MANDATORY
LEVIES ON
HOUSEHOLD
CAPITAL
Summary
January 2018
Council of Mandatory Contributions
g
DISCLAIMER
This document is designed to help readers more easily read
and use the Council of Mandatory Contributions’ report. Only
the report is binding upon the Council.
CONTENTS
3
Summary - Council of Mandatory Contributions
Introduction
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5
1
The six main taxes focused on asset holdings and their real
estate component . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7
2
Economic and social issues not sufficiently taken into account
by the taxation system . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15
3
Possible adaptation of the taxation of capital . . . . . . . . . . . . . . . . .23
Conclusion and points for possible adaptation
. . . . . . . . . . . . .31
INTRODUCTION
At end 2015, the net capital of French households was close to €11,000 billion
compared with €5,000 billion in 2000, or an increase of nearly 71% excluding
inflation. In 15 years, wealth grew faster than household income, which rose by only
17%. The wealth of households, net of debt, also increased from 5.6 years of
disposable income in 2000 to 8.3 years in 2015.
Until 31 December 2017, taxation on household capital has comprised
six main
taxes levied on asset holdings
– the real property tax and the solidarity tax on
wealth–,
and the revenues they generate
– subject to income tax and social security
contributions –
as well as on its transfer
, whether free of charge (inheritance and gift tax)
or for valuable consideration (disposals).
The budgetary return
of taxes on household capital stood at
€80bn in 2016,
or 3.6% of GDP
, up by 0.6% of GDP from 2006
.
Breakdown of the yield from taxation on household capital (2016)
Source: Social Security Department, Tax Legislation Department and Budget Department.
PCG: property capital gains; CGM: capital gains on movable assets
5
Summary - Council of Mandatory Contributions
Eight years after publishing a report entitled “Household Wealth” (2009), the
Council of Mandatory Contributions focused its research in 2017 on the
taxation of household capital.
This study focuses on all taxes and social contributions levied on holdings,
financial income and the transfer of elements of household capital. Taxes paid
by firms on their capital are not included in the analysis. Neither does this
report cover the residence tax or levies on self-employed persons
1
.
1
See the CPO’s March 2008 report, “Mandatory levies on self-employed persons”
Property tax
Social contributions
Property
transfer tax
Gift tax
ISF
wealth
tax
Capital
gains on
movable
assets
(PVM)
Property
capital gains
(PVI)
Taxation
of income
from real
property
Taxation
of income
from
movable
property
The Council of Mandatory Contributions has sought to determine whether the
system of taxation on household capital is sufficiently in line with its objectives.
These taxes pursue many and sometimes unclear objectives, which can appear in
contradiction. If these taxes have traditionally been assigned the dual objective of yield
and equity through redistribution mechanisms, taxation methods are made more
complex by the pursuit of other objectives such as encouraging taxpayers to participate in
corporate financing, protecting personal savings, support for real estate ownership, support
for investment on the rental market, attracting foreign capital and facilitating the transfer
of companies within the family.
The analysis examines the impact of the system of taxation on household capital,
focusing on three themes: orienting the household savings towards firms, in
particular through equity investment; reducing wealth inequality against the
backdrop of relatively sluggish growth in terms of GDP, prices and wages; and taking
demographic changes into account, foremost among which is an increase in life
expectancy.
* *
*
The finance act for 2018 includes two major reforms on the taxation of household capital:
1.
The methods of taxation of income from movable assets are simplified by the
introduction of a flat rate tax (PFU)
applied to income from movable capital and gains on
movable property (income from real property and capital gains on real estate are not
included). Its rate of 30 % comprises 17.2% from social security contributions and 12.8%
from income tax. In addition to the fixed nature of the rate, the reform’s goal of
simplification translates to the abolition of several dispensatory regimes. According to prior
assessment of the draft finance act for 2018, this reform translates, under prevailing conditions,
to a loss of earnings of €1.9bn for public finances.
2.
The solidarity tax on wealth is replaced by a tax on real estate wealth (IFI)
which, with
the same scale and triggering threshold (€1 300 000) as the ISF wealth tax, applies to real
estate assets held by the tax household, with the exception of those allocated to the
professional activity of their owner. The 30% allowance on the primary residence is
maintained, as are the partial exemptions that apply, subject to conditions, to woodland,
forests and certain agricultural assets (shares in agricultural land management groups,
etc.) and the 75% tax deduction on charitable donations. The budgetary performance of the
new tax is estimated at €850m based on the prior assessment of the finance act for 2018.
The report limits itself to describing, in a factual manner and wherever necessary, the new
provisions introduced by the finance act.
Summary - Council of Mandatory Contributions
6
7
Summary - Council of Mandatory Contributions
1
The six main taxes focused on
asset holdings and their real estate
component
Taxes on capital (households and
companies combined) in France
amount to 10.8% of GDP
.
France is one of the EU member states
in which taxation on capital is the
highest, 2.4 GDP points higher than the
European average
(8.4%). The difference
in comparison with Germany is 4.5
GDP
points.
Share of taxation on capital - households and companies - in GDP
in the EU in 2015
Source: Taxation trends in the EU, 2017
Reading: Taxation on capital (households and companies) represented 9.5% of the United Kingdom’s GDP in
2015
For households alone, taxes on the stock
of capital accounted for 4.3% of GDP
(50% higher than the European average
of 2.8%). Taxation on income from assets
reached 1.8 % of the GDP (the EU
average is 1.1%).
France is also among the countries with the
highest taxation of real estate transactions
(1.1% of the GDP in 2015 compared to
the 0.4% average in OECD countries).
Similarly, inheritance and gift taxes
represent 1.2% of mandatory levies in
France, compared to the 0.34% average
in OECD countries.
From 2006 to 2015, the share of taxation
on capital in France’s GDP remained
relatively stable, after a sharp increase
over the previous decade (1995-2006).
These taxes accounted for 10.6 % of GDP
in 2006; then, their share in GDP fell from
2006 to 2009 to stabilise at 9.4 %, before
rising again over the 2010-2013 period to
reach 10.8%.
Italy
France
Luxembourg
Belgium
United Kingdom
Malta
Cyprus
Denmark
Greece
Spain
Portugal
Poland
Austria
Finland
Sweden
Germany
the Netherlands
Ireland
Czech Republic
Slovakia
Hungary
Romania
Bulgaria
Lithuania
Croatia
Slovenia
Latvia
Estonia
EU (28)
Euro zone (19)
% of GDP
The six main taxes focused on asset holdings
and their real estate component
The gap between France and other
European countries can be explained in
part by a higher share from mandatory
levies in the GDP.
In France, taxation of capital (households
and companies) accounts for
23.5% of
Summary - Council of Mandatory Contributions
8
mandatory levies, compared with the
European average of 21.6%.
Until end 2017, the French system of
taxation
on
household
capital
comprised six main taxes for an
overall yield of €80bn per year.
