French Income Tax
This page outlines
- Taxable income
- French income tax rates
- French income tax declaration and deadlines
- Unearned income, interest & gains (FLAT TAX)
- French Social Taxes
- Foreign Bank Accounts
- French Income Tax Optimisation
- Contributions to Private French Pension Plans (PERP)
- Special French Tax Advantages for foreigners coming to work in France (Impatrié)
Although France has a reputation for high taxes, income tax is generally no higher than many other developed countries - in particular for couples. Past attempts to propose “excessive” increases have always been rejected by the Conseil Constitutionnel - showing that no French government has unlimited freedom to tax its citizens.
President Macron is aiming to reduce unemployment by encouraging entrepreneurs and small businesses - including lower taxes for those that create wealth and invest in the economy - a major change from the past.
Macron’s Loi de Finances 2018 and Loi de Financement de la Sécurité Sociale 2018 were approved by parliament and the Conseill Constitutionnel at the end of December 2017.
The key increase is in social charges - which rise from 15.5% to 17.2%.
The key reduction is a new (optional) “flat tax” (taux forfaitaire unique) for all financial income (interest, dividends, capital gains, assurance vie withdrawals, ...) aimed at encouraging private investment. Whereas previously all financial income was taxed at your top band rate (up to 45% + 15.5% social charges, so potentially over 60%), Macron now provides an alternative fixed rate of 12.8% (+17.2% social charges) - resulting in an overall “flat tax” of 30%.
Despite the advantages of the new flat tax, for most higher-rate tax-payers longer-term savings should still be wrapped within an assurance vie (French life assurance policy) or similar French-recognised wrapper - allowing gains and income to roll up inside without being taxed until withdrawn.
All those living in France should note that foreign financial income (bank interest, dividends, gains, etc) must still be declared and the 30% flat tax paid “on account” by the 15th of the month following receipt (whereas income arising within French banks will automatically be declared and the flat tax paid on account for you). This is mandatory except for those below the specified income thresholds (see below).
French Income Tax captures a wide spectrum of revenues, including
- Salaried employment
- Professional & personal company income (BNC / BIC)
- Financial investment income (dividends, interest, etc)
- Property rental income
- Capital gains (property and financial gains)
French residents must declare all such income and gains on a worldwide basis - normally including foreign property income and deducting foreign taxes where specified by the appropriate dual tax treaty. Non-residents normally only need to declare income and gains from French property.
If the taxman considers you've declared insufficient income for the lifestyle you lead (based on an old fixed list of signs of wealth including houses, cars, ... and horses) - he can tax you on estimated income, calculated according to specific rules.
FRENCH INCOME TAX RATES
Various deductions are allowed including:
- 10% off salary (within certain limits) (see below for additional deductions for those coming to work in France)
- 40% off dividends (dependent on certain rules) - unless you opt for the above mentioned 30% flat tax.
Many other deductions can be applied, ranging from employing baby-sitters to home insulation - see below.
To calculate French income tax, add up income for the household, divide by the number of parts (based on household members), apply the rates below, then multiply back by the number of parts.
When calculating the number of parts, note that the first & second child count only as a half-part, whereas the third child counts as a whole part. Live-in grannies usually count for the same as a child.
Please note that there is a limit on the benefit obtained through multiple parts.
According to the Loi de Finances 2018 the revised bands for income received in 2017 are:
- to 9,807€ 0%
- 9,807 to 27,086€ 14%
- 27,086 to 72,617€ 30%
- 72,617 to 153,783€ 41%
- above 153,783€ 45%
There is a small but complex reduction for couples earning less than 41k€ (or 20.5k€ if single) - and slightly higher ceilings apply to families with children.
There is an additional “temporary” French income tax on global (earned or unearned) income above 250000€ known as “Contribution exceptionnelle sur les hauts revenus” - and this also applies to income subject to the above mentioned Flat Tax. The rate is 3% from 250k€ to 500k€ and then 4% thereafter. These thresholds are doubled if you are declaring income as a couple. If income is higher than the previous two years, it can sometimes be possible to calculate on an average basis. These additional taxes are supposed to last until the level of French public debt returns to below 3% - and the latest forecasts at the time of writing imply that this could be soon...
FRENCH INCOME TAX DECLARATION AND DEADLINES
New residents are still obliged to make their first declaration using paper forms - unless you have specifically received a letter confirming that you can declare online.
The deadlines for internet declarations depend on the department where you live.
