HTS Newsletter 2019 (French Taxes only)
February 25, 2019
We look forward to assisting you this year with filing your French Income Tax Declarations.
We are halfway through the perfect tax storm that began in 2018 and continues through the remainder of 2019. The good news is that we foresee smooth tax sailing in 2020. We repeat many of the changes announced earlier, with emphasis being made on the economic impact to you in 2019.
The French government has implemented a “pay as you earn” tax collection system effective January 1, 2019. There will be no 2018 income taxes imposed on 2018 recurring income such as pensions and regular professional earnings. From January 1, 2019, French professional earnings and pensions will be subjected to withholding taxes. When you read about the “année blanche” this refers to the year 2018, following the decision of the French government to NOT collect taxes on 2018 recurring income. You will still need to file a 2018 French income tax return in 2019 so that the tax office can identify non-recurring 2018 income, such as capital gains, and assess taxes on that slice of income. We ask that salaried employees provide us copies of all 2018 French payslips to allow us to identify “exceptional “income which should be subject to income taxes.
The French tax administration has done an excellent job of implementing the complicated pay as you earn tax collection system, and you can view the administration’s dashboard and control, to some degree how taxes are collected on your online account. If you do not already have access to your online French income tax account at impots.gouv.fr, it is imperative that you initiate this account at your earliest convenience.
We have included in our tax toolbox a resource entitled “Understanding Prélevement à la Source” which may be a useful resource in helping you understand how 2019 taxes will be collected on different types of income, and determining what action you should take to revise payments, as required. We have also posted a link to a video (in French) which explains also how this works.
We remind you that our clients have the ability to exchange confidential tax information with our office using a trusted internet portal service, www.SmartVault.com. If you want to establish a SmartVault account or would like us to resend an invitation to establish an account, please send us an email and we will get you set up.
Information sharing agreements implemented by the governments of developed countries mean that taxpayers need to report their financial accounts in order to avoid imposition of penalties (or worse). Often, the penalties for failing to disclose an account exceed the income taxes due on the corresponding income. Contact us if you discover you are out of compliance and we can help resolve and/or refer you to competent legal counsel.
The contents of our toolbox found in the “Clients Only” section of our website will keep you informed and enable you to effectively analyze and share tax information with us. You’ll find videos, “cheat sheets”, and excel workbooks to help you organize your information. We continue to improve these tools and add new ones, so please check back regularly.
Details of changes to the French income tax laws follow. (If you are reading a hard copy of this text we encourage you to access the “live” version posted on the clients only section of our website at: www.hortontaxservices.com). The password is “confiture”. Rest assured that we do not post confidential client information on our website.
You may book an appointment directly on the calendar posted on the clients only section of our website.
New clients are invited to watch our welcome video that shares information about our practice and provides ideas for communicating information with us in an effective manner.
Due dates for filing French declarations will be posted on our website when available, and will be updated when new information becomes available.
Key exchange rates can be found on our website.
You will be asked to review the tax return before we submit it to the French tax administration. If you have registered for a SmartVault account, we will provide your tax declaration using the Smartvault.com internet portal. Alternatively, we will e-mail you your tax return as an Adobe file.
If you would like us to mail you a copy of your income tax declaration, please let us know by X’ing the box at the top of the second page of the checklist. We no longer charge for this service.
Please select from our client Tax Toolbox the appropriate tax checklist that should be used depending on your situation.
Services we provide, Services we don’t provide, and our General Office Procedures
We prepare French income tax returns, which for some clients will now include the modified French Wealth Tax, Impôt sur la Fortune Immobilière (IFI). If clients choose to send their own tax returns, we encourage the use of a registered mail service so that you have substantive proof that the tax office received the tax return. A few euros paid to La Poste could save thousands of euros in late filing penalties.
We need to invoice for our investment in assisting with responding to tax notices. We will endeavor to provide a fee quote for our assistance with these replies before commencing work.
We do not routinely assist with matters related to “taxe d’habitation, taxes foncières, redevance audiovisuelle”, or other administrative concerns. We can provide follow-up on such matters, but we will bill for the extra time spent. This type of assistance is not included in our regular service or fee.
Our fee quotes are based on the assumption that you will provide us with complete, clear information, and that only routine follow-up will be required. If we have to follow-up with multiple phone calls and e-mails to obtain missing data and explanations, it results in more time spent by us and thus a higher fee.
We generally process files on a “first in, first out” basis. Upon receipt of complete information, we log your file into our database. We will do our best to notify you if the information you have provided is insufficient to commence work.
We issue our invoices with the tax returns (or letters), and we request that clients settle their accounts timely so that we can limit the administrative time dedicated to our accounting. Clients who habitually pay late may be asked to provide a retainer fee the following year.
We do not share your information with any third party and we do not accept or pay referral fees.
Steven R. Horton, CPA
2018 French Income Tax Update
The 2019 Finance Law brings substantial changes to French taxation for 2018 taxpayers, most of which are scheduled to take effect as of January 1, 2019.
- What does 2018 année blanche mean?
