Tax in France

Individual income taxation is based on residence. Taxpayers are categorised as residents or non-residents. Treaty rules on tax residence override domestic rules.

Persons of French or foreign nationality are considered residents for tax purposes if their home, principal place of abode, professional activity or center of economic interest is located in France. As a resident, an individual is taxed on worldwide income, subject to applicable treaty exemptions.

Persons not considered resident as defined above are taxed on French-source income only.

A favourable expatriate tax law, which was implemented on 1 January 2004, applies to employees seconded to France. This favourable tax regime provides that under certain conditions, expatriates seconded to France after may not be taxed on compensation items relating to the assignment in France, such as a cost-of-living allowance, housing cost reimbursement and tax equalisation payments. The main condition is that the taxpayer must not have been considered a tax resident of France in any of the five tax years preceding their year of arrival in France.

In addition, up to 20% of the remaining taxable compensation can potentially be excluded if the expatriate performs services outside of France during their assignment (non-French workdays).

Further, local hires (including French nationals) who relocate to France and meet the above residency criteria may benefit from favourable tax treatment under the Impatriate Tax Regime. Employees hired directly by a French company (excluding intra-company transfers) may elect to have 30% of their net remuneration treated as an impatriate premium and thereby exempted from French income tax up to the limit of the French reference net taxable salary (compensation received by other employees with respect to equivalent positions).

The option for the 30% impatriate premium has recently been extended to the following:

• Individuals called by a foreign company to a company in France
• Intra-company transfers

This provision applies to individuals taking up their duties in France on or after 16 November 2018.The exemptions are available until 31 December of the eighth year following the transfer year to France.

A foreign expatriate assigned to the French headquarters (HQ) of a multinational company may be eligible under a HQ ruling for tax relief for up to six years from the assignment date. The principal advantage of a HQ ruling is the elimination of tax-on-tax if the employer reimburses an expatriate for his or her excess foreign tax liability.

Taxable income consists of annual disposable income from all sources. Income is identified based on its nature, and then allowances, deductions and treaty provisions are applied in calculating net taxable income subject to progressive tax rates.

The general principle is that losses from one category of income may offset profit from other categories and may be carried forward for six years. However, this principle is subject to limitations. Certain losses may be offset only against income from the same category of income. These include capital losses on quoted stocks and bonds.

Taxable salary income - The total of all compensation paid by an employer is considered taxable salary income and includes such items as the private-use element of a company car, employer-paid meals and employer-paid education expenses for employees and their dependent children. Taxable compensation does not include the following items paid by employers: certain pension contributions, certain medical insurance premiums and, for resident foreigners and non-residents, home-leave expenses, moving expenses and temporary housing expenses.

Self-employment and business income - Self-employment income is divided into the following three categories, depending on the nature of the activities: commercial (includes trades), professional and agricultural.

Taxable income realised from each category is subject to the progressive tax rates that apply to resident individuals. In addition, a self-employed individual is subject to a flat social tax.

Directors’ fees - Under French internal law, directors’ fees are treated as dividend income.

Directors’ fees paid to non-residents are generally subject to a flat 12.8% withholding tax, unless a tax treaty provision reduces or eliminates the tax.

Investment income - Interest and dividends are taxed at a flat rate of 30% (12.8% income tax and additional social charges of 17.2%). However, taxpayers can elect to be taxed on such income under regular progressive rates if more favourable.

Taxpayers who satisfy certain conditions may benefit from a 50% tax exemption with respect to their foreign-source dividends, interest, royalties, and capital gains (resulting from sale of securities) for a period of five years. Social surtaxes of 17.2% remain payable on the full income.

Net income derived from the rental of real estate and from royalty income (other than for industrial property) is taxed as ordinary income. Royalties from industrial property are taxed at a rate of 33.33%, subject to a possible reduced rate provided in a tax treaty. Income from real estate is subject to income tax plus 17.2% CSG/CRDS and social tax.

Exempt income includes the following:

• Certain profits from the sale of securities
• Family allowances and health care reimbursements
• Payments received pursuant to life insurance contracts (under certain conditions)

Taxation of employer-provided stock options - Exercise gains realised on stock options are subject to full ordinary income tax and employee and employer social security contributions as employment income if either the following circumstances exists:

• The stock options are from nonqualified plans
• The stock options are from qualified plans, and the reporting requirements are not satisfied

Stock option plans that qualify under French corporate law benefit from a favourable tax regime. Foreign plans may be amended to qualify under the French rules.