The dates for 2018 are:
- 22/5/18 (Departments 01-19)
- 29/5/18 (Departments 20-49)
- 05/6/18 (Departments 50-976 and non-residents)
If your 2016 income (Revenu Fiscal de Reference - shown on your AVIS d’IMPOT received around August 2017) was above 15000€, you must declare your 2017 income (in April/May 2018) online.
As from April/May 2019, everyone must make their income tax declaration on line.
You should be able to access the online declaration service (www.impots.gouv.fr) as from 11 April 2018.
FRENCH TAX ON DIVIDENDS, BANK INTEREST and CAPITAL GAINS (FLAT TAX)
For all financial income (interest, dividends, capital gains,...), by ticking the appropriate box on the income tax return, French residents can choose between:
- the new “flat tax” (taux forfaitaire unique) at the fixed rate of 12.8% (+17.2% social charges) - resulting in an overall “flat tax” of 30%. In this case no reductions (abattements) are available. Very high earners may also be subject to the additional 3-4% Contribution exceptionnelle sur les hauts revenus mentioned above.
- the above mentioned income tax bands (based on your total earned & unearned income) +17.2% social charges. In this case, you can continue to benefit from the 40% reduction on dividends as well as the capital gains reductions mentioned below. Those earning lower salaries/pensions (below the first band rate of 14%) should generally opt out of the “flat tax” and choose the income tax bands instead.
If opting for income tax bands, capital gains on shares purchased before 01/01/2018 are reduced by 50% if those shares have been held at least 2 years and 60% if held 8 years or more (these reductions also apply to mutual funds that are at least 75% invested in shares). The reduction does not apply to the social taxes. Additional reductions (up to 85%) are available for the sale of shares in small companies under specific circumstances.
Unless total prior year taxable income (revenu fiscal) was under 75k€ (50k€ if single) and a request for exemption is made, 30% tax must be deducted at source on dividends. Similarly, unless prior year taxable income was under 50k€ (25k€ if single) and a request for exemption is made, 30% tax on bank interest & other fixed income must be deducted at source. This is considered to be a “payment on account” and would in fact be reimbursed if you opt out of the flat tax and the resulting total tax based on band rates is lower. All French banks will automatically deduct & declare these amounts for you. For assets abroad, you should declare and pay yourself before the 15th of the month following receipt (unless you fall below the above mentioned limits).
No “prior declaration” or “payment on account” are required for capital gains.
Net losses can be carried forward and offset against future net gains.
Whilst the flat tax brings a welcome tax reduction for financial portfolios, it is still generally recommended to use tax wrappers such as the Assurance Vie - ensuring gains and income can roll up inside the wrapper with zero taxation until withdrawn).
FRENCH SOCIAL TAXES
In addition to Income Tax, French residents must also pay CSG, CRDS and Prélèvement Social on worldwide income and gains. Macron has raised the overall social taxes rate from 15.5% to 17.2%. For French residents with signficant financial income, this increase will generally be more than compensated for by the new flat tax mentioned above.
Those with French property income rather than financial income will unfortunately pay the full increase.
Those with rental income from properties outside France should refer carefully to the appropriate dual tax treaty. A number of such treaties (including France-UK) specify that French residents do NOT pay French social taxes on rental income from property situated in the foreign country.
In 2015 it was confirmed at European level (Ruyter, European Court of Justice) that France cannot collect these social taxes from those that depend on the social system of another EU country since these taxes form part of the French social system. The Ministère des Finances then issued instructions on how to make a claim (reclamation) (see here).
The government then modified the rules to break the direct link between these social taxes and the French social system - enabling them to charge social taxes to everyone again as from 1st January 2016 - although this may well be challenged again at European level.
Although these are called social taxes, please note they do not give right to any benefits. Please do not confuse with French Social Security contributions. A better term would be "additional income taxes".
For salaries and pensions this is usually deducted at source.
For professionals & personal companies (BNC and BIC) it is collected by the URSSAF or RSI along with the standard French social security contributions.
French social taxes also apply to property & financial investment income & gains.
You normally receive a request for payment in November based on prior year income declared in April/May.
Holding an Assurance Vie has been a method to cumulate interest, dividends and capital gains without any annual taxes until withdrawals are made. The guaranteed funds within the Assurance Vie (known as “Fonds en Euros”) are however subject to French social taxes each year - whether you make withdrawals or not - so it might be preferable to consider holding other types of assets inside the assurance vie instead.
