THE 10 KEY TAX MEASURES FRANCE BY Blevins Frank

Benjamin Haas of Burgundy 4U Real Estate France finds this information clear and helpfull for his clients

The new Sarkozy law (loi en faveur du travail, de l'emploi et du pouvoir d'achat - TEPA) was approved by the Conseil Constitutionnel and published on 22nd August 2007. The new key measures are as follows:

• Overtime Hours Exempt from Tax

From 1st October 2007, overtime will be totally exempt from tax and social security contributions for employees.

• Deductibility of Mortgage Interest

To promote property ownership, a tax credit is available for French tax residents on interest paid on a mortgage to purchase your main residence in France for the first five years of ownership (people who do not have a tax liability will receive a refund from the French tax authorities). The credit is 20% of the borrowings, limited to a maximum of €750 per year for a single person (or widow/widower or divorcee) and €1,500 for married couples or PACS partners. The credit is increased by €100 per dependent and by €50 where a child lives alternately with both parents.

In the first twelve months, the tax credit and income ceilings are double, i.e. the credit is up to 40% of the borrowings, limited to a maximum of €1,500 for a single person and €3,000 for a couple.

For disabled people, the credit is 20% of the interest paid, capped at €1,500 for a single disabled person (or widowed or divorced), or €3,000 for a married couple or PACS partners where one of the couple is disabled.

The tax credit is available where the acte authentique was signed after 6th May 2007. It is also available for properties being built provided there is a declaration of commencement of building works (declaration d’ouverture du chantier).

The credit applies for the first five years following the acquisition of the main residence. This provision will be open to everyone who acquires a main residence, not just first time buyers.

Where a taxpayer is required to move home due to work, the credit is still available provided the property is not rented out and the taxpayer does not acquire another residence.

The following table shows the total amount of credit available in different scenarios:

	Single, widow/er or divorcee	Married couple or PACS partners	Couple with 1 dependant	Couple with 2 dependants
	€	€	€	€
Ceiling of interest paid	3,750	7,500	8,000	8,500
Maximum tax credit	750	1,500	1,600	1,700

Only loans entered into with a financial institution qualify. The loans can be taken out in France or an EU member state. Replacement loans qualify but only up to the amount of interest paid on the initial loan and only for the first five years from the date of the initial loan.

Where an individual sells his home and buys another one, he will be eligible for the tax credit in relation to the new loan. For example, say an individual takes out a mortgage in 2008 to buy his main home and then sells the property in 2010. He will get the relief for 2008, 2009 and 2010 in relation to that mortgage. In 2011, he takes out a mortgage to buy another main home. He is eligible for the tax credit for a further five years from 2011.

The relief also applies to loans used to purchase land and subsequent construction expenses, provided the property is to be used as a main residence at the latest by 31st December of the second year following the year the loan was taken out.

The relief also applies where properties are purchased within an SCI which is not subject to corporation tax.

• Succession Tax Reliefs on Death

The surviving spouse or PACS partner is now totally exempt from succession tax. The position of PACS partners is in this respect now aligned with that of a married couple.

If the assets are less than €50,000, the spouse or PACS partner is not required to submit a succession tax return.

The exemption extends to sisters and brothers who are single, widowed or divorced on two conditions:

That at the time of succession they are aged more than 50 or are suffering from an illness which prevents them from working, and
They were living with the deceased during the five years preceding the death.

The above exemptions also apply where an assurance vie contract is paid to the spouse or PACS partner on death, or to a brother or sister fulfilling the above conditions.

The allowance for children has been tripled from €50,000 to €150,000 per person (this also applies where parents inherit from their children) and the allowance between brothers and sisters has been increased from €5,000 to €15,000. The allowance for nieces and nephews (which was only available for lifetime gifts) has increased from €5,000 to €7,500 and now also applies on death. Where a niece or nephew inherits by representation (because their mother or father is dead or has renounced the inheritance) the allowance of €15,000 for brothers and sisters applies instead.

The specific allowance of €50,000 for the disabled has been increased to €150,000. This can be cumulated with other allowances (e.g. the €150,000 allowance for a child).

The global allowance of €50,000 (where children or spouses inherit) has been abolished.

Finally, the rate bands will be automatically increased each year in line with inflation as is currently the case for income tax and wealth tax.

