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French Assembly Adopts Collective Budget Bill

Friday, June 17, 2011

The French National Assembly has voted in favour of the government’s supplementary 2011 finance bill, providing for a reduction in the taxation of wealth (l’impôt de solidarité sur la fortune – ISF) and for the abolition of the highly controversial and increasingly untenable tax shield mechanism (le bouclier fiscal). The bill was adopted by 310 votes to 220.

The government explains in its release that the text provides for wealth tax reform by simplifying the system and by adapting it to economic realities. From 2012, the ISF tax on wealth will comprise of only two tax brackets: a 0.25% tax rate imposed on individuals with net taxable wealth in excess of EUR1.3m and a 0.5% tax rate levied on individuals with net taxable assets above EUR3m.

To alleviate any threshold effects, a discount mechanism is to be instated applicable to wealth of between EUR1.3m and EUR1.4m, as well as to wealth of between EUR3m and EUR3.2m, the government notes. Under the proposals, tax declarations are to be simplified for the majority of taxpayers from 2012.

According to the government, the reform is to be financed by a greater taxation of donations and very large inheritances and by the introduction of a tax imposed on the secondary residences of non-residents, by way of a contribution to national public services from which they benefit.

Under the plans, measures designed to combat international tax evasion are also to be introduced, notably the taxation of trusts and the creation of an “exit tax” on capital gains derived from the sale of significant participations for taxpayers who elect to transfer their fiscal residence abroad.

In accordance with the provisions contained in the bill, the tax shield mechanism, limiting direct taxes in France to 50% of income, which was introduced in France in 2005 and subsequently strengthened in 2007, is to be abolished

Defending the measures contained in the bill, the government emphasized back in May that the aim of the reform is to ensure that the taxation of wealth is fairer, simpler and more economically pertinent. Indeed, the government highlighted at the time that the existing solidarity tax on wealth, which is often considered a French anomaly, merely serves to lessen the attractiveness of France.

Determined to assure the electorate that the reform does not merely constitute a gift to France’s wealthiest, the government has also recently made known its intention to examine the idea of introducing a specific tax on top earners and on banking bonuses, which could be included in the country’s forthcoming 2012 finance bill in the autumn.

The 2011 supplementary finance bill is due to be examined by the Senate from June 21.