in 2016 provided for a progressive reduction of the ordinary corporate tax rate from 33.33% to 28%. The draft budget provides for a progressive reduction of the rate to a 25% rate, totally applicable in 2022. The pace of application of the progressive reduction would be as follows:
- In 2018, 28% rate up to a taxable profit of 500,000 Euros and 33.33% above
- For the financial years opened as from January 1st, 2019, the normal rate would be decreased to 31%, the first 500,000 Euros of profit being still subject to the 28% rate
- For the financial years opened as from January 1st, 2020, the 28% rate would become the new ordinary rate (for all profits)
- Such ordinary rate would then be decreased to 26.5% and then 25%for the financial years opened respectively as from January 1st, 2021 and 2022.
The 3.3% surtax on the standard corporate income tax should remain unaffected.
2 - Cancellation of the 3% tax on distribution of dividends
The 3% tax would be cancelled for distributions paid out as from January 1, 2018. As a reminder the scope of this tax had already been substantially narrowed last year following a decision of the French Constitutional Court. It was also under attack before the European Court of Justice which has already judged that it was levied in contradiction with the EU Parent-Subsidiary Directive.
Numerous litigations are still pending in this respect.
The cancellation is therefore justified by the need to put French legislation in conformity with the European Union legislation.
3 - CICE
The CICE is a tax credit .Such credit is available on salaries below a certain threshold paid by companies. Its aim is to decrease the overall social cost of employees.
Currently the rate of the CICE is 7% of the paid qualifying salaries.
Under the draft budget, the rate of the CICE would be reduced to 6% for salaries paid during the calendar year 2018.
As from 2019, the CICE would be suppressed and replaced by a permanent reduction of social charges due by employers, under a mechanism to be provided for in the Social Security Financing Law for 2018. Such reduction of charges would amount to 6% for the salaries up to 2.5 times the minimum salaries (so-called SMIC) and to 9.9% for the salaries equal to the SMIC.
4 - Measures of interest to financial and insurance institutions
Companies not fully subject to VAT on their revenues (mostly banks, financial institutions and insurance companies) are subject to a progressive payroll tax on the salaries they pay.
Currently a 20% rate applies to the portion of the individual yearly salaries paid by these entities which exceed 152,279 Euros.
Below this amount, the rate of the tax is 4.25%for the portion of the individual yearly salaries below 7,721 Euros, 8.5% for the portion between 7,721 and 15, 417 Euros and 13.60% for the portion of the individual yearly salaries between 15,417 and 152,279 Euros. The 20% rate would be cancelled so that the portion of the salaries above 152,279 Euros would now be subject to the 13.60% rate, instead of 20%.
Such measure is indeed aimed at attracting foreign financial institutions in France and inciting them to locate in France their high level executives, especially in the frame of the Brexit.
For individuals
1 - Institution of a flat tax on financial income
Currently, financial income (dividends, interest, capital gains) earned by individuals is subject to social levies at a cumulative rate of 15.5% plus income tax assessed at progressive rates (up to 45% but with certain abatements applicable to the taxable basis of dividends and to capital gains, depending, for the latter, on the length of time during which the taxpayer has owned the investments).
Overall, the global rate of taxation of financial income might hence reach more than 60% of the gross income.
A comprehensive flat tax of 30% (comprising of social levies for 17.2% after the increase of the CSG (see separate comments) and of income tax for 12.8%) will instead apply to all financial income earned by individuals as from January 1, 2018. The abatements mentioned above would no longer apply
Taxpayers would have however the possibility to elect for the application of the existing progressive income tax rates (the portion of the social levies due on this income remaining unchanged in this case) on this income, in which case they would still benefit from the abatements which existed in the past. However the election, when made, would apply to all the financial income of the taxpayer (no possibility to pick up only certain income for the election).
Given this change, the rates of withholding taxes levied on dividends and certain capital gains earned by nonresident taxpayers would also be reduced (subject indeed to the application of the relevant tax treaties) to 12.8%.
2 - Replacement of the wealth tax (ISF) by a real estate wealth tax (IFI)
So far, the ISF is assessed on all the assets owned by the taxpayers when their net wealth exceeds a certain threshold (1.3 Million Euros). The basis includes worldwide assets for taxpayers domiciled in France and French real estate for nonresident taxpayers. The ISF would be cancelled and replaced, as from January 1, 2018 by a new real estate wealth tax (so-called “Impôt sur la Fortune Immobilière” or IFI°), which would be assessed only on the real estate owned by the taxpayer to the extent that his real estate assets exceed 1.3 Million Euros.
All other assets, and especially the financial ones, would no longer be subject to the wealth tax, as the aim of the reform is to encourage taxpayers to finance the economy (i.e. companies or business activities).
Certain real estate or real estate rights, mostly those deemed used for professional purposes (under very strict conditions and criteria) by the taxpayer, would be excluded from this new IFI.
The progressive rates of the IFI would be similar to those which currently apply to the ISF.
