2021 FRENCH TAX BUDGET UPDATE
The French budget issued on 27 September 2020 is currently being reviewed. We summarise below the main proposed changes which, if accepted, should be voted in by the end of the year.
The tax rate of the barème’s first taxable income band was reduced from 14% to 11% in last year’s Finance Law and this change will be maintained. However, the income bands are due to be indexed by 0.2% resulting in the following new sliding scale:
|Income Bands (€) – Applicable
to 2020 taxable income
|Up to 10,084
|Between 10,084 and 25,710
|Between 25,710 and 73,516
|Between 73,516 and 158,122
|In excess of 158,122
The 10% pension allowance cap has been updated to €3,858 with a minimum deduction of €394.
The capping of the 10% deduction on salaries is now set at €12,652 with a minimum of €442.
Taxpayers who house a dependant aged over 75 benefit from an allowance of €3,542.
Mandatory taxation based on “unexplained” external signs of wealth is means-tested using deemed income streams for each “sign of wealth”. If these exceed a total annual sum of €47,203 “deemed income” it triggers the mandatory assessment.
The tax abatement for households with taxpayers over 65 years old or disabled has been increased to €2,446 if their total taxable income is below €15,340 and to €1,224 where the income is between €15,340 and €24,690.
The 2021 TV tax or redevance audiovisuelle will remain the same as 2020 at €138. If you do not have a TV, ensure you tick box RA on the front page of your income tax form or contact your local tax office.
The monthly “pay as you go” (“PAS”) payments for January to August 2021 are established on the basis of the reported 2019 income and assessment thereof. Payments for September to December 2021 will be adjusted based on the taxpayers’ 2020 income, reported on the returns filed in May 2021.
The 20% minimum income tax rate applicable to French source income and property gains received by non-residents of France is set at 20% up to €25,710 and 30% thereafter.
€25,654 is the taxable income limit under which a taxpayer may benefit from a nil rate under the “pay as you go” system for the period from 1st January to 31st August 2021 and €25,705 for the period between 1st September and 31st December 2021.
The indexation of the barème income bands affects the annual income limit for the eligibility to the auto-entrepreneur regime option in 2021. This is set by reference to the upper limit of the second income tax scale band, i.e. €25,710, with an extra 50% per extra half family share. We remind our readers that a single taxpayer has one family share, a couple has two and there is an extra half share for each of the first two dependent children and one whole family share from the third dependant onwards.
The tax benefit for each extra half family share is capped at €1,567 under the “plafonnement” rule. There are specific capping rules for half shares granted in respect of disabled dependents, past single parents, war widows or army veterans.
Households which include married or pacsed children, or children with dependents, may benefit from an annual tax-free allowance of €5,959. The same amount is awarded as a tax deduction if a taxpayer provides support (food allowance) to a child over 18.
Commercial, non-commercial and agricultural activities
Since 2006, taxpayers assessed under an itemised regime in respect of their business activities were assessed on an extra 25% taxable profit if they did not engage the services of an accredited auditor or equivalent organisation to oversee their business accounts. The budget proposes to gradually phase out this surcharge as follows: 20% for 2020; 15% for 2021; 10% for 2022 and 0% from 2023 onwards.
Interest for late payment of tax liabilities
In 2017 this interest charge was reduced from 0.4% to 0.2% up to 31st December 2020 only. It is now proposed to maintain this lower rate indefinitely.
Protection Universelle Maladie (PUMA)
The PUMA is compulsory for any French tax resident who is not eligible to any other French social security regimes or affiliated to another EEA territory’s regime. After the end of the Brexit transitional period, i.e. post 31 December 2020, this may affect anyone who can no longer be registered to continued UK health cover under form S1. This is quite significant since it can lead to compulsory PUMA contributions assessed on the taxpayer’s financial investment and property income as well as investment gains (see our 2020 January bulletin – www.bdo.gg). In addition, exposure to the PUMA triggers the application of the CSG and CRDS at 9.7% on non-French investment income and gains. In the absence of any other health cover, the PUMA contributions should be deductible from the taxable income.
Proposed changes to the Contribution Economique Territoriale (CET)
The CET (local business tax) capping, now to be set at a maximum of 2% of the computed added value, can be applied for through the submission of form 1327 CET. This is down from 3% previously.
A 3-year CET exemption for activities created in 2021 is also on the cards. This will not automatically apply and will have to be requested from the relevant Tax Office. This would be in addition to the first year’s exemption.
The exemption would be based on the local council’s deliberations and applications would have to be submitted before 1st January of the year following the activity’s creation; so before 1 January 2022 for a creation in 2021, to result in a possible exemption for 2023, 2024 and 2025.
Lockdown and French tax residence issues
The pandemic has meant, for many, being in lockdown in a different jurisdiction to their habitual place of residence. For most it was not a question of choice, but in some cases spending lockdown in France was a preferred option which could potentially lead to becoming inadvertently treated as a French tax resident.
Earlier this year, however, special provisions were put in place to neutralise the effects of lockdown in respect of cross-border workers, tied with the following territories: Germany, Belgium, Switzerland, Luxembourg and Italy.
