French finance bill and social security finance bill for 2019 non-residents taxation
The French finance bill for 2019 introduces modifications regarding non-residents taxation, both in terms of French-source income tax and real estate capital gains tax, and for the exit tax rules. Also, the social security finance bill for 2019 provides adjustments of social security contributions.
1. French-source income taxation: Minimum non-resident tax rate and alignment of the taxation of non-residents and residents of France
Raised of minimum tax rates
For taxable income 2018 and following years, a minimum tax rate of 20% and 30% will be applicable to net income subject to income tax. Nevertheless, if the taxpayer can prove that the French tax rate of tax on all his income arising in France and abroad is less that the rate of (20% to 30%), this rate will be applicable to his income taxable in France. In this case, specific mention is needed.
This minimum tax rate will be the following :
|Net income subject to income tax
|< or = to €27,519
> to €27,519
|20 % (1)
30 % (2)
Modification of the French-source income tax regime:
In 2019, the tax regime still effective:
- Tax basis: The withholding tax is based on the net taxable income after applying the flat-rate deduction of 10% for professional expenses.
- Tax amount: The withheld tax is calculated as follow:
|Net income subject to income tax
|Less than €14,839
Up to €14,839 to €43,047
- The withheld tax calculated at the first two brackets (0% and 12%) covers the tax obligation related to the income subjected to tax in those brackets (the income subject to tax in these two brackets is not taken into account to determine the final income tax, and the amount of tax paid is not deductible). However, the withheld tax paid at the 20% rate is deductible from the final income tax liability determined by application of the income tax rate brackets.
The tax regime will be modified starting January 1st, 2020 and will be determined using the same approach as that applicable to French tax residents:
- Tax basis: The withheld tax will be based on net taxable income before applying the flat-rate deduction of 10% for professional expenses.
- Tax amount: Non-residents’ tax system will be the same as for the French tax resident. The withheld tax rate will be determined on the basis of the provisions of Article 204 H of the French tax code (FTC) : personalized tax rate which is the rate determined by the French tax authorities on the basis of the last income declared by the taxpayer or the neutral tax rate (calculated on the basis of the rate schedules detailed by Article 204 H of FTC).
- The withholding tax will not be any more in full discharge of income tax and whole amount of withholding tax paid will be deductible from the final income tax liability.
2. Real estate capital gains
The sale of the ex-principal residence
As opposed to residents’ tax system, real estate capital gains from the transfer of the principal residence were not exempt. This difference in treatment was first considered constitutional(3) and then the administrative tribunal of Versailles esteemed that it was contrary to European law(4). As a reaction, French Parliament has provided for a full tax exemption to the real estate capital gain realised if the following conditions are met:
- The taxpayer transfers his residence to a Member State of the European Union or to a State which has concluded with France a mutual administrative assistance agreement to prevent fraud and tax evasion as well as a mutual assistance agreement in terms of collections (not including non-cooperative states or territories);
- The taxpayer transfers his former principal residence located in France at the date of transfer to his tax residence outside France.
- The sale shall be realised at the latest on 31 December of the year following the year of the tax residence transfer.
Between the departure from France and the transfer, the individual must not have put his residence to a third party’s disposal, free of charge or for a fee.
Sale of other property
In the event of the sale of a property by a non-resident, real estate capital gains are partially tax exempt up to 150 000 € if the following conditions are met:
- The individual had his tax residence in France continually for at least 2 years at any time before the transfer of its residence;
- From now on, the sale of the property is completed no later than the 31 December of the tenth year following the year of the tax residence transfer.
Thus, the legislator has provided for an extended period: from 5 years to 10 years.
3. Adjustments on social security contributions
Since 2012, social security contributions have been due by non-residents on:
- French real estate income;
- French real estate capital gains realised directly or indirectly.
Taking into account the De Ruyter ECJ case-law(5) and a recent administrative decision of Nancy(6), Article 26 of Social security finance bill for 2019 brought the Social security contributions system into compliance with European law. So, taxpayers would be exempted of CSG/CRDS on income and capital gains realised on property in France if the following conditions are met:
- Affiliated to a European social security system failing within the scope of EU regulation 883/2004 (EU, Iceland, Norway, Liechtenstein, Switzerland),
- Not covered by the compulsory French social security scheme.
Nevertheless, the contribution called “Prélèvement de solidarité”, has been increased to 7.5% (instead of 2%) and is still due by these non-residents (Article 235 ter FTC).
These adjustements start :
- January 1st, 2019 regarding French real estate capital gains,
- January 1st, 2018 regarding French real estate income.
Consequently, for example, French-source real estate income from 2018 will be taxed as follow:
||E.U or Switzerland if the above conditions are met
||E.U or Switzerland if theabove conditions are not met and non-E.U
||20% or 30%
||20% or 30%
|Social security contributions
4. Exit tax
Article 112 of the Finance bill for 2019 relaxes the exit tax rules currently provided by Article 167 bis of the FTC by transforming them into anti-abuse regulations, which apply to the transfers of tax domiciles occurring as from January 1st 2019, without any retroactive application for taxpayers who transferred their tax domicile prior to that date.
The new provisions include the general application of the automatic deferral of the payment of exit tax to transfers to European Union member-States, and to any other State and territory having concluded a mutual administrative assistance agreement with France to prevent fraud and tax evasion as well as a mutual assistance agreement in terms of collections (not including non-cooperative states), as well as a reduced expiration period after which the taxpayer can obtain a cancellation of the deferred exit tax (except in the case of sale, purchase-cancellation of stock or liquidation of the intervening company in the interim).
To view footnotes, please download the PDF here.
For more information, contact:
Sevestre & Associés