Simplified schema of the architecture of taxation on household capital
Source: Special rapporteurs, DLF and the Budget Department. 2016 yield excluding real property taxes, both
TFPB (built property tax) and TFPNB (land property tax): 2015 yield. Yield from the ISF wealth tax and the
gift tax are based on an estimation for 2016
Holding
Total wealth
€4.6bn
€20.1bn
€12.7bn
€10.6bn
(property
transfer tax)
€12.8bn
(gift tax)
€19.4bn
Total wealth after allowance
ISF wealth tax
Built/unbuilt property tax
Social contributions +
income tax or specific regime
Social contributions + income tax based on
holding period
For securities: social contributions + income tax
after allowance
For disposals of companies: social contributions +
income tax after increased allowance
For gifts and successions: gift tax
For life insurance: exemption or flat tax rate
after allowance or inheritance tax after allowance
For the acquirer: property transfer tax
Notional rent value of furnished
assets
Actual rent
Capital gains from disposal net of fees
(latent property capital gains for the Exit Tax)
Capital gains
(excluding main residence)
Purchase price of asset
Wealth transferred by heir
Tax base
Taxation methods
2016 yield
Tax
social contributions
Real estate wealth
Real estate income
Income from
movable property
Disposals of
movable property
Disposals of real
property
Property transfer
Gifts and
successions
Income and
capital gains
Transfer
Dividends and products distributed
Income from life insurance
Income from share savings plans (PEA)
Income from capital investment funds (FIP, FCP and FCPR)
Income from employee shareholding
Income from employee savings schemes
Interests, coupons and other fixed-rate investment
products
Regulated savings products (Livret A, LDD, PEL,
Livret jeune, CEL, LEP)
Social contributions + income tax
Social contributions + income tax or withholding tax according to date of subscription
Social contributions + withholding tax according to date of subscription
Social contributions + exemption if holding period > 5 years
Social contributions + income tax or withholding tax based on date of a tribution
Social contributions + exemption if placed in a company savings plan > 5 years and PERCO until retirement
Social contributions + income tax + withholding tax
(if interests <€2,000)
Exemption (only social contributions for home ownership savings
plans and accounts)
The six main taxes focused on asset holdings
and their real estate component
9
Summary - Council of Mandatory Contributions
The composition of household wealth
The net wealth of households stood at €10,692bn at end 2015, while it was only €4 928 bn
in 2000 (in current euros). The average net capital per household rose from €202 000 in 2000
to €361,000 in 2013.
This growth can be attributed mainly to the
sharp rise in real estate prices
between 1995 and 2007. Non-financial wealth multiplied by 2.3 between 2000 and 2007,
rising from €2,946bn to €6 789 bn, while financial wealth stagnated over the same period.
Evolution of wealth in years of net disposable income
These include income tax (IR) and
social security contributions (PS) for
the taxation of capital income, gift tax
(DMTG) on inheritances and donations)
and property transfer tax (DMTO), real
property taxes on land and buildings, and
the solidarity tax on wealth (ISF).
The
majority
of
taxes
are
levied
exclusively on household capital, but
certain taxes – mainly the real property
tax and the property transfer tax – are
also paid by firms.
Source: France Stratégie, based on national accounts Insee
Source: DGFIP and CPO
Reading: For income from capital subject to income tax, yield calculated based on the average rate.
The taxes paid by households represent 0.8% of their net wealth and 46% of the
income it generates
.
Total wealth
net of debt
Total net non-
financial wealth
Total financial
wealth
Taxation
Income tax
Social contribution
Gift tax
Property transfer tax
Real property tax
Wealth tax
Total
Yield
12.7
19.4
12.8
10.6
20.1
4.6
80
Summary - Council of Mandatory Contributions
10
Distribution by authorities of taxes levied on
household capital in 2016
Source: CPO
An increased yield and relative share
due to the rise in the real property tax
and in social contributions
Between 2006 and 2016, the yield from
taxation on household capital rose from
3.0% to 3.6% of GDP
(from €55.7bn to
€80bn), increasing more rapidly than the
other mandatory levies: their share in the
overall yield rose from 7.0% to 8.1%.
Changes in the return of taxation on household capital
between 2006 and 2016 (in billions of euros)
Today, nearly a quarter of taxes on
household capital are used to finance
social security. The remaining three
quarters serve to finance government
expenditures (39%) and those of local
authorities (37%): the latter receive the
property tax and the majority of the
property transfer tax.
The share assigned to local authorities —
35% in 2006 — has increased over the past
10 years, primarily under the effect of the
increase in the real property tax.
Source: CPO
The six main taxes focused on asset holdings
and their real estate component
The increases in the ownership tax
(+€9bn over the period, or +82%), social
security
contributions
(+€6.3bn,
or
+48%) and gift taxes (+€4.5bn, or +55%)
account for four-fifths of the increase
seen between 2006 and 2016. The
remaining portion is due to the increase in
property transfer duties (+€1.8bn, or
+20%) and the ISF wealth tax (+€1.7 bn,
or +52%).
Property income tax
Income tax on
moveable capital
Income tax on capital gains
from movable property
Income tax on property
capital gains
Total income tax
Social contributions
Real property tax -households
Property transfer tax -households
Gift tax
ISF wealth tax
25.0
20.0
15.0
10.0
5.0
0.0
Sécurité
sociale
24%
Government
24%
Local
authorities
34%
11
Summary - Council of Mandatory Contributions
Taxes are levied more on the stock of
capital than on its income, due to the
weight of the real property tax
Taxes
on
income
from
capital
represent 40% of the overall figure
(€32bn),
compared
with
31%
for
holding
(€25bn)
and
29%
for
transmission (€23bn). Between 2006
and 2016, the relative share of taxes on
income from capital declined (from 43%
to 40%), as did the share of taxes on
wealth transfer (from 32% to 30 %),
while the share of taxes on holding
increased (from 24% to 30%).
Th
e French tax system taxes the stock
of household capital at a higher rate
than the income it generates,
primarily
due to the
weight of the real property tax,
which alone represents nearly 1 GDP point
(1.5
including the property tax paid by
firms).
2/3 of taxes levied on household
capital apply to the real estate tax
base
Around €50bn of the total yield of
€80bn is collected from the real estate
tax base
and €30bn on financial assets.
Taxation
on
real
estate
focuses
primarily on the stock of wealth
. In
fact, the real property tax, the gift tax
and the ISF wealth tax account for 55%
(or €28 bn) of the total yield of these
taxes. Taxes on income from real estate
assets generate 25% of taxes levied on
household real estate. Property transfer
taxes on real estate sales account for the
remaining 20%.
The reverse is true of taxes on the
movable capital of households, two
thirds of which are calculated based on
revenues
: income from movable capital
(€13.2 bn) and capital gains on movable
assets (€4.8bn). Taxes on the stock of
financial
capital
account
for
the
remaining third, the share of property
transfer taxes on the sale of elements of
movable wealth being residual.
The drop in yield after taxes on wealth
and the income it generates, seen over
the past 15 years, is parallel to that of
before-tax yield and attributable to the
specific trend in asset yields and, even
more so, to the decline in conservative
bond rates.
Taxes on household capital can be divided into
three categories according to their taxable
event: financial income, transmission or
capital holdings. Each category includes two
taxes: respectively, income tax and social
security contributions; DMTG and DMTO; and
ownership taxes and ISF.
