France: Tax and social withholdings increases for 2011

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Proposals will see increases in income and capital gains taxes, social withholdings, and less attractive treatment for stock options and qualified instruments.  The proposals are to reduce state indebtedness and finance the country’s social system.

The developments are included in the draft finance law for 2011 and the draft social security financing law, both currently under review by the French Parliament, and will be enacted by the end of the year, with some new rules applicable retroactively to the year 2010.

Under the proposal, the highest income tax rate will be increased to 41% (from 40%) for income derived in 2010, applicable to net income over €71,000 for a single person.  The taxation rate for major financial income will be also be increased, by 1% to 3%, starting in 2011, and the domestic withholding tax rate on interest and dividend income will be increased to 19%, plus social contributions of 12.3%, where applicable.  The current rate is 18%, plus social contributions of 12.1%.

Capital gains taxation will also be modified in several respects.  Capital gains tax will be increased to 19% plus social contributions, up from the current rate of 18% for gains from the sale of shares and securities, and 16% for gains from the sale of real properties.

Whereas, at present, capital gains tax on shares and securities is levied only when total sales proceeds in any given year exceed a certain threshold (€25,830 in 2010), the draft finance law proposes a new rate of 19% irrespective of the amount of annual sales proceeds.

The new regime will also mean a reduction in the tax advantages from major tax ‘niches’.  French taxpayers currently have the possibility to substantially reduce income tax liability through investments in specific qualified schemes.  However, the draft finance law proposes to reduce the tax advantage from most tax savings schemes by 10%, to generate new revenues for the state budget.

Tax and social treatment on stock options will also be harsher: the new social security financing bill proposes to increase the employer social withholding by 4% to 14%, and employee social contributions will be more than tripled to 8%.  Under the current rules, stock options are subject to employer and employee social security withholding of 10% and 2.5% respectively.  The employer contribution is due on the grant of the option and calculated on the fair market value of the stock option, while the employee contribution is due on the sale of the shares.  In future, the tax on stock option gains exceeding €152,500 will be increased by 1% to 41% as a consequence of the increase of the highest income tax rate, making the extension of international stock options schemes to French participants financially unattractive, both for the company, and the eligible participant.

Draft Finance Law for 2011, as adopted on 26 October 2010

Projet de loi de financement, as adopted on 3 November 2010

For further information or to discuss any of the issues raised, please contact Pascal Ngatsing (pngatsing@soffal.fr) on +33 15 393 9400.