The year 2008 will certainly go down in global financial history as a year to remember! At times it seemed that the economic world was changing by the day.
In France, 2008 saw some moderate changes in taxation. France was also affected by the worldwide economic activity with skyhigh food and oil prices pushing up French inflation to its highest in nearly two decades. Here’s a review of some of the main issues.
Tax changes
Wealth tax The reduction in relation to the main home was increased from 20 per cent to 30 per cent and the time limit for making an enquiry into a taxpayer’s wealth tax return (délai de reprise) was reduced from 10 years to 6 years. Both measures applied from 1 January 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 which has now been reduced to 6 years.
Capital gains tax The income tax rate on share gains for residents rose from 16 per cent to 18 per cent and remains liable to social charges of 11 per cent (increasing to 12.1 per cent from 1 January 2009). The annual capital gains tax threshold for shares increased from €20,000 to €25,000 (£16,748 to £20,935) per household from 1 January 2008.
Investment income An increase in tax on investment revenue was proposed to finance a new welfare reform bill known as RSA (le revenu de solidarité active). The new tax of 1.1 per cent comes into force on 1 January 2009 and will be added to the 11 per cent social charge on investment income, bringing the total social charges on investment income to 12.1 per cent.
Since 1 January it is possible to elect to have dividends from investments taxed at a final withholding tax of 18 per cent, applicable on the gross dividend amount. This is an alternative to having them taxed at the French progressive rates of income tax (maximum 40 per cent), with a potential rebate of 40 per cent of the dividend and a fixed deduction of €1,525 (£1,277) – or €3,050 (£2,554) for a married couple – this is only likely to be beneficial if you are a 30 per cent or 40 per cent taxpayer.
The 40 per cent rebate and 18 per cent withholding tax option only apply to dividends from companies that are situated in the EU (or with which France has a tax treaty with an administrative assistance clause) and which are liable to corporate tax or similar.
Incentive income tax rules for incoming professionals – the LME law of 6 August 2008 includes provisions whereby the ‘inbound’s’ tax regime has been improved and now includes passive income. The inbound assignees who benefit from the new inbound regime can also exempt, under certain conditions, 50 per cent of the amount of the following foreign income: interest and dividends; royalties, capital gains and industrial and intellectual property rights arising from a country based in the EU or bound by a treaty containing an administrative assistance provision.
The law LME also introduced incentive tax rules for taxpayers who transfer their tax residency in France after a five-year residence abroad: they will only be subject to French wealth tax on their French-located assets for the first five years.
Double Tax Treaty
France and the UK signed a new Double Tax Treaty on 19 June 2008, to replace the existing treaty, which dates back to 1968. A previous treaty was signed on 28 January 2004 but this will not proceed.
Before the new treaty becomes law, it needs to be ratified by both parliaments. It was hoped that this would have happened in time for the new treaty to come into force in France as early as the tax year starting 1 January 2009 and for the UK tax year 2009/10 starting on 6 April, but as yet (mid- November 2008), it has not yet been ratified by either country.
Savings tax directive
On 1 July 2008 the EU Savings Tax Directive’s (STD) withholding tax rate increased to 20 per cent, up from 15 per cent where it had stood for three years since the introduction of the STD on 1 July 2005. The withholding tax rate will rise again on 1 July 2011, leaping to 35 per cent.
The tax is levied on interest from deposits in an offshore bank account situated in Andorra, Austria, Belgium, British Virgin Islands, Guernsey, Isle of Man, Jersey, Liechtenstein, Luxembourg, Monaco, Switzerland and Turks & Caicos Islands. All other EU Member States, plus Anguilla, Aruba, Gibraltar, Madeira, Montserrat, Netherland Antilles and San Marino apply automatic exchange of information, whereby the tax authority in the country where you reside will be notified of the interest earned and account holders taxed accordingly.
From 1 January 2008, French bank interest for residents is subject to a withholding tax of 18 per cent plus 11 per cent social charges. The minimum tax rate for non-residents on French source income earned in 2007 is 20 per cent.
Interest rates
The European Central Bank (ECB) dropped its interest rate to 3.25 per cent in November. In July it went up to 4.25 per cent from 4 per cent where it had stayed since June 2007. Then in October it was cut to 3.75 per cent before the latest 0.5 per cent drop in November in response to the banking crisis. ECB president, Jean-Claude Trichet, said that the bank would not exclude a further reduction in December.
In the UK, the Bank of England slashed the November interest rate by 1.5 per cent to 3 per cent. In January the interest rate was 5.5 per cent. In February and March it dropped to 5.25 per cent. In April it dropped to 5 per cent until October when it was cut to 4.5 per cent.
Both banks had been trying to curb rising inflation. Now the effects of the credit crises and the need to lower bank rates to boost lending have taken precedence.
Price of oil
The price of oil hit an alarming $147 (£97) a barrel on 11 July. It reached $100 (£66) a barrel for the first time in February. On 12 November it had fallen to just under $60 (£40) a barrel, just short of the price it was at the beginning of 2007.
The price of oil, along with global food shortages, caused a wave of high inflation worldwide. French fishermen and truckers joined others in Europe in protesting against high fuel prices. The fishermen formed blockades in France, which caused French president, Nicolas Sarzoky, to call on the EU to cap the VAT levied on fuel above a certain level. France was handing an extra €150-€170 million (£126- £142 million) in VAT every quarter to the French government since oil prices had rocketed. Sarkozy maintained that the government could utilise this money to lessen the impact on those affected the most due to the fuel price rises.
The EU rejected Sarkozy’s plea. A proposal to this effect would have to be backed by all the member states and could not be introduced unilaterally. The drop in the price of oil is expected to lower inflation.
French inflation
In March inflation in France hit a 17-year high of 3.5 per cent. It dropped back to 3.4 per cent in April then shot to 3.7 per cent in May and 4 per cent in June and July. It then began to come down again, reaching 3 per cent in October (latest figure available).
The ECB’s target rate for inflation is below but close to 2 per cent. France’s inflation was one of the lowest in the 15 Eurozone countries. Energy and food prices were mainly to blame.
Sarkozy said that the price of goods in supermarkets had risen faster in France than in almost all other European countries. ‘I will improve the purchasing power of the French people by obtaining either a decrease in prices or at any rate a controlled rise,’ he said towards the end of April.