The six main taxes focused on asset holdings
and their real estate component
Source: CPO, based on DGFIP data, Insee, social
security accounts. Note: for taxation on income, the
conservative estimate of income tax on capital is used
(assuming that the share of income from capital in
income tax post-2012 is constant and equal to its level
in 2011).
Comparative yield from household
wealth and inflation between
2001 and 2015
Before tax
After wealth tax
After wealth tax and income from wealth
Inflation
6.0%
5.0%
4.0%
3.0%
2.0%
1.0%
0.0%
Summary - Council of Mandatory Contributions
12
The six main taxes focused on asset holdings
and their real estate component
The rules of territoriality for the
taxation of capital take the increasing
mobility of capital into account
Assets held abroad by French residents
are not exempt from taxation
Taxation on capital considered excessive
by the taxpayer may play a role in his or her
decision to expatriate. However, fewer
residents subject to the ISF wealth tax
choose to relocate outside France than
do those subject to high-rate income tax.
The automatic exchange of information,
which became effective in September
2017, will enable the tax administration
to tax assets held abroad by French
residents in a more efficient manner.
The implementation over a four-year
period (June 2013 - December 2017) of
a state department for processing
corrective tax declarations (STDR)
voluntarily submitted by
taxpayers
with undeclared foreign assets has
boosted the number of foreign assets
that are declared and taxed in France.
Source: Based on DGFIP data
Trend in the number of departures of taxpayers subject to income tax
and their average reference tax income
Taxation of residents’
foreign-held assets
Persons having their tax residence in France are subject to income tax and social contributions on
all their income, regardless of the source. They are also subject to the ISF wealth tax on all
their assets, whether they are situated in France or abroad. The gift tax applies to all the
assets that comprise the wealth of the deceased person or the donor whose tax
residence is located in France, including assets held abroad, regardless of the country of
residence of the heir or the beneficiary.
However, real property taxes apply only to assets located in France: properties held abroad are not
subject to them. Similarly, property transfer taxes are, in principle, payable only for transactions
carried out in France and the assets located there: if a taxpayer domiciled in France sells an asset
located abroad, this does not give rise to transfer duties, but to the taxation of any capital gains
within the framework of tax treaties in force.
Average reference tax income
of expatriated taxpayers in N-1
Average reference tax income
of all tax base in N-1
Number of expatriated
taxpayers + total number of
taxpayers in N-1 (right scale)
€60,000
€50,000
€40,000
€30,000
€20,000
€10,000
€0
0.14%
0.12%
0.10%
0.08%
0.06%
0.04%
0.02%
0.00%
Summary - Council of Mandatory Contributions
13
The six main taxes focused on asset holdings
and their real estate component
Assets held in France by non-residents
are subject to specific tax rules
intended to make financial investment
more attractive.
Real estate assets held in France by
non-residents
are
taxed
under
conditions similar to those of common
law, while
taxes on their financial assets
are levied under more incentivizing
conditions:
n
they are exempt from the ISF wealth
tax (contrary to their real estate
investments);
n
their income from movable assets and
their gains on transferable securities
and interests are not subject to social
contributions
and
the
interests
collected are exempt from income
tax, except when they are paid in a
non-cooperative country or territory;
n
dividends and other products of
French origin are subject to a final
withholding tax, at the rate of 21%
when the taxpayer resides in the EU or
the EEA and of 30 % in all other cases
(a reduced rate is often provided by tax
treaties);
n
capital gains on movable property
are exempt, except when the
assignee’s
participation
has
exceeded, over the past five years,
25% of share capital in the French
company whose securities he or
she is selling, in which case a tax
rate of 45% is applied.
Above
and
beyond
the
level
of
taxation,
the
complexity
and
instability of tax rules applied to non-
residents is likely to make the French
territory less attractive to foreign
investors.
The specific regimes applicable in the event of a transfer of permanent residence
to France or outside France: inpatriation and the exit tax
In order to favour the “inpatriation” in France of employees from abroad
(and who have
worked outside France for the five preceding years), lawmakers introduced a
dispensatory
scheme
which offers temporary exemption from income tax on the portion of wages
generated by activity carried out abroad. Since the Economic Modernisation Act of 4 August
2008, this has included an exemption for a period of five years from the ISF wealth tax on
the foreign-held assets. In addition, “inpatriates” are eligible for a reduction of 50% on the
amount of their income from movable capital and capital gains on movable property held
abroad. While certainly attractive, this scheme remains less advantageous than provisions
offered by certain countries that seek to attract high net worth foreigners through tax
competition, such as the non-residents regime in the United Kingdom (non-taxation of
foreign income not repatriated to the United Kingdom), the tax on expenditures in
Switzerland and the non-domiciled resident regime in Italy.
In the opposite situation (the transfer of domicile to another country outside France
), the
law provides an “exit tax” scheme
in order to avoid the loss of a taxable base
: pursuant to
Article 167 bis of the General Tax Code, transfer of the tax domicile triggers the immediate
application of income tax and social contributions to latent gains on movable property,
based on the size of participating interests held. A deferment of payment, by right and
without collateralisation, is granted when the taxpayer transfers his or her main residence
to another EU member state or to a state party to the EEA agreement and having signed
with France a convention on mutual administrative assistance in tax matters.
15
2
Economic and social
issues not sufficiently
taken into account by
the taxation system
Summary - Council of Mandatory Contributions
A comparison of taxation on household
capital in France and abroad points to a
number of similarities and differences
France shares with its neighbours a
number of methods of taxing the stock
of wealth and assets
. Hence, the
difficulty
of
keeping
property
assessment bases up to date is not
specific to France: Germany, Austria,
Luxembourg also retain historical values
dating back several decades. As regards
inheritance and gift tax, the vast majority of
countries apply different rates to direct-
line successions and to those outside the
direct line (only Anglo-Saxon countries
do
not
employ
this
distinction).
Favourable tax measures are often
applied to the transfer of companies.
Taxes on the stock of wealth are
marked by two main characteristics:
n
Real property taxes
2
are high in
France
: while they represent on
average 3.3% of mandatory levies in
OECD countries, in France they
account for nearly 6% of mandatory
levies, which are themselves higher
than those in the rest of the OECD.
This figure does include taxes paid
by firms, but around 75% of French
real property taxes would apply
exclusively to households in 2015,
compared with 67% in Belgium, 60 %
in the Netherlands, 51% in the United
Kingdom and 40% in Germany and
Sweden;
n
while the
taxation of net global
wealth
was
practised
by
14 European countries until the early
1990s,
it
has
become
far
less
common: apart from France, where
the ISF wealth tax was applied until
end 2017, it is still practised in
Switzerland, Norway and Spain. Its yield
is determined in large part by the
triggering
threshold:
in
countries
where the tax base is large due to a
low
threshold
(Switzerland),
it
accounts for more than 1% of
mandatory levies, while in France,
where the threshold is high, it
represents only 0.5%.
With regard to real estate sales, France
also applies a higher taxation rate
than
the OECD average. The property transfer
tax represents 0.65% of GDP (2015)
compared with the 0.4% average in
OECD countries, even if their share in
GDP is even higher in Belgium, Italy, the
United Kingdom and Spain.
