France To Move Ahead With Minimum Tax Proposal

by Ulrika Lomas, Tax-News.com, Brussels

31 August 2007

The French government is studying a fresh proposal to introduce a minimum tax in France that aims to prevent individual taxpayers from exploiting loopholes in the existing tax laws to reduce their tax liability.

According to a report by Dow Jones Newswires, a Finance Ministry spokeswoman revealed that the proposal will be presented in a report to parliament some time in the autumn.

The report revealed that the law is designed to stop individuals from deducting various items from their income, such as the employment of domestic staff and real estate investments, and from taking advantage of some 400 loopholes in the tax system to reduce the amount of income tax payable.

It is estimated that such tactics cost the French government EUR45 billion in revenues, and President Nicolas Sarkozy hopes that the minimum tax will help fund a EUR13 billion tax cut package designed to restore more of an investment culture in France. However, two previous attempts at a minimum tax under the previous government failed to get past challenges from the French constitutional court.

Two key proposals contained in Sarkozy's ‘Work, Employment and Buying Power’ (WEB) legislation are designed to encourage investment in the property market through tax relief on mortgages and an increase in the Inheritance Tax Threshold from EUR50,000 to EUR150,000 per parent for each child. It is estimated that with the new changes, as many as 95% of the population of France will no longer pay any Inheritance Tax at all upon the death of their parents.

Initially, the new mortgage tax relief proposal only applied to new mortgages, with a government plan to include existing mortgages in the scheme blocked by a court ruling. This led to a new proposal to double the allowance to 40% of the interest for the first 5 years of loan repayment.

Other measures include the capping of wealth taxes at 50% (down from 60%) in a move designed to send a signal that Sarkozy's new government is more amenable to investors. The reforms would also cut tax on overtime - encouraging more French workers to work beyond the previously politically sacred 35 hour week, as part of plans to make the domestic labour market more flexible and business-friendly - alongside the tax cuts on mortgage interest payments.

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