The creation of the flat tax was at the heart of the main tax reforms undertaken at the start of Emmanuel Macron's five-year term. It stemmed from the government's desire to clarify, simplify and lighten the tax landscape for French taxpayers.
Easier to understand and calculate, the flat tax replaces the old tax systems that were seen as too complicated and difficult to grasp. It has reduced the tax burden for many taxpayers and made the tax rules clearer, encouraging investments in stocks and bonds.
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The flat tax is now an unavoidable tax for a large portion of French taxpayers.
It works like this: it consists of a flat-rate levy of 30%, made up of 12.8% income tax and 17.2% social security contributions.
Previously, income from movable capital was taxed according to your marginal income tax bracket, i.e. between 0% and 45%. Taxpayers were also required to pay social security contributions of 15.5%.
The flat tax replaces the old tax system in several cases:
- Paying out dividends
- Receiving interest from bonds
- Receiving interest paid by your bank on savings accounts, except for regulated savings such as Livret A, for example.
The flat tax involves paying a global tax levy of around 30% on all dividends received, regardless of the level of your other income.
In the past, anyone receiving dividends was taxed according to their marginal income tax bracket. They also paid 15.5% in social security contributions.
So, the introduction of the flat tax means a tax reduction for everyone whose previous overall tax rate was higher than 30% (in other words, the sum of the income tax rate and the social security contributions paid).
Otherwise, the introduction of the flat tax leads to an increase in taxation. You can still benefit from the old tax system if it's more advantageous, simply by requesting it from the tax authorities.
The introduction of the flat tax has simplified the rules for taxing capital gains made from the sale of shares. All capital gains are now subject to a global rate of 30%, without any deductions.
In the past, they were taxed according to your marginal income tax bracket. You also had to pay an additional 15.5% in social security contributions. Each taxpayer could benefit from a 50% allowance if they had held the shares for more than 2 years and less than 8 years, and 65% if they had held them for more than 8 years.
Again, it is possible to continue to benefit from the old tax system if it is more advantageous.
However, it is important to note that all securities acquired since January 1, 2018 will no longer be eligible for an allowance for the period of ownership.
The Flat Tax is designed to encourage investment in movable assets, to get French people investing in the real economy rather than in property.
It can lead to a reduction or increase in taxation depending on the status of each taxpayer, which is why it's necessary to run a simulation to find out the most advantageous taxation method for your personal situation.
Written by our expert Paul LASBARRERES-CANDAU
April 23, 2021