2
The statistics presented, established by the OECD, take into account all property taxes whether they are
paid by the landlord or the tenant, a private individual or a firm.
Moreover,
the difference in tax treatment
between an unfurnished rental
(taxed as
property income)
and a non-professional
furnished rental
(taxed on industrial and
commercial profits), unique to France,
creates a distortion: the possibility of
depreciating the asset for tax purposes
boosts the profitability of a furnished
rental investment property, with average
profitability at around 4%, compared
with 2% for an unfurnished rental.
The tax benefits applicable to income
from capital are lacking in consistency
and have not been thoroughly assessed.
Their
economic
impact
generates
distortions
that
can
cause
the
profitability of an investment to vary
greatly. Moreover:
n
the tax regime for
employee savings
schemes
(total
outstandings
of
€90bn, tax expenditure of €1.9bn and
social expenditure of €0.5 bn)
seems
to use these benefits more as an
alternative method of remuneration
than an instrument for financing the
economy
;
n
the
employee shareholder social
insurance
scheme (stock-options,
free share allocation) may create
substitution effects between labour
costs and capital return;
n
the
tax
benefits
on
financial
investments fail to direct household
savings
towards
financing
the
economy.
Thus, the total amount
outstanding in share savings plans
declined by a third between 2007 and
2016 to €80 bn; the flows of annual
investments in SMEs and innovative
companies remain limited (€1.9 bn in
2017), with the global cost of tax
benefits at €0.75 bn
3
;
Economic and social issues not sufficiently
taken into account by the taxation system
France is also unique in its methods of
taxing income from household capital
:
n
juntil the end of 2017, a proportional
tax (social contributions) and a
progressive tax on the income tax
scale together determined taxation
of income from movable property in
France,
whereas our neighbours
prefer taxation proportional to this
income;
n
taxation is, in large part, designed
to
direct
household
savings
towards certain areas.
The consequence is a fragmented tax
landscape in France, marked by the
juxtaposition
of
many
special
provisions and dispensations, with a
central
position occupied by life
insurance and regulated savings. If
certain foreign tax systems offer fiscally
advantageous savings products (the
United Kingdom via
the International
Savings Account
, Ireland with the
Prize
Bonds
, and Belgium), no other country
offers such a wide range of schemes.
A complex taxation system that lacks
logical coherence
The same elements of real estate
wealth are valued differently according
to the tax.
Real estate holdings are taxed on two
separate tax bases
. While the gift tax
and the ISF wealth tax are levied on the
net market value of assets, the property
tax is calculated based on historical
rental
value,
which
is
meant
to
correspond to the imputed rent of the
dwelling. However, these values have
not been updated since 1970 for built
property and since 1960 for unbuilt
property.
Summary - Council of Mandatory Contributions
16
3
Tax benefits serve, moreover, to remunerate management intermediaries.
Summary - Council of Mandatory Contributions
17
Economic and social issues not sufficiently
taken into account by the taxation system
n
schemes
aimed
at
long-term
holding are based on the age of
contracts rather than the length of
time the underlying assets have
been held:
it is enough to “
mark the
date
”
when
taking
out
a
life
insurance contract to benefit from
the
tax
reduction.
The
tax
exemption is granted based on the
term of the share savings plan and
not on the length of time the
securities were held.
The tax system offers more incentive
for conservative savings than for risky
savings
. taxes on regulated, non-risky
and liquid savings are low or nonexistent.
Taxes
on unit-linked life insurance
plans remain identical whether funds
are in accumulation units or in euros,
The case of regulated savings
Savers have access to a range of regulated savings products that are liquid and
guaranteed by the state, with interest rates fixed by regulations and exemption from
social contributions and income tax. With total outstandings of €420bn, these products
accounted for 10% of households’ financial savings at the beginning of 2017, thanks to
a rise in the deposit ceilings in 2013 at the expense of open investment.
The regulated savings ceiling exceeds the level of precautionary savings and the
savings capacity of low-income households, as well as the funding needs for social
housing.
The trends observed indicate that regulated savings products are used in part for long-
term savings, a purpose to which they are poorly adapted.
Changes in the bank savings of households since 1999 (in billions of euros)
Source: CPO based on Banque de France data
although the risk lies with the insured in
the former and not in the latter.
Intermediated investment is favoured
over direct holding
of the same assets.
Hence, bonds held through life insurance
give rise to a post-tax yield three times
higher than would those held directly.
The
objective
of
taxation
on
life
insurance
is
“to
encourage
the
development of
individual long-term
savings in order to contribute to
corporate financing”
. Yet, due in large
part to the absence of regulatory
investment requirements, and despite
historically low rates, only 15.5% of life
insurance
investments
participate
in
corporate financing (compared with 24%
for pension funds).
Fixed-term deposits
Ordinary savings account
Deposit account
PEP
PEL
CEL
Livret jeune
LEP
LA, LDDS and livrets bleus
1,600
1,400
1,200
1,000
800
600
400
200
January 99
January 00
January 01
January 02
January 03
January 04
January 05
January 06
January 07
January 08
January 09
January 10
January 11
January 12
January 13
January 14
January 15
January 16
January 17
from rents payable (traditional “Borloo”
and “Robien”
incentives),
or
a
tax
reduction on the costs of acquiring the
property (newer “Scellier” and “Pinel”
incentives). They represented over
twenty tax exemptions at a cost of
€1.84bn in 2016.
If these tax measures have facilitated
the decision to invest, they have also
had an inflationary effect on the real
estate market. Moreover, the fixing of
rent
ceilings
can
create
windfall
effects (for example, the zoning of the
Pinel scheme results in ceilings being
unfavourable in the areas under the
most pressure and less restricting in
low-pressure areas, which investors
prefer).
Taxation on property transactions can
result in a higher rate of retention
. At
the time of a real estate sale, the total
transaction costs (property transfer tax
and other fees, including those at the
expense of the seller) are 14% in France,
the second highest rate in the OECD
(after Belgium). These transfer duties
increase the sale price of a real estate
asset by nearly 5.8%.
The high number of tax and social
contribution
expenditures
is
in
opposition to the broad-based, low-
rate taxation model
The tax
and
social
contribution
expenditures
associated
with
taxation on capital amount to over
€21bn per year
, or a quarter of their
yield. The taxation of income from
capital alone represents 84 % of these
expenditures, or a tax expenditure of
€14.1 bn and a social contribution
expenditure of €3.6bn.
Economic and social issues not sufficiently
taken into account by the taxation system
Summary - Council of Mandatory Contributions
18
Finally, although one of the motivations
expressed in favour of life insurance is
preparation
for
retirement,
life
insurance functions less as a retirement
savings product to be withdrawn only
upon retirement than as a pure savings
product that comes with tax benefits on
holding, financial income and transfer, as
well as other benefits - guaranteed capital,
unlimited deposits and withdrawals
.
Not
all
tax
measures
have
demonstrated
their
economic
efficiency
The tax system favours the owner-
occupant,
without
clear
economic
justification
. The growing percentage of
owner households is a positive trend in
that it results in more taxpayers putting
aside compulsory savings in preparation
for
retirement
and
property
tax
payments. But it also has the negative
consequence of decreasing residential
mobility, which often prevents individuals
from accepting an employment offer in a
location far from their main residence,
while exposing households to the risks of
the real estate market.
