Tax Increase on French Rental and Investment Income

We have written previously in these pages about the notorious social welfare levy (CSG/CRDS/PS), a regressive tax levied on most incomes that is neither part of the main system of social security contributions, nor the French income tax system. The tax is levied at the rate of 8% on wages and 7.1% on early retirement pensions, but at the rate of 11% on savings, investment, capital gains and rental income in France. Whilst the rate on wages and early retirement pensions will remain unchanged, the Government have decided to increase the rate on investment and rental income to 12.1%. The charge will also be applied on capital gains realised on the sale of French property, which will bring the total charge to 28.1% (16% + 12.1%). Gains on the sale of shares will be taxed at the rate of 30.1% (18% + 12.1%), meaning that the total tax rate on share gains has risen by three percentage points since January 2008. French Life insurance policies (assurance vie) will also be hit by the increase in the rate of the social welfare levy of 12.1%. Assuming you also pay the withholding income tax of 7.5%, this means withdrawals after 8 years will now be taxed at 19.6%, although the existing tax allowances for annual withdrawals remains untouched. However, it would seem that savings in French bank accounts will be spared any increase, although it will be necessary to wait until the proposal has found its way through the French Parliament before a definitive answer can be given on that point. The tax hike is expected to raise €1.5 billion a year, which will go towards getting people off long-term social security benefits and into employment. A new social security benefit called Revenu de solidarité active (RSA) aims to attack the disincentive to work caused by the withdrawal of benefits in gaining employment. It will replace two existing benefits, the Revenu Minimum d'Insertion (RMI) and l'Allocation de Parent Isolé (API). The RSA will ensure that those who obtain employment will only lose a proportion of their benefits, leaving them better off than they would be out of work. The initiative has been widely welcomed by both those on the left and the right, but there has been widespread concern amongst french people as to just how it was to be funded. By choosing to fund the new measure by a tax on ‘capital’ rather than revenues, President Sarkozy has won the support of those on the left, but many on the right would have preferred a cut in the French public expenditure to fund the idea, rather than a new tax. Lawrence Parisot, President of the French Employers' Federation, Medef, expressed dismay that the Government considered it legitimate to create a new tax every time it wanted to introduce a new initiative. Her attack drew support from a leading figure in the French Parliament, who considered that it displayed a continuing lack of coherence in the French Government financial policy. Since 2007 there have been a succession of new minor taxes that have been introduced, in order to fund new initiatives, as well as measures aimed at reducing the burden of tax on business. 'These measures are partial and have no strategic sense', argued Phillip Marin, Chair of the Senate Budget Committee. The French landlords' association (UNPI) have also condemned the increase for the impact it will have on the small landlord, with most having net rental earnings of less than €5000 a year. Around 4 million households in France rent out property, with 12 million households who hold life assurance, and around 9 million own shares. Whilst the tax is payable on expat early retirement pensions, those who are in receipt of a UK state pension and an E121, do not pay it on their pension. You can read more about the capital gains social welfare levy here. If you would like to make any comments on the article you can e-mail [email protected]