France Unveils Plans To Modify Wealth Tax

By Editorial 18 April, 2011

Following a final arbitration meeting, and ending months of uncertainty and speculation, the French government has finally announced details of its plans to profoundly modify the country’s existing system of wealth tax (l’impôt de solidarité sur la fortune – ISF).

Although initially championed by French President Nicolas Sarkozy, plans to completely abolish the controversial tax were eventually renounced given mounting opposition from within the ranks of the president’s own Union for a Popular Movement (UMP) party.

Under the proposals, the entry threshold for wealth tax will rise from EUR800,000 currently to EUR1.3m, exempting around 300,000 individuals from the tax. The tax rates applied are also due to be reduced under the reform plans. For individuals with net assets of between EUR1.3m and EUR3m, a 0.25% tax rate will be applied, and for those with wealth in excess of EUR3m, a 0.5% rate will be imposed. Existing rates currently vary between 0.55% and 1.8%.

In parallel, and very much as anticipated, the government has elected to abolish the tax shield mechanism (le bouclier fiscal) and to remove the cap on wealth tax. Emblematic of President Sarkozy’s era – the measure was strengthened following his election - the tax shield mechanism, seen by many as a symbol of fiscal injustice, currently limits direct taxes in France to 50% of income. This increasingly unpopular device has simply become untenable, however.

Plans to reduce wealth tax and to abolish the tax shield will, however, result in a shortfall in fiscal revenues for the government of an estimated EUR900m, of which EUR300m is as a result of the decision to remove the first tax bracket and EUR600m as a result of plans to lower the tax rates. By way of comparison, the decision to abolish the tax altogether would have led to predicted costs for the government of over EUR3bn.

Determined to compensate for the significant loss in income arising from the reform, the government has confirmed plans to increase inheritance tax for those with large fortunes. Consequently, the top two inheritance tax rates applied to inheritance in excess of EUR4m will rise by 5%. The government also plans to create an exit tax for expatriates, and to toughen existing conditions governing exemption from gift tax for lifetime donations.

Although the government has, for the time being at least, ruled out the idea of introducing an additional top rate of income tax of 45%, it remains to be seen whether it will manage to assert its will in parliament. Plans to impose an annual tax on life assurance contracts have also been dismissed following fierce opposition.

Defending the government’s ISF reform plans, UMP spokesman Jérôme Chartier argued that the proposed reform does not merely represent "a present for the rich". Chartier emphasized the need to create a fair solidarity tax, although not one that it is simply confiscatory.

The reform plans are due to be presented to the council of ministers on May 11, before being examined by the National Assembly and the French Senate in June. It is hoped that the reform will be adopted before mid-July.

Tags: Individuals | Expatriates | Inheritance Tax | Tax | Tax Rates | Gift Tax | France |


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