The
tax
regime
for
ownership-
occupancy of the primary residence is
more favourable than the regime for
rental investment in existing property:
implicit rent has not been taxed since
1965, capital gains on the sale of a
primary residence are exempt, and the
primary residence benefits from a 30 %
allowance in order to determine the ISF
wealth tax base.
Dispensatory
regimes
for
rental
investments create windfall effects
.
These tax schemes offer either the
deduction of a share in the investment
Summary - Council of Mandatory Contributions
19
Economic and social issues not sufficiently
taken into account by the taxation system
In a context of relatively sluggish
growth in terms of GDP, prices and
wages, the rise in the real rate of return
favours the concentration of capital and
the income it generates, to the benefit
of households that have already
accumulated
savings,
thereby
accentuating
socioeconomic
and
generational inequalities.
The mandatory levy system has failed to
adjust to the growth of wealth in the
economy:
n
although real estate was the main
factor in the growth of household
wealth over the past few decades, the
real property tax has not taken this
growth into account as its tax base is
still determined by notional rental
value rather than on market value,
creating a gap between the economic
value and tax value of assets;
n
The rise in real estate prices, coupled
with
low
interest
rates,
drives
households to take on debt; nearly
a third of households currently
have a real estate loan. However,
liabilities are not taken into account
in
the
real
property
tax
base,
creating a disadvantage for younger
households;
n
in a context of low inflation, the
allowance
for
capital
gains
on
property
based
on
the–holding
period can no longer, given its
amount, be justified by accounting
for monetary erosion, and introduces
a tax distortion between real estate
assets and transferable securities.
The level of deduction now exceeds that
of monetary erosion and creates an
incentive for long-term holding
. The cost
of tax and social security expenditures
associated with the allowance on capital
gains on property based on the holding
period stood at €3.6bn in 2015.
A globally progressive tax system
The high-yield taxes (property tax,
social contributions) are proportional,
but the system of taxation on capital
is globally progressive, since income
from capital is taxed at the income tax
and ISF scale rates.
Tax and social contribution expenditures in
taxation of household capital
Source: Appendix Ways and means, volume II of the
2017 draft finance act; appendix 5 of the 2017
Social Security Appropriation Bill. Tax expenditures
related
to real property taxes concern only
households
Share of various taxes in the reference tax
income of households according to income
decile and centile
Source: Based on DGFIP data. Note: implicit taxation
rate on reference tax income excluding capital gains.
Therefore, income tax on revenues from real estate
and movable property accounts for 0.1% of the RFR
of households in the first nine income deciles, 0.8% of
those in the first eight centiles of the last income
decile and 2.8% of those in the last two centiles.
No. of schemes
assessed
2016 amount
(€m)
Income tax - income from movable capital
Income tax - capital gains on movable assets
Income tax - property income
Income tax - capital gains on real estate
Total income tax
Social contributions
Built/unbuilt property tax
Gift tax
Property transfer tax
ISF wealth tax
TOTAL
26
11
25
12
74
4
> 12
5
13
18
> 126
7,107
274
3,878
2,870
14,129
3,587
1,842
70
803
1,114
M€ 21,544
Income tax (excluding income from real
estate and movable property
Income tax (income from real estate
and movable property)
Real property tax
ISF
wealth tax
Summary - Council of Mandatory Contributions
20
Economic and social issues not sufficiently
taken into account by the taxation system
Taxation on the transfer of capital
has not adapted to societal and
demographic changes
Gift tax revenues rose from €8.2bn in
2006 to €12.8bn in 2016, under the
effect of an increase in the number of
deaths (+15% between 1995 and 2015)
and in the average amount of the gift.
Gifttaxes are concentrated on a reduced
tax base which is subject to high rates
,
while the majority of the taxable base is
exempt. The scale is favourable to direct
line successions. A child can receive up to
€100,000 from a parent free of gift tax,
€200 000
if he or she is the beneficiary
of a previous gift (up to €100,000
if the
gift was received before the end of the
15-year tax cycle period). Between 85%
and 90% of transfers from parents to
children are fully exempt from the
inheritance tax. Conversely, successions
outside the direct line are more heavily
taxed: 50% of gift taxes are collected on
successions outside the direct line,
although they represent only 10% of
cash flows from successions.
The
scale
is,
in
fact,
minimally
progressive:
its
top
brackets
are
virtually never attained, with the vast
majority of taxpayers situated in the
20%
bracket.
Today,
the
average
effective tax rates on the top 0.1% of
inheritances do not exceed 25% (in part
because tax exemption schemes such as
life
insurance
thrive
primarily
on
sizeable transmissions).
Source: Analysis brief no.51 of January 2017, France Stratégie
Rate of taxation according to the line of inheritance
IThere is a general trend in Europe
towards abolishing the inheritance and
gift tax, most often due to the low yield
of this tax. In the majority of countries
studied, inheritance tax is based on a
progressive scale but many derogations
are provided, which explains why the
effective tax rate is much lower than the
applicable base rate and that transfers
between
close
relatives
are
often
favoured.
Median of inheritance received
25% of inheritances
received
Rate of taxation
Amount of inheritance received
Non-relative
(including live-in partner)
Other relative
Nephew/niece
Brother/sister
Child
Life insurance
Spouse or
PACS partner
50%
90%
99%
99.9%
0.1% of inheritances received
Summary - Council of Mandatory Contributions
21
Economic and social issues not sufficiently
taken into account by the taxation system
The
legal,
conventional
and
European
framework
is
highly
restrictive
Lawmakers
must first ensure that
taxation
accurately
gauges
the
contributive
ability
of
taxpayers,
whether in regard to rules governing
the tax base or to rates.
As
regards
income,
a
maximum
marginal
tax
rate
of
two
thirds,
regardless of the source of revenue, can
be considered the threshold above
which a tax measure runs the risk of
being censured by the Constitutional
Court.
The
latter
permits
the
respective autonomy of civil law and
tax law, provided that the differences
resulting from the tax regime are based
on objective and rational criteria directly
linked to its objectives.
As regards taxation on holdings, a cap
on the amount of tax due based on
disposable income seems necessary
when the applicable rate is high, so as
not to be confiscatory.
Secondly,
the
tax
differentiations
established by lawmakers must respect
the principle of equality and European
state aid regulations.
The Constitutional Court ensures that the
distinctions
introduced
between
taxpayers are based on differences in
situation or an objective in the general
interest, are consistent with the goals of
lawmakers and do not create inequalities
between taxpayers placed in the same
category.
In the event that tax benefits channel
indirect
aid
to
specific
firms
or
productions, lawmakers are required to
comply
with
European
state
aid
regulations by submitting the taxl
measures envisaged to the European
Commission in advance.
Thirdly, taxation on wealth must not
lead to discrimination or prevent
the exercise of the four freedoms
protected by EU law, notably
the free
movement of capital
, unless it is justified
by a legitimate goal in the public interest
and proportionate to the objectives
pursued.