With the new income tax withholding regime, “prélèvement à la source (or PAS, discussed later)”, taking effect as of January 1st 2019, recurring income from 2018 will not be taxed.
- In 2019, ALL taxpayers will need to file a 2018 French income tax declarationreporting their income and deductions in 2019. Taxpayers will get a tax credit for all tax related to non-exceptional or recurring professional income items (crédit d’impôt modernisation du recouvrement or CIMR) similar to the deemed foreign tax credit currently available on U.S. income in applicable cases. Recurring income includes wages (including overtime and for employees previously unemployed), standard contractually stipulated allowances and bonuses, recurring annual bonuses, unemployment payments, recurring pension income, recurring alimony and support payments, rental income
Exceptional income :
- Wages and pension income: bonuses not mentioned in the work contract (conditions and computation) above the usual compensation received in the company, non-recurring pension income (lump sum), income that relates to another year than 2018 (deferred or anticipated income), income from stock-options and free shares, severance pay for employees and executive officers, ‘participation’ and ‘intéressement’ that are not part of a ‘plan d’épargne salariale’, amounts withdrawn from a ‘plan d’épargne salariale’, certain amounts withdrawn from a ‘compte épargne temps’, any other income that is not intended to be earned annually. ;
- Business income (BIC, BNC, BA): the amount of 2018 income which exceeds the highest amount earned during years 2015, 2016, and 2017;
- Rental income: penalties for not complying with the conditions set to benefit from real estate tax credits, i.e. engagement to rent or to hold required by laws Robien, Perissol, Borloo, Besson, Scellier, and ‘régularisation des provisions pour charges de copropriété’ related to non-deductible expenses;
- Investment income: interest, dividends, capital gains.
- The taxpayer is responsible for specifying which income is not eligible for CIMR on the 2018 personal income tax return.
- In the fall of 2019, taxpayers will receive an ‘avis d’imposition’ that will show the amount of CIMR for both personal income tax and ‘prélèvements sociaux’ on 2018 non-exceptional income. The ‘avis’ will also show the personal income and ‘prélèvements sociaux’ due on 2018 exceptional income, and compute an updated ‘prélèvement à la source’ rate.
- Tax credits: the amount of French qualified tax credits available to taxpayers (e.g. domestic employee, charitable donations etc.) reported on the 2018 income tax declaration will be refunded in the fall of 2019 to the extent that they do not offset any 2018 income tax. On January 15th 2019, the administration proceeded with an advance refund of an amount of credit equal to 60% of the 2017 amount shown on the 2018 ‘avis d’imposition’, as a measure to help cash flow. Any regularization will take place when the administration issues the 2019 avis d’imposition on 2018 income, taxpayers with the same or higher credits from 2018 will receive an additional refund after the declarations are processed. Those who did not will remit the difference back to administration.
- What is the PFU?
As of January 2018, the standard combined income and social tax rate applicable to investment income is a flat rate of 30%. Taxpayers may still opt for a progressive rate taxation when filing the income declaration.
- Prélèvement forfaitaire unique (PFU) – Flat Tax on investment income 30%. For earnings occurring as of January 1, 2018, the 2018 Finance law established a standard flat tax of 30% on investment income and capital gains. The 30% is composed of the following:
- 8% standard flat income tax
- 2% social taxes
(This rate replaced the 21% and 24% income tax and 15.5% social tax rates previously in effect for dividends and interest respectively.)
No CSG deduction is permitted.
The PFU applies to the following types of income:
- Gross dividends (the 40% abatement no longer applies)
- Interest (including interest earned in PEL and CEL accounts opened as of January 1, 2018)
- Capital gains (see clarification below)
- Certain Assurance Vie contracts
- Director’s fees
- Certain shares of carried interest
The PFU does not apply to the following categories of income:
- Rental income
- Real estate capital gains
- Exempt-interest from Livret A, Livret Développement Durable
- Pre-1997 assurance vie contracts
- Specific Treatment for Capital gains:
For shares acquired before January 1, 2018:
- Taxation via PFU 30% allows netting losses, however no abatement for holding period will apply.
- Option for taxation at progressive rates, with abatement for holding period.
For shares acquired as of January 1, 2018:
- Taxation via PFU 30% allows netting losses, however no abatement for holding period will apply.
- Option for taxation at progressive rates, no abatement for holding period.
- Assurance Vie:
The tax payable on withdrawal of funds from life insurance contracts has been increased. The gains related to premiums paid into a life insurance contract as from September 27, 2017, are taxed at the 30% flat tax (“PFU”). The former tax rate of 23% will be payable on the withdrawal of funds relating to premiums invested before September 27, 2017 and to premiums below 150,000€ from September 27, 2017.
N.B. Taxpayers may still opt for a progressive rate taxation via the tax declaration, though it would be unusual for the progressive tax system to be more advantageous than the PFU. CSG is only deductible if opting for progressive income tax rates.
- Further Changes
a. Filing and paying
- Electronic filing (e-filing) of French tax declarations is now mandatory for all taxpayers who have internet access on the French government website http://www.impots.gouv.fr. The penalty for not e-filing of 15€ applies as of the second year of non-compliance.
