French Income  Tax This page outlines - Taxable income - French income tax rates - French Social Taxes - French Income Tax Optimisation Over the past few months, a series of French tax changes have been suggested, debated and many changes (but not all) implemented.  It is obviously important to keep track of the new rules - such as the Tax on High Income. We highlight the key new rates in red below. TAXABLE INCOME French Income Tax captures a wide spectrum of revenues, including - Salaried employment - Professional & personal company income (BNC / BIC) - Pensions - Financial investment income (dividends, interest, etc) - Property rental income - Capital gains (property and financial gains) French residents must declare all such income on a worldwide basis, although property income is usually taxed in the country where it arises. Non-residents must declare income and gains from French property. If the taxman considers you've declared insufficient income for the lifestyle you lead (based on signs of wealth including houses, cars, horses, etc.) - 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) - A further fixed allowance of 1525€ off dividends (3050€ for a couple) 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. The French income tax bands for 2011 (which are the same as for 2010) are: - to 5,963€                 0% - 5,963 to 11,896€     5.5% - 11,896 to 26,420€   14% - 26,420 to 70,830€   30% - above 70,830€        41% There is an additional “temporary” French high income tax on global (earned or unearned) income above 250000€ known as “Contribution exceptionnelle sur les hauts revenus”. 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. The rules are complex so please don’t hesitate to contact us for further information. You can opt for fixed rates (previously 19%), known as "prélèvement libératoire (PLF)" for certain types of income. The rate for dividends is 21% and the rate for bank interest & other fixed income is 24%. These taxes must be deducted at source and can easily be arranged with any bank in France. A special procedure is required if using a bank elsewhere in Europe. If you have low overall income, you should review whether you’d be better off declaring this income at the year end under the standard tax bands instead. The increases in these fixed tax rates brings an added incentive to use tax wrappers such as the Assurance Vie - where the principal rate remains 7.5%. The fixed rate for French capital gains tax on financial assets remains at 19%. As a reminder, the threshold for capital gains was abolished as from 1.1.2011. The rate of 19% applies also to French capital gains on property (previously 16%), and the various reductions are still available (main home, first sale, owned over 5 years, etc). As from 1 February 2012, second homes are normally only fully exempt after 30 years with a partial CGT reduction as follows: - 2% for each of years 6-18, - 4% for each of years 19-24 - 8% for each of years 25-30 FRENCH SOCIAL TAXES In addition to Income Tax and the above mentioned PLF fixed rate taxes, French residents must also pay CSG, CRDS and Prélèvement Social. These are social taxes but 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 generally receive an automatic request for payment in November, although for certain types of investment (eg bank interest) the amounts are deducted at source. From 1 October 2011 (and back-dated to 1 January 2011 for income without tax deduction at source), French social taxes amount to 13.5% (previously 12.3%). Those who are non-resident, retired or pay social contributions in another country are usually exempt. Holding an Assurance Vie has been a method to cumulate interest, dividends and capital gains without any annual taxes. However, since July 2011, the guaranteed funds within the Assurance Vie (known as “Fonds en Euros”) are also subject to French social taxes each year - whether you make any withdrawals or not - so it can be preferable to consider holding other types of assets inside the assurance vie instead. 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, solar heating, etc),or making improvements designed for senior citizens. 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. Study carefully the documentation you receive with the tax forms and discuss any questions at an early stage with your local tax office. If you are not at ease in French, we would be glad to assist. 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 ... Cabinet Gregory regularly evaluates schemes so please contact us if you are interested in any of these investments The overall limit for tax deductions is 18k€ + 6% of income for 2011 and 18k€ + 4% for 2012. 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. Film Industry - most people support the French film industry for personal satisfaction rather than financial gains. Unfortunately you're unlikely to get 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. 2012 is the final year for  "Scellier", which can enable up to 13% of the initial purchase cost (including renovation) to be deducted from overall income tax over a certain number of years.  For further information on reducing taxes via French property investments, and our currently preferred schemes, please contact us. 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. Please contact us for full details of the different types of loan available in France. 3. Invest in your own French business Setting up business is not as difficult as you may think - several million have been created in France - mostly as small personal companies. 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 (eg special insurance being required for swimming pools) - Public Housing (eg safety, hygiene, insulation, ...). Small companies have a choice between the "auto-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 Those seconded to France can usually claim exemption from French tax on salary uplifts (eg for accommodation) and work carried out abroad. Special rules also apply those recruited directly to work for a French company and self-employed individuals who satisfy certain conditions (eg specific skills in shortage) The total exemption can be up to 50%. We strongly recommend obtaining advice from qualified professionals in France - and we would be glad to assist. C Copyright © 2012 Cabinet Gregory                                                                     Tel:   +33 (0)1 5320 9027           Latest modification: 15 January 2012                                                             Email: info@cabinetgregory.com