Finally, against a backdrop of the
increasing
mobility
of
capital,
lawmakers can implement measures in
line with the constitutional objective
of fighting tax fraud
, given that these
measures are in compliance with other
constitutional principles such as the
principle of equality, and with European
law. The Constitutional Court takes a
flexible
approach
to
such
“disincentivising”
mechanisms:
for
example, it accepts higher taxation rates
than those applied by common law
regimes.
Summary - Council of Mandatory Contributions
23
3
Guidelines for adapting
the taxation of capital
The varied and sometimes contradictory
objectives assigned to taxation on
capital
can
be
divided
into
three
categories: economic impact; social
equity,
both
intergenerational
and
geographic; and budgetary yield. These
objectives vary according to the type of
tax, holdings, revenue and the transfer of
wealth.
The points for possible adaptation put
forward by the CPO in 2009 remain
pertinent:
reflect
on
the
goals
assigned to the taxation of wealth,
strive
to
make
tax
rules
more
consistent and clear, analyse the changes
to each tax in a global framework.
The CPO concluded in favour of a tax
system
centred
on
broad
bases
and moderate rates that are neutral
across assets, while maintaining the
progressivity of the whole.
Following
on this logic, the report
suggests points for possible adaptation
based on four priorities:
1 Ensuring the predictability of tax
rules
Guarantee
the
effectiveness
and
promote the acceptance of taxation on
wealth
by
adopting
simple
and
predictable rules
The past decade has demonstrated the
extent to which taxation on capital is
the object of frequent reforms.
The
recent
jurisprudence
of
the
Constitutional Court limits the ways in
which lawmakers can modify tax rules,
not only retroactively, but also going
forward. However, these requirements
protect only situations predating the
entry into force of the law from the
effects that these situations can be
legitimately expected to have in the
future.
2 Improve the economic consistency
of mandatory levies on real estate
capital
Tax capital gains on real estate after
taking monetary erosion into account
In 2016, tax revenue from capital gains
on real estate reached €993 m; the cost
of tax expenditures associated with the
Point for possible adaptation no.1
:
Improve the predictability of mandatory
levies
on
household
capital,
notably
through:
- the use of “grandfather”
clauses
under which the current tax regime
continues
to
apply
to
existing
situations, either definitively or for a
sufficient period of time;
- a limited application of changes to tax
regimes to effectively new operations;
- their implementation with a sufficient
transition period to allow households to
adapt.
Summary - Council of Mandatory Contributions
24
Guidelines for adapting
the taxation of household capital
allowance for duration of ownership
stood at €1.74bn and that of social
contribution expenditures was €1.85 bn.
The longer the asset has been held, the
greater the allowance. Gains on real estate
become fully exempt from income tax
after the property has been owned for
22 years, and are fully exempt from social
contributions after 30 years.
While the Cour des Comptes does not
propose reversing the exemption of
capital gains on real estate upon the sale
of a main residence, the methods for
calculating gains could be modified in
order to abolish the allowance for
duration of ownership in favour of
considering monetary erosion.
This would allow the calculation to take
into
account
a
macroeconomic
environment
characterised
by
low
inflation
and
neutralise
the
tax
incentive to retain real estate assets in
household arbitrage, since disposals in
the first five years of ownership are
penalised in the current regime.
Such a change would be in line with the
regime that was in force until 2004, in
which capital gains on property were
calculated after revaluation of the
acquisition price or according to the
average consumer price index. It would
also harmonise the tax treatment of
capital gains on real estate and movable
property, since the finance act for 2018
abolishes the allowance for gains on the
sale of real estate assets based on the
holding period
Accounting for monetary erosion will
reduce capital gains on real estate from
the first year. This method is all the
more favourable when gains are low in
comparison to the initial value of the
asset.
Unify the tax regime for real estate
income
Although
a
growing
number
of
taxpayers opt for the non-professional
leasing of furnished property, more than
90% of tax households that declare
income from real estate assets are
declaring property income (3,856,366
taxpayers declared property income in
2013).
The tax treatment of income from
Application of an allowance for duration
of ownership or a monetary
erosion coefficient
for an asset acquired in 2005 with an initial
value of €100k and a gross capital gain
of €100k in 2016
Source: CPO
Point for possible adaptation no.2
:
Adjust the regime for capital gains on real
estate by replacing the allowance for
duration of ownership with a corrective
monetary component.
Gross property capital gains
Property capital gains subject to income tax
Property capital gains subject to tax after inflation
Property capital gains after social contributions
Guidelines for adapting
the taxation of household capital
Summary - Council of Mandatory Contributions
25
4
This change could apply to assets leased out prior to the reform only in the event of a change of lease, if not
only to properties leased out following the reform.
real estate could be unified with the
property tax regime, whether the
property
in
question
is
rented
furnished or unfurnished. In this way
4
:
n
the expenses incurred in furnishing
could be deduced from taxable
rents, whether using the actuals
method or a standard allowance if
the taxpayer opts for the
micro-
foncier
regime (yearly rental income
under €15,000);
n
the deficits recorded (in particular
following improvement works) could
be imputed to all of the taxpayer’s
income (rather than to rental income
alone), without exceeding the cap
currently set for the property tax
regime;
n
the property tax paid by firms on
furnished rentals would be abolished.
On the other hand, certain regimes
aimed at specific investments (for
example, the “ Censier-Bouvard” would
be maintained.
Update the property tax base
Given that notional value assessment
bases have not been reviewed for more
than 40 years, updating the property tax
base for residential and unbuilt property
is essential.
One option for reform would be to
complete the review of the notional
rental value of residential properties
,
as provided for in the amended finance
act for 2013. Based on the results of the
experiment
carried
out
in
five
departments,
the
DGFIP
notably
recommends using a single grid for the
private housing stock and the social
housing stock. It seems inevitable
that smoothing measures be adopted
over several years to facilitate the
implementation of this reform, a
source of financial transfers between
households
and
local
authorities
(requiring new financial equalisation
mechanisms for the latter) as well as
support measures (in particular for
methods of updating data).
The more ambitious and sustainable
alternative to updating the notional
value assessment bases, would be to
instead use market value
. This would
bring the real property tax base closer to
that of the real estate wealth tax. Such a
reform would also lead to a change in the
tax management method, as market
value would be declared by the taxpayer.
Point for possible adaptation no.3
:
Unify the tax regime for furnished rentals with
that of unfurnished rentals.
Point for possible adaptation no.
4
:
To determine the base for the property
tax paid by households, draw on the
findings of the experiment carried out by
the DGFIP.
Over the long term, study the replacement of
notional rental value with market value.
Possibilities for adapting
the taxation of household capital
Summary - Council of Mandatory Contributions
26
Lower the rate of the property transfer
tax to improve the fluidity of the real
estate market and the geographic
mobility of persons
Based
on
empirical
estimates,
a
reduction of one percentage point in
transaction costs would increase the
rate of rotation in housing by 8%.
Moreover, the property transfer tax is a
volatile resource, tied to the real estate
market (number of transactions and sale
prices).
Several options can be envisaged:
n
differentiate the fees payable for the
purchase of a main residence (via an
allowance or an adjusted rate);
n
introduce a tax escalation measure
based on the value of the property;
n
gradually reallocate the property
transfer tax to the real property tax.