- Electronic payment (e-payment) of all French taxes: income tax, taxe d’habitation, taxes foncières, social taxes (CSG/CRDS/prélèvements sociaux). French wealth tax, IFI, (for patrimony between 1.3€M and 2.57€)) is mandatory via monthly debit or programmed debit, for taxpayers who have internet access for all payments over 300€. The penalty for non-compliance is 0.2% of the amount due with a minimum penalty of 15€.
b. How much
- There are small revisions to the progressive tax brackets for 2018. They reflect a 1.6% increase. Brackets are as follows for 2018 taxable incomes in euros:
Up to 9,964 0%
From 9,964 to 27,519 14%
From 27,519 to 73,779 30%
From 73,779 to 156,244 41%
Over 156,244 45%
- The high earner’s tax (impôt sur les hauts revenus) reference income brackets and flat rates are unchanged and as follow in euros:
Up to 500,000 0%
From 500,001 to 1M 3%
Over 1M 4%
Up to 250,000 0%
From 250,001 to 500,000 3%
Over 500,000 4%
- At-source 2019 withholding rates on salaries and pensions paid to non-residentsare as follows in euros:
Up to 14,839 0%
14,839 to 43,048 12%
Over 43,048 20%
- Starting in 2013, an employer’s contribution to a supplemental health insurance plan is deemed income to the employee. This applies to insurance for medical costs due to illness, maternity or accident. The threshold for deduction of the employee’s contributions is lowered accordingly.
- The additional mark-up (generally 10%) on French pension amounts received by persons having raised three or more children is taxable.
- The 10% standard deduction on salaries is capped at 12,502€ (vs. 12,305€ in 2017) and at 3,812€ for pensions (vs. 3,752€ in 2017).
- The deductible imputed child support (pension alimentaire) for a major child not considered to belong to the tax household is 5,888€.
- The maximum tax savings resulting from the application of the family quotient to the taxable income is 1,551€ for each half-part (first and second child). For a quarter of a part, the reduction is 775.50€. The limitation also now applies expressly to nonresidents.
- The 2018 threshold for the deduction for low income earners (décote) is 1,595€ for single filers and 2,627€ for joint filers. The new limits are: 1,196€ for single filers and 1,970€ for joint filers. The deduction is equal to the difference between the limit and the theoretical gross tax.
- Since 2015, the tax-exempt amount of severance paid to Executive Officers is now limited to 3 times the annual social security threshold, or 119.196€ for 2018. Previously this tax-exempt amount was determined as the higher of either half of the amount of severance received or twice the prior-year gross annual compensation within the limit of six times the annual social security limit.
- The global cap on tax deductions, credits, and reductions (“niches fiscales”, excluding expenditures for charities, domestic help, and childcare) will remain at €10.000 for 2019, with the exception of DOM-TOM (Girardin), SOFICA, and also the new Loi Pinel “outre-mer” investments which are capped at €18.000. SOFICA investments will remain in effect until December 31, 2020.
- The specific deduction of 75% allowed to organizations for persons in need is limited to the first 537€, allowing a maximum reduction of 403€. The deductible portion of charitable contributions in 2018 to organizations for general interest is 66% of the amount contributed. The maximum reduction may not exceed 20% of taxable income.
- The ‘prime d’activité‘ managed by the Caisse d’Allocations Familiales (CAF) replaced the ‘prime pour l’emploi’ as of January 1, 2016 and applies to employees or independent contractors with revenue below 1,500€ per month. The computation of the “prime d’activité” will be revised to reach the SMIC increase promised by the French government following the “gilets jaunes” protests.
- Article 155 B Impatriation Regime: for eligible employees or directors who started their French activity effective July 6, 2016, the favorable regime is extended to 8 years (5 years previously). The regime also applies for cases in which an employee changes jobs within the same company or moves to an affiliate of the same industrial group.
- Life insurance contracts: amounts paid upon death occurring after July 1, 2014 are taxable at 31.25% above 700,000€, after deducting the exemption amount of 152,500€, the tax rate was previously 25% above 902,838€.
- The 8% PUMa tax due since 2016 by taxpayers with little to no work or pension income (but mainly passive income derived from their wealth) has been invalidated for the tax year 2016 by a 2018 court decision, for procedural reasons. Our best interpretation of the rules for 2019 and future years is as follows: the PUMa tax rate reduces from 8% to 6.5%, the threshold to escape PUMa-CSM tax increases from €3,973 to €8,105 (€6,100 to €12,300 for “auto-entrepreneurs”), and a threshold is set to around €20,000 above which Urssaf cannot make tax calls.
- Nonresidents: French source income received by nonresident taxpayers since January 1, 2018, is subject to a 30% minimum tax rate (20% previously) for net taxable income exceeding €27,519 for 2018.
- French taxation of the acquisition and disposition of shares
- The French qualifying for Free Share (“actions gratuites”) regime is unchanged since last year. There are now the following periods to consider:
- For sale of shares received before September 28, 2012, and held for at least 4 years (2+2), the gain follows the previous taxation at either a flat rate of 30% or at progressive rates as salary.
