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French Dividend Tax To Encourage Reinvestment

by Ulrika Lomas,, Brussels

21 June 2012

In a bid to encourage companies to reinvest their profits rather than reward shareholders, the French government is planning to impose a new 3% tax on dividends this summer within the framework of a collective budget to be submitted to parliament in July.

In accordance with the government’s plans, the new tax on dividends will be paid at source by companies distributing payments to their shareholders, and will serve to generate in the region of EUR800m (USD1bn) annually for the state. The tax is predicted to yield approximately EUR300m for the state this year.

Groups receiving dividends from their subsidiaries will be exempt from the new tax, however, provided that they hold more than 5% of the capital.

The government also plans to increase the tax on financial transactions initiated at the end of former French President Nicolas Sarkozy’s five-year term in office, as revenues derived from the levy are not expected to reach the EUR1.1bn initially forecast.

Under Socialist President François Hollande, the left, which obtained an absolute majority in the French National Assembly recently, and which already had a majority in the French Senate, has already unveiled details of an ‘enormous’ raft of tax measures to redress the public finances, primarily targeting savings, wealth and top income earners.

Due to be voted on in July, the supplementary finance bill also provides for the most emblematic measures contained in President Hollande’s election campaign, including the introduction of a 75% rate of income tax, and plans to reform the country’s solidarity tax imposed on wealth (ISF).

Hollande’s aim of reforming ISF includes plans to restore the wealth tax scale of between 0.55% and 1.8%, in place before the former government’s 2011 reform, to be applied on wealth in excess of EUR1.3m. Currently a 0.25% rate is imposed on net taxable wealth in excess of EUR1.3m and 0.5% on net taxable assets above EUR3m.

Despite the legal and technical problems associated with the reform, the government plans to increase ISF from 2012, to be achieved possibly by means of imposing an exceptional wealth tax contribution on taxpayers, akin to the exceptional contribution imposed on top income earners in France at the end of 2011.

To guard against claims that the 75% tax rate is both non progressive and “confiscatory” and therefore unconstitutional, the new President plans to reinstate the so-called “Rocard cap” (plafonnement Rocard), stipulating that the sum of income tax, wealth tax and social contributions (general social contribution and contribution for the repayment of the social security debt) must not exceed 85% of household income.

The new government is also busily preparing for an assault on existing and highly costly tax breaks (niches fiscales) in France to reduce the deficit. In accordance with the President’s campaign programme, the government plans to cap tax breaks at EUR10,000 a year, compared to EUR18,000 plus 4% of income currently.

François Hollande plans to return the public deficit to 3% of gross domestic product (GDP) by the end of 2013, before returning to a balanced budget in 2017.

TAGS: tax | investment | business | capital markets | equity investment | budget | multinationals | controlled foreign corporations (CFC) | France | tax breaks | dividends

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