3 Promote greater tax neutrality by
eliminating
dispensatory
regimes
with questionable economic impact
Lower
the
ceiling
on
regulated
savings
Lowering the ceiling on regulated
savings would align the dispensatory
tax regime more closely with its
objectives
by
making
interests
from
investments
exceeding
the
adjusted
ceiling subject to mandatory levies,
following an interim period to give savers
enough time to reallocate their funds
5
.
If ceilings were readjusted to their level
in
2012
6
,
the
additional
resources
collected
by
the
savings
fund
or
reallocated
to
collection
institutions,
estimated at €30 bn, would be positioned
on other products. This reform would:
n
make other liquid savings products
more attractive;
n
encourage households to prioritise
locked
products
offering
higher
return, such as long-term holding
products;
n
limit tax expenditures (€1.4 bn in
2016, income tax and social security
contributions).
5
The Cour des Comptes has recommended that income earned from the portion of deposits that exceeds
current account ceilings should be subject to social security withholding “The State and the Financing of the
Economy”, 2012.
6
On 1 October 2012, the investment ceiling of Livret A was raised from €15,300 to €19,125 and that of LDDS
from €6,000 to €12,000. On 1 January 2013, the investment ceiling of Livret A rose from €19, 125
to €22,950.
Point for possible adaptation no.
5
:
In order to help improve the fluidity of
the real estate market and favour the
geographic mobility of persons, lower
the property transfer tax, taking into
account
local
authorities’
resource
maintenance requirements.
Possibilities for adapting
the taxation of household capital
Summary - Council of Mandatory Contributions
27
The finance act for 2018 takes a step in
this direction by broadening the scope
of the flat tax rate regime to include
interest from new home ownership
savings plans and accounts (PEL and
CEL). This change is in line with the
goal
of
improving
tax
neutrality
between different savings products.
Bring the tax treatment of income
from life insurance closer to common
law
As regards life insurance, the finance
act for 2018 aligns its taxation more
closely with common tax law:
for
amounts exceeding €150,000, which
represented less than 6% of contracts
but 60% of total value at end 2015, the
flat
tax
rate
applies
to
payouts
following
the
reform;
above
this
threshold, the reduced rate of 7.5 % will
continue to apply to contracts held for
less than eight years.
Additional measures can be envisaged
for
greater
tax
neutrality
in
the
allocation options for savers:
n
Option 1 - In the future, apply the
flat
rate
tax
to
all
income
collected on new life insurance
payouts,
and not only when the total
contract exceeds €150,000;
n
Option 2 - Tax income on life
insurance based on how far back
payouts actually go
rather than the
date on which the contract is taken
out.
This change could be applied to share
savings
plans.
The
holding
period
beyond which gains realised on closinga
product
receive
favourable
tax
treatment
would
benefit
from
harmonisation: it could be extended to
eight years for life insurance, as well as
for share savings plans, retail venture
capital
funds
(FCPI)
and
local
investment funds (FIP). In order to tie
the benefits of the tax regime to the
length of time assets are held, the
allowance of €4 600 (€9 200
for a
couple) for life insurance holders could
also be abolished.
Such measures would increase the appeal of
retirement savings products whose
outstandings remain limited.
4 Adapt the inheritance tax regime to
societal
changes
and
issues
of
equality
The system of taxation on capital must
address
three
main
challenges:
the
increase in life expectancy, the growing
concentration of capital and changes in
familial structures.
Adapt transfers of wealth to the
increase in life expectancy
Transfer by inheritance takes place later
in life: the average age at which one
inherits is now around 50, or eight years
later than in 1980. Yet, the current gift
tax rules do little to encourage taxpayers
to transfer wealth during their lifetime,
Point for possible adaptation no.
6
:
Lower the investment ceiling of regulated
savings products (LA, LDD, LEP, LJ) by
reconsidering the cumulative level of tax
exemption.
Point for possible adaptation no.
7
:
Re-examine the rates and dispensation
allowances applicable to proceeds from
life insurance contracts, with respect to
new payouts.
Possibilities for adapting
the taxation of household capital
Summary - Council of Mandatory Contributions
28
even if the practice has increased over
the long term. This has not, however,
been enough to keep generational
wealth differences in check.
To increase the appeal of gifts, two main
options can be envisaged:
n
increase taxation on successions as
compared to gifts
(for example, by
lowering the allowance, or even
restricting its application to gifts);
n
conversely, make the taxation rate
on
gifts
lower
than
that
of
successions
; this reduction measure
would be aimed at encouraging
transfers to younger generations
(i.e., by modifying the tax scale for
gifts, the applicable allowances or
the period of assessment of prior
gifts).
Decelerate the trend of concentration
of capital
The dual phenomenon, observed over
the past few decades, of the rise in value
and the marked concentration of net
household
wealth
is
expected
to
continue, due to an increase in the share
of
the
inheritance
in
households’
disposable income. The annual number of
deaths — currently 600,000 — is expected
to increase before stabilising at around
750 000 from 2040, while the number of
children per family is declining. It follows
that wealth should remain concentrated
where it was more divided when families
were larger. The share of annual transfers
in
the
net
disposable
income
of
households is expected to increase from
19% to more than 25% in 2050.
While it is not advisable to increase the
tax on indirect-line successions, already
among the highest in the OECD, other
points for possible adaptation can be
envisaged:
n
reduce
the
inheritance
benefit
attached to life insurance
: it does
not encourage the anticipation of
gifts; it applies equally to funds in
euros and those in accumulation
units,
and
therefore
dissuades
taxpayers from choosing more risky
products, to the detriment of inflows
to life-generation contracts. This
benefit represents a growing cost for
public finances, the amount of which
has not been calculated to date. The
life insurance inheritance regime
could be more closely aligned with
the provisions of common law as
regards gift tax (lower allowance
and higher rates), in line with recent
reforms
7
;
Point for possible adaptation no.
8
:
Increase the appeal of gifts to younger
generations as opposed to successions.
7
In order to limit fund outflows, the last two reforms on the life insurance inheritance tax regime are
applicable only to deaths that occurred from the date of their entry into force. Article 11 of the
supplementary finance act for 2011, dated 29 July 2011 addresses the rate of taxation on capital that
exceeds, upon the death, €1,055,338 for sums paid following deaths that occurred from the date of its entry
into force. Article 9 of the supplementary finance act for 2013, dated 29 December 2013, raised the
applicable rate from 25% to 31.25% and lowered the threshold of application of this rate from €902,838 to
€700,000, for deaths that occurred from 1 July 2014.
Possibilities for adapting
the taxation of household capital
Summary - Council of Mandatory Contributions
29
From a tax perspective, transfers
granted to stepchildren do not benefit
from the tax scale applicable to direct-
line successions
; rather, they are
subject to the rate applied for transfers
to unrelated persons. The families
concerned
are
forced
to
pursue
complex
solutions,
through
life
insurance in particular, or even through
the adoption of a stepchild.
The complete alignment of the rules
applicable to transfers to a step-child
with those applicable to
direct-line
successions is complicated.