- For shares received between September 28, 2012, and August 7, 2015, the gain is taxed as salary in the year of sale.
- For shares received from August 8, 2015, to December 31, 2016:
- The gain will be established per the capital gain regime for sale of shares, with application of the abatement for holding period and taxation at progressive rates and 17.2% social contributions. The 10% employee contribution does not apply.
- For shares received from January 1, 2017, to December 31, 2017:
- For gains up to an amount of 300,000€ the gain will be established per the capital gain regime for sale of shares, with application of the abatement for holding period and taxation at progressive rates and 17.2% social contributions.
- For gains over 300,000€, the gain will be taxed as salary at progressive rates without application of the abatement for holding period. Salary activity social contributions of 9.7% apply as well as the 10% employee contribution.
- For shares received as of January 1, 2018:
- For gains up to an amount of 300,000€ the gain will be taxed as salary at progressive rates with an abatement of 50% for holding period and 17.2% social contributions.
- For gains over 300,000€, the gain will be taxed as salary at progressive rates without application of the abatement for holding period. Salary activity social contributions of 9.7% (including 6.8% deductible CSG) apply as well as the 10% employee contribution.
- A flat deduction of 500,000€ is granted to executives selling their shares upon retirement as of January 1st The shares must be held for at least one year and be sold by December 31st, 2022. The prior conditions applicable to 2017 no longer apply.
- For U.S. citizens with U.S. source capital gains that are taxed in the U.S. as provided for in the U.S. & French income tax treaty, the U.S. gains should be reported on the French return. In earlier years the technical requirement to report the U.S. gains was often ignored since the gains did not affect the French income taxes. We have included a video in the toolbox which explains different methods you may decide to adopt to report the U.S. gains (if any). Note that application of the 30% PFU standard rate (discussed earlier) no longer allows for an abatement for holding period.
- There are some relief measures, based on the holding period and the category of asset:
- Gains from the sale of securities acquired before September 28, 2012 through the exercise of stock options or share awards programs are taxed under the old regime;
- Gains resulting from cashing out a PEA during the first 5 years of the contract are taxed at 19% after two years or at 22.5% if within two years (PFU will be applicable in some situations starting in 2019);
- Gains taxed at progressive rates are reduced based on the holding period as follows: 50% after 2 years and 65% after 8 years for shares acquired before January 1st 2018
- B. A revision to the law removed the abatement in the case of capital losses. Gross losses will be taken against gross gains, which means that they can be taken against any gains without diminishing the advantage.
- Higher reductions to the capital gains tax are allowable to encourage the creation and development of small and mid-size enterprises (PME) as follows:
- 50% if shares held for at least one year but less than 4 years
- 65% if shares held for at least 4 years but less than 8 years
- 85% if shares held for at least 8 years
- For shares of new PMEs, the tax rate also decreases based on holding period and is more favorable.
- Real estate
- The Radio-TV tax “redevance audiovisuelle” will be the same in 2019 as in 2018: 139€.
- The dwelling tax or “taxe d’habitation” regime related to principal residence only has changed: an adjustment has been introduced which from 2018 to 2020 diminishes and potentially eliminates the “taxe d’habitation” for certain households as a function of household income, as defined by Revenu Fiscal de Reference (RFR) for 2017. Taxpayers who are subject to the IFI are not eligible. For 2018, the adjustment was 30%, for 2019 65%, and for 2020 100%.
- The following thresholds apply for the full adjustment with a prorated adjustment applying up to the phase out amount:
1 part: 27.000€ (phase out = 28.000€) 3.5 parts : 61.000€ ( = 63.000€)
1.5 parts: 35.000€ ( = 36.500€) 4 parts : 67.000€ ( = 69.000€)
2 parts: 43.000€ ( = 45.000€) 4.5 parts : 73.000€ ( = 75.000€)
2.5 parts: 49.000€ ( = 51.000€) 5 parts : 79.000€ ( = 81.000€)
- parts: 000€ ( = 57.000€)
- The “taxe sur les logements vacants” applies to uninhabited residences after one year of vacancy. This tax is 12.5% of the “valeur locative foncière brute” during the first year of taxation and 25% after.
- Real estate tax credits and reductions:
The principal residence Energy Transition Credit- CITE (ex-sustainable development and energy conservation credit) has been extended to December 31, 2019. Total costs are limited to 8.000€ for single taxpayers and 16.000€ for joint taxpayers over a 5-year period. Installation must be handled by an accredited professional provider (RGE).
- The credit for Duflot – Pinel investment is extended to December 31, 2021. The Pinel program replaced the Duflot (ex-Scellier) program with a more flexible regime for real estate investments made after September 1, 2014. As was the case for the Duflot program, in order to qualify, the residence must be new, located in certain specific zones, and the owner must agree to rent the property at 20% below market prices to tenants whose revenues cannot exceed certain limits. The following specific periods and corresponding reduction rate apply:
- 6 years: 12% (36,000€ maximum or 6,000€ per year)
- 9 years: 18% (54,000€ maximum or 6,000€ per year)
- 12 years: 21% (63,000€ maximum or 6,000€ per year for 9 years + 3,000€ per year for the additional 3 years)
Two thresholds apply: the total amount considered for reduction is limited to 300,000€ per year per tax “foyer”, and the amount per square meter is limited to 5,500€.
