France introduces several tax restrictions as part of austerity plan

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France recently introduced a set of new tax measures as the first part of an aggressive plan to reduce the huge and constantly growing state deficit.

The most urgent measures were included in the Second Amendment to the Finance Law for 2011 enacted on 19 September 2011 (Second Finance Law 2011).

The other proposed changes will be included in the Finance Law for 2012 and the Social Security Financing Law to be enacted by the end of the year.

We outline below the tax developments included in the Second Finance Law 2011 that are of importance to individuals.

Capital Gains on the sale of private properties

Subject to provision double tax agreement gains derived from the sale of French properties other than the main residence are currently subject to tax at the rate of 19% (plus social contributions when applicable).  For the calculation of the taxable basis, the gain is reduced by 10% for each full year of ownership after the fifth, leading to a full tax exemption when the property is sold after 15 years.

Under the new legislation, a full capital gain tax exemption will only be available if the property has been held for 30 years.  The annual reduction rates have been lowered and will be progressive:

•      2% for each year of ownership between the 6th and the 17th (24%)
•      4% between the 18th and 24th year (28%)
•      8% between the 25th and the 30th year (48%)

Almost all other features of the French capital gain taxation of real properties remain unchanged.

The new tax regime is applicable to sale transactions that are notarized starting on 1 February 2012. Owing to the standard deadlines of 3 to 4 months to close a real property deal, this leaves very little time to take advantage of the current tax regime.

For sales transactions closed after this date, only properties acquired in or before 1982 will benefit from the full exemption if they are sold in 2012.  For all properties purchased after 1982, the gain would be subject to tax.

Increase of social tax contributions on investment income

Investment income (dividends, capital gain, rental income, etc.) are currently subject to social tax contributions at the cumulated rate of 12.3%.  The new legislation increases the social levies to 13.5% for investment income derived starting on 1st January 2011.  This is the consequence of the increase of the “prélèvement social” from currently 2.2% to 3.4%. Social taxes only apply to individuals who are subject to French social security.

Sales of Shares in Real Property Companies

The new legislation imposes a general obligation to notarize the shares in French or foreign real property companies in France when the transaction is signed out of France.

The purpose of the new rule is to make sure that transfer of shares of real property companies that are executed out of France are subject to French taxes.  Sales of shares in French or foreign real property companies, i.e. companies whose assets consist of more than 50% of French real properties, are subject in France to a transfer tax of 5% and capital gain tax, whether the transaction is executed in or out of France.

Other Measures – exceptional tax for high earners

Other measures of the austerity plan will be included in the Finance Law for 2012 that the Government submitted to the Parliament on 29 September 2011 include the introduction of an exceptional tax of 3% payable by all individual with taxable income exceeding €500,000 (€1,000,000 for a married couple).

Resources

Second Amending Finance Law for 2011 (Law No. 2011-1117 dated 19 September 2011)

For further information or to discuss any of the issues raised please contact Pascal Ngatsing on +33 1 53 93 94 00.