It could be envisaged, on the basis of
established civil law, to provide that
transfers to stepchildren by way of a
gift or will are carried out under more
favourable tax conditions than those
currently in place
. The beneficiary of the
gift or inheritance could be taxed, either
under the same conditions as those
for direct-line heirs, or at least under
more favourable conditions than the
current taxation rate of 60%. From a
tax point of view, this would better take
into account the reality of relationships
within a blended family, a reality
demonstrated by the donor or testator’s
desire to leave inheritance to a stepchild.
n
adjust
certain
partial
or
full
exemptions following a review of their
effects (woodlands and forests, shares
in rural forest property management
groups, artworks).
Better account for the changes in
familial structures
The current law does not take into
account the increase in the number of
blended families
. In 2011, 1.5 million
children under the age of 18 , or one
out of ten children, live in one of
720 000 blended families. Yet, under
civil law, only descendants (and the
surviving spouse in the absence of
any descendants) are protected heirs.
The legal provisions concerning the
devolution of succession (Art. 734 of
the
French
Civil
Code),
which
establish the order in which heirs are
to
inherit through various family
relationships, do not recognise the
category of stepchildren although they
mention the descendants of brothers
and sisters.
Point for possible adaptation no.
9
:
Identify various measures that could
contribute to slowing the trend of wealth
concentration (increase the gift tax on
direct-line successions; carry out a
systematic
review
of
the
different
specific regimes applicable to inheritance
tax, in particular the inheritance benefit
attached to life insurance).
Point for possible adaptation no.
10
:
Reflect on ways to adapt the gift tax to
the sociological changes in the family
unit, in particular the tax treatment of
transfers to a stepchild.
CONCLUSION AND POINTS
FOR POSSIBLE ADAPTATION
Taxes on household capital, which
accounts for 10.8% of GDP in France,
presents several weaknesses:
n
methods of taxation are complex
and difficult to assess
due to the
wide range of objectives pursued. The
coexistence of many dispensatory
taxation schemes leads to a cost for
public finances equal to more than
25% of the total yield from taxes on
income from capital. They can,
moreover,
have
contradictory
effects on household behaviour;
n
the
system
of
taxation
on
household
capital
has
not
managed to mitigate the trend of
concentration
of
capital:
the
share
of
the
last
decile
of
households in overall wealth was
55.3% in 2014, compared with
50.0 % in 1984, or an increase of
5.3
GDP points in 30 years; a
lesser increase, however, than that
seen
in
other
comparably
developed countries;
n
economic,
social
and
demographic
changes
not
sufficiently taken into account in
the
system
of
taxation
on
household capital.
Taxation on
savings thus favours liquid and
conservative
investments
(regulated savings), over corporate
financing. Similarly, population
ageing may make certain changes
to gift and inheritance taxation
advisable;
n
against
the
backdrop
of
the
growing international mobility of
capital,
the
rules
governing
taxation of non-resident capital
gains have an impact on the
attractiveness of the territory for
foreign investors
. If the financial
investments of non-residents benefit
from attractive measures, their real
estate investments are taxed under
conditions
similar
to
those
of
common law, which can be heavier
than the tax applied by the other
member countries of the OECD.
The
Council
of
Mandatory
Contributors proposes a change to
the taxation on household capital
based on four priority areas
. This
change could be entirely in line with
the new framework for the taxation
of capital established by the finance
act for 2018, which notably includes
the introduction of a flat tax on capital
income (PFU) in place of the capital
gains tax scale, as well as replacement
of the ISF wealth tax with a real estate
wealth tax (IFI):
n
to
make taxation rules more
consistent
and
predictable
,
methods
of
introducing
tax
reforms should preserve existing
situations, if not definitively then at
least for a sufficient period to give
economic actors enough time to
adapt to these changes;
Summary - Council of Mandatory Contributions
31
CONCLUSION AND POINTS
FOR POSSIBLE ADAPTATION
n
to help improve the fluidity of the
real estate market and encourage
the mobility of persons
, the tax
treatment of capital gains on real
estate
could
be
adjusted
to
neutralise the incentive to retain real
estate assets, and the reduction of
property transfer taxes encouraged
to lower the costs associated with
a real estate transaction. The
unification of tax treatment of
income from real estate around a
single property income tax regime
would streamline the methods of
taxing
both
furnished
and
unfurnished rental properties. The
updating of notional rental values
in assessment bases for certain
municipalities, separate from real
estate market values, is necessary;
n
to promote greater neutrality in
the tax treatment of different
savings products
and increase
the appeal of products oriented
towards corporate financing, the
deposit
ceilings
on
regulated
savings products could be lowered
to a level more compatible with the
accumulation
of
precautionary
household savings. The flat rate tax
could be applied to all income
collected
on new life insurance
payouts, rather than only when the
total contract exceeds €150 00, so
as to neutralise the tax regime with
regard to the investment choices of
households;
n
to adapt the gift tax to the increase
in
life
expectancy,
slow
the
concentration of wealth and better
account for societal changes
such
as the diversification of family
structures, the appeal of gifts could
be
strengthened
over
that
of
successions. The methods of taxing
successions could be modified,
in order to reverse the trend
of concentration of household
wealth, by freezing the rise in the
share
of
inheritance
in
overall
wealth; for example, by reducing, or
even abolishing, the inheritance
benefit attached to life insurance. In
order to take the situation of the
stepchild into account, the transfer
to the latter by way of a gift or will
could be carried out under more
favourable tax conditions than those
currently in place.
Summary - Council of Mandatory Contributions
32
In light of these findings and in addition to the tax provisions of the
finance act for 2018 (PFU and IFI), the CPO puts forwards ten points
for possible adaptation:
1. Improve the predictability of mandatory levies on household capital,
notably through:
- the use of “grandfather” clauses under which the current tax regime continues
to apply to existing situations, either definitively or for a sufficient period of
time;
- a limited application of tax regime changes to effectively new operations;
- their implementation over a sufficient transition period to allow households
to adapt.
2. Adjust the regime for capital gains on real estate by replacing the allowance for
duration of ownership with a corrective monetary component.
3. Unify the tax regime for furnished rentals and that of unfurnished rentals.
4. To determine the base for the property tax paid by households, update the
rentalvalues of residential properties by drawing on the findings of the experiment
conducted by the DGFIP. Over the long term, study the replacement of notional
rental value with market value.
5. In order help improve the fluidity of the real estate market and favour the
geographic mobility of persons, lower the property transfer tax, taking into account
local authorities’ resource maintenance requirements.
6. Lower the investment ceiling of regulated savings products (LA, LDD, LEP,
LJ) by reconsidering the cumulative level of tax exemption.
7. Re-examine the rates and dispensation allowances applicable to proceeds
from life insurance contracts with respect to new payouts.
8. Increase the appeal of gifts to younger generations as opposed to
successions.
9. Identify the various measures that could contribute to slowing the trend of
wealth concentration (increase the gift tax on direct-line succession; carry out a
systematic review of the different specific regimes applicable to inheritance tax, in
particular the inheritance benefit attached to life insurance).
10. Reflect on ways to adapt the gift tax to the sociological changes in the
family unit, in particular the tax treatment of transfers to a stepchild.
Summary - Council of Mandatory Contributions
33
CONCLUSION AND POINTS
FOR POSSIBLE ADAPTION