**As opposed to the Duflot program, the Pinel program does allow the owner to rent to parents or children without losing the tax advantage of the reduction.
The tax reduction is subject to the “niches fiscales” cap mentioned above.
Different rates and thresholds apply to rental properties in the Territoires d’Outre-mer.
(The provision restricting the credit to 80% of the units initially applicable in case of buildings with at least 5 units no longer applies).
- The “Loi Malraux ancien” deduction of expenses in the context of a restoration permit submitted before January 1, 2009 for old buildings in certain zones ended December 31, 2017. For “Loi Malraux” restoration of rental properties in run-down historic neighborhoods is extended to December 31, 2019.
- The “nouveau Malraux” for permits post-January 1, 2009 in certain sectors allows a tax credit for taxpayers committing to a 9-year rental period for certain expenses within a limit of 100,000€ representing 30% of expenses. In case of a net rental loss, this could be taken against global revenue.
- The credit for Censi-Bouvard investment is extended to December 31, 2021.
- The exemption of capital gains on sale of real estate destined for social housing is extended until December 31, 2020.
- Real estate capital gains:
- For French residents and non-residents the rate is 19% + 17.2% CSG/CRDS/ Prélèvements sociaux.
- Surtax of 6% on high gains: real estate gains greater than €50,000 are subject to an additional tax of 2% – 6%. This surtax (progressive based on the amount of the gain) is imposed in addition to the existing capital gains tax of 19% plus 17.2% social charges, after deduction of the exemptions for the holding period. The maximum tax including CSG/CRDS will be 42.2%.
- Real estate gains realized after September 1, 2014 are subject to a uniform tax treatment, whether from the sale of constructible lots or other real property.
Graduated exemption based on holding period:
6% for the 6th through 21st year
4% for the 22nd year
This results in a total exemption after a holding period of 22 years, compared to 30 years previously. For the “prélèvements sociaux”, the exemption based on holding period follows a different schedule resulting in total exemption after 30 years.
- Nonresidents: as of 2014, for nonresidents who sell their residential property in France within 5 years of leaving France, a one-time tax exemption of the capital gain of up to 150,000€ can apply. This exemption has been expanded to include residences that are rental properties. The seller must have lived in France for at least two years continuously. This regime has been modified for sales by nonresidents of their principal residence in France after January 1, 2019 (see below).
2019 French Income Tax Update
- Withholding Prélèvement à la Source (PAS): Since January 1, 2019, taxpayers either have tax withheld (employees) or make estimated payments (others) for both personal income tax and ‘prélèvements sociaux’. The withholding applies to the same taxable basis as previously i.e. after deduction of social charges and before the standard or real expense deduction.
For self-employed individuals or those receiving income from rents or alimony and support payments, the basis for the estimated payments made in year N is the net taxable income from year N-2 for the months of January through August, and from year N-1 for September through December.
- Taxpayers who have household employees will have to withhold personal income tax at source on their employees’ salary starting January 1, 2020. For tax year 2019, the French tax authority will withhold the tax directly on the household employee’s bank account.
- Starting January 1, 2019, PFU is applicable to:
- Capital gains on bitcoins. Taxpayers cannot opt for the progressive rate taxation of capital gains on crypto-currencies.
- Withdrawals on PEA within 5 years of the investment made after January 1, 2019.
€ Article 155B Impatriation Regime: The standard 30% tax-exempt impatriation bonus is now also available for seconded employees assigned by a foreign company to a French company. This new rule applies to wages earned since January 1, 2019, by employees who began working in France from November 16, 2018.
- Nonresidents of France:
- At-source 2020 withholding rates on salaries and pensions paid to nonresidents will be identical to the neutral rates applied by default to residents since the implementation of ‘prélèvement à la source’. This means that the withholding will be computed on salaries and pensions before the application of the 10% standard deduction (as opposed to after the 10% deduction until 2019). The default 0% to 45% progressive tax brackets will apply (as opposed to the specific 0%-12%-20% brackets applicable to nonresidents until 2019).
- Starting January 1, 2019, taxpayers who make a Pinel investment while they were French tax residents can keep on claiming the tax credit AFTER they transfer their tax residence abroad. A 2018 court decision has extended this reform to the credit Scellier investment.
- The taxation of real estate capital gains realized by nonresidents has been reformed. This reform is applicable to sales taking place after January 1, 2019:
- Similar to the regime applicable to French tax residents, the real estate capital gain on the sale of the principal residence in France of a former French tax resident who transferred his or her tax residence outside of France is tax exempt. The sale must occur before December 31 of the year following the year of the transfer of residence.