FOREIGN BANK ACCOUNTS
Remember to list all your financial accounts held outside France. This includes current, savings, and investment accounts - as well as foreign life policies.
There’s a box to tick at the end of the annual French income tax return and you must then provide the bank details and account numbers. This information should be given each year for each account used or closed during that year - and you should also make sure you reported at some point in the past any other accounts still open. Remember that this information is being automatically exchanged between the tax authorities of most European countries and being rolled out worldwide.
French fines for non-declaration are substantial:1500€ for each year that the account should have been declared - increasing to 10000€ if the account is held in an offshore country (without a dual tax treaty) such as the Channel Islands or Isle of Man. In some circumstances these fines can even be increased to 5% of the account balance if the latter is over 50000€.
OPTIMISATION : HOW TO REDUCE FRENCH INCOME TAX
1. Know your rights.
For example, there are many allowable costs concerning your principal residence, such as domestic help (nanny, cleaner, gardener, etc), assisting sustainable development (thermal insulation, heating from renewal energy, etc),or making improvements designed for senior citizens. Check the rules and limits carefully first and make sure you keep the invoices.
Make sure you declare the full number of household members. For example, children up to 25 (even if they are not living with you) and dependant relatives can be included under certain conditions.
Payments made to support adult children or aging parents (or invoices for basic living costs paid on their behalf) can also be deductible if they clearly have insufficient income.
Study carefully the documentation you receive with the tax forms and discuss any questions at an early stage with your local tax office.
2. Use schemes with tax incentives
The follow lists some examples of the more interesting schemes available.
Obviously you must never invest in a scheme simply because it saves you taxes!
Ensure that the financial return is appropriate.
Watch out for high commissions and charges ...
The overall limit for tax deductions is 10k€.
European Venture Capital Funds - these qualify if invested in small companies described as Innovative (FCPI) or Regional (FIP).
Given the potential risks, it is important to find experienced fund managers.
These funds may be appropriate if you are looking for longer-term investment and diversification of your financial portfolio..
The eventual gains are exempt from French capital gains taxes.
Private French Pension Funds (PERP or PERCO)
Although significant pension contributions are deducted automatically from payslips, no-one can be sure how much pension those contributions will provide. Many French residents prefer to ensure a private “top-up” pension scheme that they can manage themselves. Each year, private pension payments - up to 10% of your professional income - can be deducted from your taxable income. For those on 30% upper tax bands this is almost a no-brainer deduction to organise (unless you don’t think you’ll make it to pension age). You should take careful note of the restrictions on access - and ensure you choose a scheme with a good choice of high-quality underlying investment funds.
Film Industry - most people support the French film industry for personal satisfaction rather than financial gains.
Unfortunately you're unlikely to see your name in the credits!
French property - many types of property investment schemes have provided substantial tax reductions - often to the surprise of newcomers to France. If you are interested in rental property - it is worth taking a further look. “Malraux” and “Monument Historique” continue and remain the best methods for reducing tax on high incomes. Standard income-earners may wish to consider investing in new or renovated properties in “difficult” areas under the “Pinel” scheme - especially if you consider the area is undergoing significant improvement - although bear in mind the restrictions on rents and tenant incomes.
If you decide to go ahead with a tax-reducing property investment, it's wise to consider a bank loan since the interest is tax deductible and rates are currently low.
3. Invest in your own French business
Setting up business in France is not as difficult as you may think - several million have been created in France - mostly as small personal companies - and President Macron is aiming to simplify and encourage entrepreneurship further.
Many types of business will however be subject to specific regulations. For example, setting up a Gîte or Chambre d'Hôte involves taking account of:
- Competition rules (to protect restaurants and hotels)
- Insurance rules (eg special insurance being required for swimming pools)
- Housing rules (eg safety, hygiene, insulation, ...).
Small companies have a choice between the "micro-entrepreneur", "micro-entreprise" or the "real" system, and professional advice should be taken to determine which is the most advantageous.
4. Special rules for those coming to work in France (Impatriés)
Those recruited to work in France who have not been resident in France for at least the previous five years can usually claim exemption of up to 50% from French taxes for a period of eight years (recently increased from five years to attract high earners from London as a result of Brexit).
This applies to remuneration in France as well as unearned income from abroad.
Copyright © 2018 Cabinet Gregory Latest modification: 11 April 2018 Email: firstname.lastname@example.org