France Unveils 2011 Finance Bill

by Ulrika Lomas, Tax-News.com, Brussels

04 October 2010

The French Budget Ministry has published key details of the country’s 2011 finance bill, presented recently to the council of ministers, and providing for a “historic reduction” of the public deficit to 6%, for drastic cuts in public spending and for a EUR9.5bn cut in existing tax breaks.

This unprecedented effort to reduce fiscal spending is designed to generate in the region of EUR9.5bn for the government in 2011 and EUR10.5bn in 2012, representing an average saving of EUR10bn over the course of the two-year period. In both 2013 and 2014, the government aims to cut tax shelters by a further EUR3bn.

Defending its decision to implement such dramatic cuts in tax breaks, the government emphasized that the key objective of its 2011 budget is to consolidate the public finances. Not only are cuts in tax breaks preferable to an increase in taxation, but, in terms of fiscal justice, the cuts will serve to reduce current inequalities, it noted. This year alone, fiscal spending on tax breaks represented a shortfall in state revenues of an estimated EUR115bn.

Key fiscal measures contained in the 2011 finance bill are as follows:

Financing pension reform

As part of its proposals for pension reform, the government aims to introduce a 1% contribution on top earners in France as well as on certain income derived from capital.

Consequently, the top rate of income tax is set to rise by 1% from 40% to 41%. The flat rate levy currently imposed on share dividends and on interest from fixed rate investment products, as well as the rate of withholding tax currently levied on dividends paid out by French companies to non-resident individuals will rise by 1%, from 18% to 19%. In addition, the proportional rates applied to capital gains from the sale of transferable securities and to capital gains from real estate will also increase by 1%.

Designed to contribute to financing solidarity measures in the country’s pension system, these contributions will fall outside of the tax shield mechanism (le bouclier fiscal), which limits direct taxes to 50% of income, and are expected to generate around EUR495m in 2011 and EUR610m in 2020.

Certain tax breaks benefiting income from savings, including the dividend tax credit, are to be abolished under the government’s plans. In addition, capital gains derived from securities are to be taxed from the first euro. Businesses in France will also be required to contribute, and the government intends to remove the ceiling currently limiting the share of costs and charges incurred by a parent company for the taxation of dividends paid out to its subsidiaries.

Cuts in fiscal spending

• The government aims to reduce the global tax break threshold (combined tax reduction and tax credit total) by 10%;
• The income tax benefit for newly-weds and for couples getting divorced is to be removed and the system of multiple tax returns abolished. Under the new provision, couples completing income tax returns for 2011 and beyond will be required to chose whether or not to complete two individual tax returns or to submit a joint tax return covering the entire fiscal year. Couples getting divorced will be required to complete two separate income tax declarations;
• The government plans to reduce tax breaks accorded to individuals electing to invest in solar energy production. The tax credit for sustainable development applying to the purchasing of equipment is to be reduced by half. For example, the 50% tax credit for spending on solar panels is due to be reduced to 25%. The tax credit limit is to remain unchanged at EUR8,000 for individuals and EUR16,000 for couples;
• The bill introduces a modification to the value-added tax (VAT) rate levied on “triple play” services (television, telephone and broadband Internet), and the standard rate of 19.6% is to apply. Currently, 50% of the bill for triple play subscribers is taxed at the reduced rate of 5.5%, while the remaining 50% is subject to the standard rate of 19.6%;
• The government aims to modify, or refocus, tax reductions (income and wealth tax) accorded for investment in the capital of small- and medium-sized companies in order to make these more effective;
• Created in 2009, the flat rate levy imposed on interest and participation is to rise to 6%.
• The field of application of the company car tax (la taxe sur les véhicules de société – TVS) is to be modified.

Other measures designed to support the country’s economy

• Regarding homeownership, the government aims to extend the zero rate loan scheme;
• In the area of research, the government plans to continue the system of granting immediate reimbursement of the research tax credit accorded to small- and medium-sized enterprises;
• In the area of agriculture, the tax credit benefiting organic farming is to be extended and modified.

Strengthening financial market regulation:

Determined to draw lessons from the financial crisis, the government is proposing to strengthen financial market regulation of the banking sector by subjecting high risk banking activities to a systemic tax and by increasing the resources allocated to its financial market authority (l’Autorité des marchés financiers – AMF).

The government is expecting economic growth of 1.5% this year, rising to 2% in 2011 and in 2012,2013 and 2014 it is predicted at 2.5%.

Examination of the 2011 budget bill is due to begin in the National Assembly on October 18.

Recommended