- The one-time tax exemption of the capital gain on the sale of any residence in France by a nonresident of up to €150,000 remains available. It is applicable to sales that occur on December 31 of the 10th year following the transfer of tax residence outside France (formerly 5th year).
- Both regimes are now in existence. The taxpayer will have to choose the most favorable one depending on his or her specific situation.
2019 – New IFI : Impôt sur la Fortune Immobilière (replaces ISF)
A major change for 2018 was the replacement of the ISF with a wealth tax based essentially on real estate.
The fair market value of real estate on January 1, 2019 is the basis for the wealth tax filing. Other assets are no longer included, with the exception of shares relating specifically to real estate assets held directly or indirectly by the taxpayer. This includes the real estate component of the redeemable value of Assurance Vie contracts. Exemptions maintained for real estate assets related to professional activity and for woodlands, forests and rental agricultural (GFA) shares.
- The threshold for liability to the new IFI wealth tax remains at 1,3M€ of net assets (net of debts related to assets subject to the wealth tax) and tax is payable on assets above 800,000€. The same progressive rates apply as follows:
- 800,000 to 1,300,000 5%
- Over 1,300,000 up to 2,570,000 7%
- Over 2,570,000 to 5,000,000 0%
- Over 5,000,000 to 10,000,000 25%
- Over 10,000,000 5%
- The “actif” for purposes of the IFI is now defined widely in relation to real estate: principal residence, other real estate property, and also encompasses shares in companies or organizations linked to real estate assets. Similarly, deductible “passif” relates specifically to the taxable assets: i.e. loans, taxe foncière. Note that OPCVM shares held via companies holding real estate assets are excluded if the taxpayer’s interest is less than 10% and the company’s total real estate interest is less than 20%.
- The reduction of the tax is limited to 75% of eligible contributions made between the 2018 IFI and the 2019 IFI filing date, within a limit of 50,000€. The ISF-PME reduction is no longer allowed. The IFI reduction may not be greater than the IFI due. If it is, the excess amount is neither reimbursable nor carried forward to a future year.
- Regarding the exoneration of 75% of the value of employer shares if a six-year holding period is respected per the “pacte Dutreil-ISF”: for the ongoing ‘pactes’ on January 1, 2019, we confirm that the six-year holding period needs to be respected even if the ISF has been reformed. The French tax authority could audit past ISF returns if the shares were sold before the end of the holding period. However, reporting obligations have been simplified: taxpayers do not have to provide a yearly statement from the company confirming that they still hold the shares anymore, only one statement is required the last year of the holding period.
- The IFI wealth tax is capped if the total of wealth tax, income tax and ‘prélèvements sociaux’ would exceed 75% of the taxpayer’s net worldwide income realized in the prior year. Any excess wealth tax over that amount is eliminated. The income to take into account when calculating this cap includes income from foreign sources and income from assurance vie accounts.
- There is now a unified declaration process for wealth tax. All taxpayers declare their gross and net assets via the 2042. Annexes contain the detail of the assets. The tax will be collected via assessment in the fall. Taxpayers whose net assets subject to IFI are between 1.3M€ and 2.57M€ need to report the value of both gross and net assets on their French Income Tax Declaration, Form 2042C. As last year, no payment is due with the declaration; a separate ‘Avis d’Imposition pour l’IFI 2019’ will be issued in the fall of this year.
2018 Gift and Inheritance Tax Update
- The highest bracket of the progressive rate scale for gift and inheritance for lineal descendants is 45%. Higher tax rates may apply for transfers to more distant kin.
- The exemption amount for gift/inheritance tax for lineal descendants is €100,000 (lower exemption amounts apply to more distant relationships). The exemption re-sets every 15 years, as opposed to every 10 years previously.
- Regarding the exoneration of 75% of the value of employer shares if a six-year holding period is respected per the “pacte Dutreil-transmission”, the ongoing ‘pactes’ on January 1, 2019, or those signed after January 1, 2019, are subject to a more flexible regime: the ownership threshold for eligibility to the regime is reduced, the owner of a single person company (EURL, SASU) can now enter into such a ‘pacte’, sale of the shares to a holding company is now allowed during the holding period, reporting obligations are simplified.
2018 & 2019 Exit Tax
- Taxpayers transferring their fiscal domicile outside of France from January 1, 2015 are taxed on the unrealized capital gains of their stock (at the progressing rates conforming to the new rules regarding capital gains) if the following applies:
- They lived in France for 6 out the 10 years preceding their departure, AND
- They have stock in one company representing 50% of its net income; OR
- Their total stock in all companies exceeds €800,000. Taxpayers having transferred their fiscal domicile out of France during 2013 may, however, elect to be taxed at the 19% flat tax rate in effect prior to 2013.
- Values of OPCVMs are now included in the taxable base.
- The exit tax can be avoided if the stock is held for 15 years (up from 8 years under the previous law).
- For transfers of domicile that occur after January 1, 2019, the holding period for the securities on which there was an unrealized capital gain is reduced to 2 years (5 years for taxpayers whose wealth subject to exit tax exceeds 2.57M€). The guarantee required by the French tax administration and the filing obligations after the transfer of domicile are simplified.
