Some of the changes proposed in France's 2006 Financial Law Bill have implications for non-residents who derive income from within France. Our tax experts in France explain the basics

The 2006 Financial Law Project (Projet de Lois) proposes to simplify the taxation system, primarily through two major changes: the 20 percent abatement that affects salary-earners and those independent taxpayers who submit their declarations via a recognised authority will be scrapped, and be integrated into the system of taxation brackets.

The rates would, under the plan, be reduced by 20 percent and the limits of each bracket increased by 25 percent in order to ensure those revenues that already benefited from the 20 percent abatement remain strictly neutral.

For the same reasons, certain abatement limits would be adjusted. Corrective measures would ensure, however, that the new plan would not create an excessive fiscal advantage for those who did not previously benefit from the 20 percent tax reprieve. These would include, amongst others, a smaller decrease in the top rate of taxation for people on very high income, and an increase in tax on dividends from 50 percent to 60 percent.

From the taxation of 2006 income onwards, the number of brackets in the reckoner will be reduced from seven to five, as follows:

- up to €5515: 0%  
- from €5,515 to EUR 10846: 5.5%  
- from €10,486 to EUR 24 432: 14%
- from €24,432, to €65,559: 30%
- above €65,559: 40% .

Revised Withholding Brackets for 2006

The changes will also affect withholdings: to incorporate the abatement of 20 percent  in the system’s rates, both the minimum rate of tax that non-residents’ incomes from within France are subject to, and the rates and limits of withholdings on the salaries of people who are not fiscally established (domiciled) in France, must be adapted correspondingly.

The rates would be reduced by 20 percent and the limits of the withholding brackets would be increased by 25 percent. The new daily withholding rates would be:

- from €0 to €42: 0%
- from €42 to €122: 12%  
- above €122: 20%  

Taxes capped at 60 percent of income for any one taxpayer (Bouclier Fiscal)

The Financial Law Bill aims to limit the overall tax burden on individuals with a plan dubbed a ‘tax ceiling’. In particular, a flagship scheme will cap at 60 percent of annual income the amount paid by any one individual on a number of taxes to the state (Income Tax and Wealth Tax) and to localised communities (council tax and property taxes on primary residences): rebates can be claimed from 2007 (they will cover eligible taxes paid in 2006, which will include Income Tax calculated on 2005 income).

The income tax rates applicable to any income received in 2006 (therefore declared and taxed in 2007) have been revised.

The brackets are now as follows (they are not definitive):

These rates apply whether the French source income is received by a resident or a non-resident of France. However, for non French residents, the income tax liability cannot be less than 20 percent of the net taxable income. This 20 percent minimum rate does not apply if the tax payer can justify that the average rate which would apply to his worldwide income would be less than 20 percent.

For example, a non French resident receives a net taxable income from French source of EUR 10,000. He is single and has no children.

If the progressive rates were applied to this income, his liability would be EUR 247 ([10,000-5,515]*5.5 percent). However, his income tax liability cannot be less than 20 percent of the net income i.e. EUR 2,000.

The same person has a net French income of EUR 100,000.
 

This is more than 20 percent of the net income (EUR 20,000). Therefore, the final liability will be EUR 28,302.

Note for the self-employed

It is important to note that for the self employed who did not submit their returns via a recognised authority (association de gestion agréée), the net income is increased by 25 percent. For instance, for a net income of EUR 10,000, the taxable income will be EUR 12,500.

September 2006

For more information contact the authors at Deloitte Touche Tohmatsu in France: Patrick Tyrrell, telephone: +33 1 40 88 22 14, Marie-Caroline Meig de Boofzheim, telephone: +33 1 55 61 54 84, Anne Vaucher, telephone: +33 1 55 61 54 56.

Subject: Income tax in France, income tax for non-residents working in France