An increase in French capital gains tax on the sale of property and shares looks to be on the cards for 2011.

There is also likely to be an increase in the top rate of income tax, and a tax credit on dividend income is to be abolished.

These proposed increases have been announced as part of a package of measures to deal with the budget deficit in France, with some of the increased income earmarked to support the state pension scheme.

Other tax increases are also likely to be announced in the near future as the government is forced to rely more and more on a rise in taxes rather than a reduction in expenditure to get the budget deficit down to the EU target of 3% of GDP by 2013. It is currently around 8%, and public spending accounts for 54% of the French gross domestic product, the highest proportion in the euro zone.

The government have indicated that one of the targets will most definitely not be an increase in VAT in restaurants and cafes, a tax was was only reduced from 19.6% to 5.5% in July 2009, following agreement with the EU. The cost to the public purse of this lower rate is €3 billion a year.

It is likely there will be a toughening of the rules on French mortgage interest relief, and a major review of all forms of housing assistance is currently under way.

The following is a summary of what we know so far.

Property

At the present time, French capital gains tax on the sale of property is charged at the rate of 16%, which it is proposed to increase to 17%.

Social charges of 12.1% are also payable, so the total rate currently payable of 28.1% will increase to 29.1%.

Those who are not resident in France are not liable for the social charges, so second home owners would incur a charge of 17% on the sale of their home in France, assuming they did realise a capital gain!

The current exemption from capital gains tax on the sale of your main home will remain, as well as the tapered relief that is available on the sale of second homes.

You can read more in our guide to French Capital Gains Tax.

Shares

At the present time, no capital gains tax is payable on the sale of shares, provided the sale value in the year is no greater than €25,830. Where it is greater than this figure then the rate of tax is 18%, plus 12.1% social charges.

In future, it is planned to remove this concession, so that all capital gains on the sale of shares will be taxed, and at the rate of 19.1%, plus social charges.

Indeed, since the beginning of the year the sale of shares has attracted social charges. In future therefore, the taxable rate on the sale of shares will be 31.1%, including social charges.

You can read more about the taxation of shares at Taxation of Share Income in France

Income Tax

The top rate of income tax is to increase from 40% to 41%.

This rate is only payable if you have a net income of around €70,000 a year. It will affect around 350,000 people.

All other rates of income tax will remain unchanged, at least for the time being.

You can read more in our guide to French Income Tax.

Dividends

It is proposed to end the tax credit of €115 (€230 per couple) on the payment of dividends.

Nevertheless, the taxation of dividends will still remain a relatively generous one, as a general allowance of 40%, and a personal allowance of €1525 (per person) will remain in place.

Because they attract no social security contributions, the use of dividends as a remuneration strategy for business owners is common in France, although the government have stamped down on the practice by those in the professions libérales, where they are most widely used.

You can read more about the taxation of dividends at Taxation of Business Profits in France.

Implementation

The proposals will be submitted to the French Parliament later this summer, with a view to them being introduced in 2011.

It is likely that there will be further changes during the passage of these proposals through the legislative process. We shall update you in due course.