• Lifetime Gifts

Lifetime gifts made to children are subject to an allowance of €150,000 instead of €50,000. A child can therefore receive up to €300,000 (€150,000 from each parent) tax free every six years.

However, the allowance for lifetime gifts between spouses remains at €76,000. For PACS partners the current allowance of €57,000 has been increased to €76,000 in line with that of spouses. However, the allowance will be withdrawn if the PACS agreement is broken within the same year or the following year for a reason other than marriage to each other or the death of one of the partners. The tax rates applying where the gift is above €76,000 are now the same for spouses and PACS partners.

• Cash Gifts

The specific exemption for cash gifts has increased from €20,000 to €30,000 where the gift is made to a child, grandchild or, if there are no direct line descendants, to nieces or nephews. This is provided the donor is less than 65 years old and the donee more than 18 years old. In addition, the gift should be declared and registered by the donee at his/her local tax office within one month of the gift.

This exemption can be cumulated with other allowances, (i.e. the €150,000 for children, €30,000 for grandchildren and €5,000 for nieces and nephews). However, it does not renew after six years and can only be used once.

The above succession tax exemptions and allowances applies to gifts and inheritances received from 22nd August 2007.

• Stock Options

It was possible to escape tax on the gain realised from the exercise of stock options by gifting the options to children at the time of exercise. This exemption has been removed.

This measure will not be retrospective and will only apply to options granted from 20th June 2007. Stock options granted before 20th June 2007 are not affected. The holders of these options can therefore still gift the options to their children free from tax at the time of exercise.

• The Bouclier Fiscal (Limit of Income Tax and Wealth Tax) reduced to 50% of taxable income

Where the total of taxes paid (i.e. income tax, wealth tax, taxe foncière and taxe d’habitation on the main home, and the social charges – CSG, CRDs and PS) exceed 50% of your income for the previous year, you can claim a refund of the overpayment from the fisc.

This provision applies for income earned in 2006 onwards. So, for 2006 income, you look at the total taxes paid in 2007. If they exceed the 50% limit, a refund will need to be reclaimed. The refund can be reclaimed from 1st January 2008.

• Wealth Tax

The reduction in relation to the main home has increased from 20% to 30% from 1st January 2008.

The time limit for investigating a taxpayer’s wealth (délai de reprise) for residents and non-residents who fail to file a wealth tax return has been reduced from 10 years to 6 years. This measure applies for tax audits starting after 1st June 2008.

Currently, where a wealth tax return is submitted, the French tax authorities have three years to make an enquiry into the return to assess the validity of the declarations made. However, where an asset has not been declared, or in the absence of a wealth tax return altogether, the authorities had a 10 year window to open up an enquiry. This 10 year window has now been reduced to 6 years.

• Wealth Tax reduction where investments made in PMEs (small and medium enterprises)

A wealth tax reduction of up to €50,000 is available on 75% of the initial capital (or increased capital) invested in unquoted PMEs or organisations of general interest (charities, foundations, French National Research Agency, non-profit making public or private research entities for general interest, higher education institutions etc). For close investment funds (fonds d’investissement de proximité - FIP) the reduction is 50% of the amount invested and is capped at €10,000.

The shares must be retained for at least five years. If the shares are disposed of within this time, the wealth tax will be clawed back.

For a reduction in wealth tax paid say on 15th June 2009, the investment must be made between 15th June 2008 and 15th June 2009.

A PME belonging to the taxpayer, his/her spouse or PACS partner, or a partner who he/she is living with does not qualify.

• Income of Students

Currently students under the age of 21 are exempt from tax on earnings from ‘holiday jobs’ up to twice the minimum wage. For income earned from 2007, the exemption will be increased to three times the minimum wage (€3,750 from 1st July 2006) and will be available to students under the age of 25 (at 1st January of the relevant tax year), and will take account of total earnings during the year (not just earnings received during holidays).

For advice on these matters please contact Jane Hayward at:
Blevins Franks Tax Advisory Service Ltd
Barbican House,
26-34 Old Street,
London EC1V 9QQ.
Tel: +41 (0)20 7336 1116
Fax:+41 (0)20 7336 1001
Email: jane.hayward@blevinsfranks.com
Internet: www.blevinsfranks.com © Blevins Franks – 2008