The French Authorities, who had initially stated that they would make no exceptions in all other cases, recently published a reminder that the time spent in France is a criteria that is only really relevant if the place where an individual’s home is not conclusive. The notion of home can be quite subjective but essentially taken as the place where family members (spouse, partner, children etc) tend to gather. If the French Tax Authorities have enough evidence to argue that someone has transferred their home over to France, this may lead to a worldwide exposure to the tax system. As a reminder, the domestic law criteria of French tax residence are as follows, and only one is sufficient to find someone resident in France for tax purposes:
- If the individual’s home (foyer fiscal) is in France, or if this cannot be ascertained, if France is the place where they spend most of their time, or
- if an individual carries on his/her main professional activity in France, or
- if their centre of economic interest is in France.
UPDATES ON TRUST MATTERS
The 2020 annual report filing deadline was postponed this year to 30 September 2020. As a reminder, this reporting concerns all trusts with:
- at least one French resident member (settlor, trustee or beneficiary) and/or
- trusts which hold any French assets as at 1 January. From 2019, the definition of reportable French assets was broadened to include all French financial assets.
The French Administration integrated the provisions of the 2018/843 AML EU Directive into its domestic law through an Ordinance, published last February, no2020-115. Although the effective date of the Ordinance was 14 February 2020, we are still awaiting the commentaries of the French Tax Authorities in order to determine its full impact on the trustees’ reporting obligations. We would also expect the French Administration to issue new trust reporting forms fully adapted to the new reporting scope. Finally, the annual report normally states the situation as at 1st January, so it is debatable whether the new scope was effective for the 2020 tax filing.
The Ordinance extends the reporting obligations to all trustees who are not established in the EU, if:
- they acquire French real estate – it is not specified whether this applies to indirect acquisitions. The holding of the French property would render the trust reportable anyway;
- they enter into a professional or commercial relationship in France as defined by Article L 561-2-1 of the French Monetary and Commercial Code. The “relationship” concerns regular and ongoing dealings with financial or advisory professionals regardless of the existence of a written contract. In the absence of any comments to the contrary, this change is also likely to affect trusts with no French resident parties although, in practice, such cases may not be widespread.
The Ordinance has also added the following information to the scope of French trust reporting:
- the identity and full details of the protector; and
- details of any other individual(s) who exercises effective control over the trust or who holds a similar role.
The Ordinance introduced a new article in the procedural legislation, Article L.102 AH which sets out an obligation for relevant professionals and authorities who have access to the French trust register, to report any discrepancies or omissions they may come across in reference to this register to the French Tax Authorities. The Administration then notifies the trustees who need to provide them with an explanation in a timely manner. Provided the trustees’ replies are sufficient, the Administration will simply correct the register accordingly. In the absence of any satisfactory response, the €20,000 penalty for omission may apply.
Rulings affecting French-connected trusts Capital distributions and “indirect gifts”
On 6th November 2019 the French Supreme Court ruled that capital distributions made in 2003 from a Canadian irrevocable and discretionary settlement to a French resident beneficiary constituted an “indirect gift” from its settlor. The intention to give was deemed to have originated from the Deed of Trust itself. Although the decision concerns capital payments made before the July 2011 French Legislative Framework for Trusts, this ruling is a reminder of how such distributions are treated by the French Tax Authorities pre-July 2011. In the relevant case, the Deed did not name the settlor and the beneficiary refused to provide any information pertaining to the settlor. The capital distributions were subjected to the 60% gifts tax charge as the Authorities were unable to confirm the relationship between the donor and donee. We expect further developments on these issues.
Anti-Tax Evasion Article 123 bis
Article 123 bis allows the French Tax Administration to tax French residents on a lookthrough basis in respect of financial assets held via certain entities located in low tax jurisdictions. For this, taxpayers must hold over 10% in financial or voting rights but, in certain instances, they may escape this treatment if they can adequately demonstrate that the set-up is not tax motivated. The 10% limit is deemed attained if the entity is established in a blacklisted territory and, if so, the individual is subject to tax on either the income effectively generated, or a minimum return basis, calculated by reference to a set percentage growth updated every year.
Despite a reminder that this form of taxation does apply in the context of Anglo-Saxon Trusts, on 24 June 2020 the Parisian Administrative Court ruled against the application of this tax for 2010 and 2011 in favour of the French resident beneficiaries of three Bermudan irrevocable discretionary settlements on the following grounds:
- they did not hold any real financial rights in these trusts due to their irrevocable and discretionary nature – the 10% minimum holding condition was, therefore, not met. In addition, the trusts were not registered in a blacklisted territory, so the Administration could not apply a deemed 10% holding;
- that the trusts were set up in 2004 and 2008 before the settlor’s arrival in France. Moreover, his motive for the use of such entities was to protect assets following a dispute with a business partner in view of his children’s young age. Therefore, the set up could not be viewed as artificial.
Treatment of Trusts
In a ruling dated 20 March 2020, the Conseil d’Etat had to consider the treatment of a French company held via a US trust in a very specific context. The company was claiming an exemption from a 3.3% social surcharge applied in addition to corporation tax. To be exempted, companies must have a turnover below €7,630,000 and a fully paid share capital held at least up to 75% and continuously by individuals. In considering the issue, the Administration looked through the trust and awarded the exemption on the grounds that the trustee was an individual.
For further information or advice please contact Virginie Deflassieux or Catherine Le Pelley.
This publication has been carefully prepared, but it has been written in general terms and should be seen as containing broad statements only. It cannot be relied upon to cover specific situations without obtaining professional advice.
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