Within the framework of the next finance and social security Bill , several reforms are bound to have an impact on taxes in France for non-residents.
Overview of the main measures foreseen:
Exemption of capital gains tax on sale of main residence after departure abroad
As of today, a tax resident in France who sells his main residence is not taxed on the capital gain made on that sale.
However, a non-resident who sells the property that was his main residence before his departure abroad is not exempt from that capital gains tax but can only benefit, under certain conditions, from a one-time tax allowance of €150,000.
The draft Finance Bill for 2019 (PLF 2019) foresees an alignment between the tax systems applicable to residents and non-residents regarding capital gains made on their main residence.
Consequently, a non-resident who sells the property that was his main residence in France at the time of his departure abroad would not be taxed on the capital gains made, subject to the dual condition that:
– The sale was concluded at the latest on December 31st of the year following the year of the tax residence transfer (to another country); and
– The property was not placed at the disposal of a third party, whether for a fee or free of charge, between the transfer of residence and the sale.
Possible exemption of social levies on capital income
Currently, in France, non-residents are subject to social levies (including, in particular, CSG, CRDS and solidarity levy), at the rate of 17.2% on their French-earned income from property and capital gains on real estate.
The draft finance bill on social security for 2019 provides that the people affiliated with a mandatory social security system in another member state of the European Economic Area (EEA) or Switzerland will not be subject to CSG and CRDS in France on capital income but the solidarity levy, whose rate would be increased to 7.5 %, would remain due.
Nevertheless, that exemption would not concern people having established residence outside of the EEA or Switzerland, and who would therefore remain subject to social charges in France on capital income.
Various changes in tax modalities of France-sourced income
The PLF 2019 provides for various measures aimed at bringing the tax system on non-resident income closer in line with the system applied to tax residents in France.
First of all, French-earned salaries, pensions and life annuity rents paid to non-residents are currently subject to a specific deduction at source, partially discharging tax on income, as specified in Article 182A of the French Tax Code (CGI).
As from January 1, 2020, that deduction at source would be eliminated and replaced by a flat, non-discharging deduction at source calculated by applying the tax rate by default used for the withholding tax on resident income.
In addition, starting with taxes on income earned in 2018, the minimum tax rate applicable to France-sourced income of non-residents will rise:
– From 20% to 30% in Metropolitan France; and
– From 14.4% to 25% for income whose source is in the French Overseas Departments (DOM).
Of course, taxpayers can still request the application of the average tax rate to their France-sourced income, resulting from the application of the progressive tax brackets to the whole of their foreign- and France-sourced income, if it is lower than the minimum rate mentioned above.
Lastly, the PLF 2019 provides that, starting with taxes on 2018 income, non-residents can deduct the alimony paid out, on condition that it is taxed in France and that it has not already entitled the taxpayer to a tax break in his Country of residence.
To be continued when voted on in late December…
For the past several months, French legislators (deputies) have sought to implement a tax break on transfers by gift or inheritance.
To this end, last May, legislators introduced a bill mainly aimed at increasing the tax allowance beyond which an inheritance or a gift is taxed, raising it from €100,000 to €159,325.
Those legislators also proposed to apply tax allowances every 10 years instead of every 15 years as is currently the case in effect.
Although the bill has not been voted on, it now seems to have little chance of being passed.
In answering two ministerial questions raised, the French Government expressed its intention of not changing those tax rules.
As per the increase of the current €100,000-allowance, the Ministry of Economy and Finance considers that the amount is “very close to the median net assets of all households, which, according to the INSEE, reached €113,900 per household in early 2015” and “that, on its own, it results in a very large majority of transfers being tax exempt“.
As for the time period related to past gifts, the Ministry considers that the current time period is adequate, and as a reminder points out that “contrary to the sentiment expressed by (public) opinion, over three-fourths of inheritances are exempt from the payment of gift or inheritance tax.”
It is therefore in the best interest of taxpayers with a substantial estate to plan the transfer of their assets to their descendants in advance.
In a ruling dated 13th June 2018 (CE plén. 13-6-2018 n° 395495), the Council of State has finally clarified the notion of an “active holding company,” which it defines as a company: “whose principal activity, in addition to managing a portfolio of investments, is to play an active role in the management of the group’s policy and the running of its subsidiaries and, where relevant and on a strictly internal basis, the provision of specific administrative, legal, accounting, financial and property services.”
Before the 13th June ruling, only the Cour of Cassation have issued a definition of active holding companies. The Council of State’s definition builds on the definition issued by the Cour of Cassation, adding that management must be the company’s “principal” activity.
As such, companies with non-controlling minority shares in businesses may qualify for “active holding company” status.
Furthermore, the Council of State mentions a certain number of factual elements to be used to prove “active holding” status, notably including:
– Minutes from meetings of the company’s board of directors attesting their involvement in the management of their subsidiaries’ policies; or else
– The existence of a contract for administrative and strategy and development support, specifying that the holding company will play an active role in the strategy and development of its subsidiaries, without compromising their respective autonomy as legal entities.
In the terms of article 219, I-a quinquies of the French Tax Code (CGI), the quasi-exemption regime for long-term capital gains is applicable to shares held for at least two years, which:
– Have, in accounting terms, the nature of equity securities, whether they are entitled, or not, to the parent companies’ tax regime; and
– Are entitled to the regime of the parent companies and subsidiaries (CGI, article 145) without having, on the accounting level, the nature of equity securities subject to the shares being recorded in a special subdivision of a balance sheet and subject to representing at least 5% of the distributing company’s capital.
In accounting terms, equity securities are those whose lasting ownership is considered useful to the activities of the company, notably because they enable the company to exercise control or influence over the company issuing the shares.
In principle, the usefulness of lasting ownership of transferred shares can be characterized by the existence of a shareholders’ agreement.
In the case judged by the Council of State, it was considered, quite to the contrary, that such was plainly not the case as the agreement established that the shareholders were solely pursuing the objective of financial returns. In this instance, neither the intent to exercise influence over the issuing company nor the intent to ensure its control was therefore characterized by this agreement.
Moreover, regarding the condition of holding at least 5%, the Council of State specified that the percentage had to be assessed based on the date of the event having generated the tax, i.e. regarding capital gain on transfer, on the date of that transfer, and not in a continuous manner over a 2-year period.
According to Article 155, IV of the French Tax Code, LMP status is granted to taxpayers:
– Whose annual income, derived from said activity by the members of their tax household, is over € 23,000 and exceeds their tax household’s professional revenues; and
– Whose tax household has one member registered in the Trade Register as a professional landlord.
As a relieving measure, the French tax authorities granted LMP status to individuals who were not registered in the Trade Register simply due to the Register’s refusal based on the non-commercial nature of the activity, so long as those individuals could provide proof of the reason for said refusal.
In ruling n°2017-689 QPC dated February 8, 2018, the Constitutional Council overturned the obligation for registration in the Trade Register, considering that the aforementioned obligation ignored the principle of equality of public burdens.
As such, only the conditions pertaining to income derived from the activity as a furnished rental property landlord remain necessary for qualifying the activity as professional in nature, or not.