Capital gains derived from the disposal of shareholdings and real estate are subject to tax in France.

Capital gains realised by a taxable household on the sale of listed or unlisted shares, bonds, or related funds are taxed at a flat rate of 30% (12.8% income tax and 17.2% of CSG/CRDS and additional social charges). In some cases, taxpayers can elect to be taxed at progressive tax rates with a discount based on the holding period if more favourable.

Gains derived from the sale of real property are taxable at a rate of 19%, and are subject to CSG/CRDS and social tax (17.2%), resulting in a combined total tax rate of 36.2%. Gains are reduced for each year that the property is held, effective from the fifth year of ownership (no chargeable gain arises with respect to property owned for 22 years or more for income tax and no charge for CSG/CRDS and social taxes applies after 30 years of ownership). The purchase price is increased to take into account purchase expenses and capital improvements. Effective from 1 January 2013, supplementary tax rates apply to capital gains in excess of €50,000. These supplementary tax rates range from 2% to 6%.

Individuals may benefit from a total exemption for gains derived from the sale of a principal private residence.

Capital losses from the disposal of real estate are final losses and may not be carried forward to offset future capital gains from real estate.

Effective from 1 January 2018, the real estate wealth tax replaced the wealth tax.

The real estate wealth tax is levied on individuals with total net real estate assets exceeding €1,300,000 as of 1 January.

Real estate wealth tax applies to all real estate assets and real estate rights as well as to the shares in companies or other organisations for the fraction of the assets that represent real estate or real estate rights held directly or indirectly.

The following are the progressive rates of real estate wealth tax.

A discount is planned for the taxable wealth included between €1,300,000 and €1,400,000.

French tax residents are taxed on their French and foreign real estate assets. Non-French tax residents are taxed on their French real estate assets only, subject to the application of tax treaties.

In addition, a specific exemption from real estate wealth tax on any assets located outside of France exists for individuals who move their residence from abroad to France and who have not been French tax residents during the preceding five civil years. This measure applies until 31 December of the fifth year following the year of the transfer of the residence in France.

Real estate wealth tax due from a French tax resident can be capped if the total taxes due from the individual exceed 75% of his or her annual income of the preceding year.

French taxpayers liable for real estate wealth tax must indicate their net asset value on the 2042-IFI tax form filed with the annual income tax return. The French tax administration calculates the real estate wealth tax and the amount due must be paid after the receipt of the real estate wealth tax assessment.

An exit tax on restricted categories of income (mainly capital gains) may apply to taxpayers who departed France on or after 3 March 2011 if they own more than 50% of the stocks of a company or have more than €800,000 in shares the day before breaking their French tax residency, and if the taxpayer was a French resident for at least 6 years during the last 10 years. The exit tax on the unrealised capital gain calculated at the date of the tax residency transfer may be due or may be postponed with or without a financial guarantee, depending on the country to which the taxpayer transfers her or his tax residency.

Effective from 1 January 2014, after the departure from France, the taxpayer must hold his or her shares for at least 15 years (for transfers of residence after 1 January 2019, the 15-year period is reduced to 2 years or 5 years if the shares value exceeds €2,570,000). If the taxpayer decides to sell his or her shares before the end of this period, the postponement of the taxation ends, and the taxpayer is taxable on the gains calculated at the departure. The taxpayer must comply with filing obligations, which differ depending on the state and date of the transfer.

If a decedent or donor was resident in France (or if the heir or beneficiary is French tax resident and was French tax resident during 6 years of the 10 past years), tax is payable on gifts and inheritances of worldwide net assets, unless otherwise provided by an applicable double tax treaty. For non-resident decedents or donors, only gifts and inheritances of French assets are taxable, provided the beneficiary is also a non-resident of France.

Various reliefs and exemptions apply.

To provide relief from double inheritance taxes, France has entered into estate tax treaties with 36 countries.

An individual’s social security taxes are withheld monthly by the employer. French social security tax contributions are due on compensation, including bonuses and benefits in kind, earned from performing an activity in France even if paid from a foreign country. However, this rule may be modified by a social security totalization agreement. The total charge for 2023 is approximately 15% to 24% (depending on retirement fund contributions and level of remuneration) of gross salary for employees, and 35% to 47% for employers.

Social security taxes are independent from CSG and CRDS contributions.

Recent legislation has also been enacted which allows for certain employees to opt out of paying French statutory pension contributions. Under certain conditions, employees and their employers can opt out of paying statutory pension contributions for a period of three year that is renewable for three additional years.