France: Tax Developments
Some proposed measures in France’s draft Corrective Finance Law for 2011 could impact individuals and their multinational employers. Among these are proposed “freezes” in the rates and brackets for personal income tax and inheritance and gift taxes, an increase in the flat-rate tax on dividends and interest, and changes to the value-added tax. In addition, in this newsletter, we cover moves by the Senate, further to its review of the draft Finance Law for 2012 (Projet de loi de finances pour 2012), to tighten some of the finance law’s measures. And in a separate but related development, France’s budget minister, Valérie Pécresse, announced on 24 November a reinforcement of the measures designed to combat fraud.
Bill on Corrective Finance Law for 2011
In its weekly cabinet meeting, the Council of Ministers, recently approved the bill for the corrective finance law for 2011 (projet de loi de finances rectificative pour 2011).1 The bill will be sent to Parliament for its review and action. The aims of the bill are to account for any fiscal shortfalls or gaps as a result of changed economic or fiscal conditions since the finance law for 2011 was enacted at the end of 2010 and to help reduce France’s public deficit.
The principal measures in the proposed law potentially affecting individuals and their multinational employers are highlighted below.
• Income Tax, ISF, Inheritance Tax Rates/Thresholds – It is proposed to maintain the income tax rates/thresholds at their current levels for 2012 and 2013. In addition, the rate and thresholds for the solidarity tax on wealth (l’impôt de solidarité sur la fortune or “ISF”) and abatements applicable to inheritance and gift taxes (droits de succession et de donation) will also be frozen until such time as France’s public deficit falls below the 3-percent of GDP threshold. (For prior coverage of recent measures on tax rates and thresholds in the proposed 2012 budget, see Flash International Executive Alert 2011-182, 3 November 2011.)
• Flat-Rate Tax on Dividends and Interest – An increase in the rate of the standard flat-rate tax on dividends and interest (prélèvement forfaitaire libératoire sur les dividendes et les intérêts) from 19 percent to 24 percent is being proposed, in order to align the taxation of capital income with the taxation of labor. The effective rate of tax together with surtaxes will be 37.5 percent.
• Value Added Tax – The government is proposing the creation of a second reduced rate of value added tax (VAT) of 7 percent. This rate will apply to those goods and services currently subject to the original reduced rate of 5.5 percent, excluding food, energy, and goods and services for the disabled (these goods and services will remain subject to the 5.5-percent rate). Currently, the 5.5-percent rate is applied to such goods and services as: restaurant and catering services, renovation of housing, books, taxi services, and public transportation of passengers (from January 2012, the new reduced 7-percent rate will apply). The current standard VAT rate of 19.6 percent remains unchanged.
Draft Finance Law for 2012
The Senate, further to its review of the draft Finance Law for 2012 (Projet de loi de finances pour 2012), tightened some of the measures. The adopted amendments to the draft finance law2 include:
• A top rate of income tax of 45 percent (in addition to the specific contribution on higher earners on income over EUR 100,000).
• An increase in the taxable basis for dividends – A reduction in the standard deduction of 40 percent to 20 percent was introduced by the Senate. If a shareholder receives EUR 1,000 of dividends, the taxable basis will be EUR 800 instead of EUR 600, as it is currently.
It will be necessary to wait until the final review of the law by the joint mixed commission which is expected mid-December 2011and the National Assembly to see if these measures are adopted.
Measures to Combat Fraud
In a separate but related development, France’s budget minister, while discussing France’s efforts to combat fraud3, announced that the government intends to raise the statute of limitation from three years to 10 in respect of the reporting of financial assets (bank or securities accounts) held abroad or foreign life insurance policies.
The minister also intends to give the tax police the powers to investigate for three extra years after the signature of an agreement with a State when it is removed from the list of tax havens.