2019 French Sanctions on Undisclosed Non-French Accounts
- The French government has further defined sanctions in regard to undisclosed foreign assets (bank accounts, assurance vie, stock, trusts, real estate). A 2018 court decision has confirmed the legality of these provisions.
- The amended Finance law for 2018 of December 31, 2017 instituted a standard penalty of 80% on undisclosed Non-French bank accounts, life insurance and trusts and removed other proportional penalties (the latter were expressed as a percentage of the balances held in the different types of account).
There are now two types of sanction:
- All back taxes on taxable amounts in such accounts are subject to a proportional 80% penalty (exclusive of other fixed penalties).
- The 80% penalty cannot be less than fixed penalty per account : i.e. €1,500 to €20,000 (see below)
- Only the fixed penalties of €1.500 to €20.000 (see below) apply if the income or balances of the non-disclosed accounts have otherwise been declared i.e. via income tax or wealth tax declarations.
- Other proportional penalties no longer apply i.e. 5% for life insurance, 12.5% for trusts.
- A penalty of €1,500 per undisclosed account per year for the previous 5 years is applicable if the account is held in a treaty country (€10,000 if the account is held in a country without an agreement allowing the exchange of bank account information).
- In the case of failure to disclose a foreign trust, the sanction is €20,000 per year. Besides, while the 2018 ISF reform which created IFI had reduced the scope of the yearly trust reporting solely to the real estate assets held in trust, the Finance Law for 2019 reinstates the previous rule: all assets and income held in trust have to be reported on a yearly basis by the trustee starting January 1, 2019.
- Income on the undisclosed accounts must be reported on amended income tax returns; back income taxes and social charge contributions (prélèvements sociaux) will be assessed. The ordinary statute of limitations of 3 years can be extended to up to 10 years with respect to the undisclosed accounts.
The tax administration can characterize deposits into the accounts or withdrawals from the accounts as deemed taxable income unless the taxpayer can prove the contrary.
- A penalty of 40% for willful non-compliance will apply. This rate is calculated on the amount of back taxes due (not on the total net assets).
- Interest at the rate of 0.4% per month late will apply. This equals an annual rate of 4.80%.
- The law to fight tax evasion published on December 7, 2013 reinforces applicable sanctions. The maximum penalty is raised to €2M and 7 years in prison in case of organized tax fraud involving several parties, undisclosed foreign bank accounts, false acts, structures, entities or tax domiciliation.
Taking steps to dissimulate foreign bank assets via foreign trusts or other entities or using hidden cash to purchase tangible assets would be considered acts of organized tax fraud.
- Enhanced discovery and enforcement procedures were also included in this law.
- Since June 21, 2013, a regularization program has been established which reduces the above sanctions if the taxpayer meets certain conditions
- Starting January 1, 2020, bitcoin accounts will also have to be reported by individual taxpayers on their annual foreign bank accounts disclosure (Form 3916). A penalty of €750 per undisclosed account per year will be applicable (€1,500 if the account balance is higher than €50,000 at any time during the year).
- Besides the annual reporting by French tax residents of their non-French bank accounts on Form 3916, French banks can ask their clients to fill out auto-certification forms, which typically include questions on tax residence, US citizenship, and taxpayer identification numbers. These forms must be filled out and sent back to the banks. Since November 1, 2018, French banks have the legal obligation to provide the French tax authority with the list of their clients who refuse to provide the requested information.
- A recent law project proposed to reform the procedure to prosecute tax fraud before French criminal courts. The French tax authority will have the obligation to inform French criminal courts of all audits resulting in a €100,000 or more tax, or when certain penalties apply. The court will decide alone whether or not to prosecute cases. New criminal procedures will also applicable to tax delinquents, and penalties will rise. Taxpayers can avoid the application of these procedures by opting for voluntary disclosure.
ANNEX – FATCA & Form 8938 Page 1 of 3
Not everyone is impacted by this legislation. If you AREN’T affected, your 2018 tax return will be very similar to those you have filed in earlier years. If you ARE affected by the new legislation, your 2018 U.S. income tax return will include the form which adds complexity to your tax filing commensurate with the nature and quantity of your specified foreign financial assets.
One of the requirements that came into effect for January 1, 2015 is that now your non-U.S. financial institution will be required to gather information on U.S. citizens (i.e. Social Security Number and address) for purposes of generating any 1099 Forms and filing these with the IRS. Many individuals will have received a request from their bank to complete a W-9 form which assists the financial institution with gathering the necessary information. This form should be completed and returned back to your bank. If you are a U.S. citizen and you receive a W8-Ben form you should not be completing this as it is only applicable for non-U.S. citizens.
The Foreign Tax Compliance Act of 2009 (FATCA) took effect with the 2011 U.S. Individual Income Tax Return. FATCA requires that U.S. Citizens, U.S. resident aliens (Green Card Holders) and in some cases non-resident aliens, report the value of specified foreign assets on Form 8938 that is integrated with the U.S tax return.
The FINcen Form 114 must continue to be filed, as necessary.
The Form 8938 cannot be prepared independently of the 2018 income tax return because the figures reported on the Form 8938 are reported in other places on the U.S. income tax return, and of course the figures must agree. For example, if you are required to file the Form 8938 and you own a French savings account that generates interest income, the interest income needs to be included on the Form 8938 and on the U.S. Income Tax Return Schedule B.
We ask that you determine whether you are subject to the FATCA reporting rules and if so, provide all necessary information. You will find two checklists on our website:
- A checklist for taxpayers NOT subject to the FATCA/Form 8938 reporting rules
2) A checklist for taxpayers who ARE subject to the FATCA/Form 8938 reporting rules
Learning the rules will allow you to stay “within the law” and keep your professional tax preparation fees to a minimum.
Penalties for failing to comply with the FATCA provisions are severe. A $10,000 penalty may be imposed for failure to file a complete and correct Form 8938 with the income tax return. An accuracy related penalty equal to 40% of the under reported income taxes on a transaction involving an undisclosed Specified Foreign Financial Asset (SFFA) may be assessed. Failure to comply with the disclosure requirements may also result in exposure to criminal penalties. The statute of limitations for the tax year will remain open until three years after an accurate Form 8938 is submitted.
ANNEX – FATCA & Form 8938 (continued) Page 2 of 3
The form instructions are complicated. We have posted a link on our website to the Form 8938 and its instructions. If you believe you may be required to file the Form 8938, we ask that you watch a short video (around 10 minutes) found on our website. The video provides a recap of the FATCA rules and offers tips on how to assemble information necessary to prepare the 2018 U.S. income tax return.
Your requirement to file the Form 8938 is determined according to:
1) The filing status of your 2018 U.S. income tax return;
2) Your Country of Residence;
3) The value of your SFFAs at 12/31/2018 and
4) the highest value of your SFFAs at any time during 2018.
Below, you will find a table to help you determine whether you must file the form. For example, if you file the 2018 U.S. income tax return using the “Head of Household” filing status and you live outside of the United States, you must file the Form 8938 if the value of your SFFAs exceeded $300,000 at any time during 2018 or if the value of your SFFAs exceeded $200,000 on 12/31/2018.
|Filing Status||Country of Residence||Value on 12/31/2018||Value Any Time During 2018|
|Single, Married Filing Separately, Head of Household||United States||$50,000||$75,000|
|Married Filing Jointly||United States||$100,000||$150,000|
|Single, Married Filing Separately, Head of Household||Foreign Country||$200,000||$300,000|
|Married Filing Jointly||Foreign Country||$400,000||$600,000|
The form instructions would be more useful if they stated which assets are NOT considered to be SFFAs. As a starting point for establishing which of your assets are SFFAs you can exclude the following:
- S. situs property including assets held by a U.S entity, U.S. partnership, U.S. trust, U.S retirement plan, etc.
- Financial accounts maintained by S. payers or foreign branches and subsidiaries of U.S. financial institutions.
- Foreign real estate (including principal residence, secondary residence, etc.) owned individually OR foreign real estate that is owned within a foreign entity NOT held for investment (an example would be a principal residence owned by an SCI).
- An interest in a foreign government’s social security or social insurance program.
- Tangible personal property owned individually.
ANNEX – FATCA & Form 8938 (continued) Page 3 of 3
If you own property or a beneficial interest in an asset that falls outside the preceding categories you will need to read the Form 8938 instructions in order to clarify whether the asset in question is a SFFA. The following assets are clearly SFFAs:
|· Assurance vie – fonds en euros|
· Assurance vie – unités de compte
· Compte épargne / compte sur
· Compte épargne logement (CEL)
· Compte titres
· Contrat de capitalisation
· FCPI (held outside financial
· Foreign trust
· Livret A
· Livret Développement Durable (LDD)
· Livret Jeune
· Loi Madelin retirement plan
· Other Foreign Pensions
· Ownership in foreign corporation (held outside financial account)
· Ownership in foreign partnership (held outside financial account)
· Vested article 39 French Pension· Articles 83 French Pension
· Plan d’épargne entreprise (PEE)
· Plan d’épargne logement (PEL)
· Plan d’épargne populaire (PEP)
· Plan d’épargne retraite (PER)
· SCPI (held outside financial account)
· Vested stock options and bonus shares
Complicated rules apply to joint ownership in SFFAs. This is particularly troublesome for SFFAs that are considered to be “community property” and which may be reported nominally (by the foreign financial institution) as being the non-resident alien spouse’s account. It is likely that a practical approach for disclosure will need to be adopted in cases where the form instructions are deficient.
Most taxpayers will know by making a quick mental calculation whether or not they are required to file the Form 8938. However, for taxpayers with SFFA valuations on the edge of the limits for filing, it will be necessary to make a definitive calculation. On our website, you’ll find a Form 8938 worksheet that allows you to tally your SFFAs. We have also included an information checklist (tab II of the spreadsheet) that will provide an inventory of documents we will need to prepare the Form 8938, as necessary. Our FATCA video explains how to use the spreadsheet.