Following the general election of July 2024 and the formation of a new Government in September, it is now time for the French Parliament to examine the French draft Finance Bill for 2025, presented by the Prime Minister on 10 October 2024. This draft pursues the government's objective of reducing the budget deficit by asking the wealthiest taxpayers to contribute more, as evidenced by its flagship measures affecting both businesses and individuals. This article focuses on the main tax measures relevant for individuals (for the measures concerning businesses, see our other post).

Introduction of a ‘differential contribution on high incomes’ (DCHI) 

A new contribution would apply to taxpayers whose ‘reference tax income’ exceeds €250k for a single person and €500k for a couple, if they are domiciled for tax purposes in France. Therefore, French-sourced incomes received by non-French residents should not be in the scope of this new contribution. 

It would apply as from 2024 and until 2026. 

For the purposes of this provision, ‘reference tax income’ (RTI) would be defined by reference to the one taken into account for the purposes of the already existing exceptional contribution on high income (ECHI), with certain adjustments. It shall be specified that exceptional income (i.e., income that, given its nature, ‘is not likely to be received annually’ and whose amount exceeds the average net income in respect of the previous three years) is taken into account only for a quarter of its amount (this could include capital gains if certain conditions are met).

This contribution is intended to ensure that the relevant taxpayers will be subject to an overall taxation of their annual income at least equal to 20% of their RTI. As a result, it would be equal to the positive difference between (i) 20% of the RTI as defined above and (ii) the sum of the income tax and the ECHI due in respect of the relevant year. A mechanism would be provided to avoid threshold effects. 

Accordingly, the DCHI would generally apply where the taxpayer receives income which is predominantly subject to the flat tax (e.g., for a taxpayer who only receives dividends subject to the flat tax, the DCHI could be equal to 20% - 12.8% (income tax portion of the flat tax) - 4% (ECHI) = 3.2% - this rate would be lower for capital gains, provided that they are considered ‘exceptional’ – see above). 

Changes to the regime of the warrants for business creators (bons de souscription de parts de créateurs d’entreprises – BSPCEs)

Under strict conditions, certain recently created companies may attribute BSPCEs to their employees or executives. Under the favorable BSPCE tax regime, the whole gain (i.e., the gain recognized on the exercise of the warrants and the capital gain recognized on the sale of the corresponding shares) realized by the BSPCE holder is eligible for the capital gains tax treatment (i.e., taxation at the flat tax rate of 30 %, unless a global option is made for the progressive tax scale). In a decision dated 5 February 2024, the French Administrative Supreme Court ruled that the whole gain realized by BSPCE holders is eligible for the capital gains tax treatment, and that it was therefore eligible for the tax-free roll-over applicable to contributions of shares. 

The draft Finance Bill for 2025 intends to override this court decision, by establishing a distinction between (i) on the one hand, the gain realized upon exercise of the warrants, qualified as an employee benefit and, (ii) on the other hand, the gain realized upon disposal of the shares received in exchange for the BSPCEs, having the nature of a capital gain. Both gains would continue to be eligible for the 30% flat tax, unless an election is made for the progressive scale, but the exercise gain would not be eligible for the deferral of taxation in the event of a transfer of the shares. A deferral of taxation would nevertheless be applicable in the event of certain transactions the taxpayer was involved in, such as a takeover bid, merger, demerger, stock split or reverse stock split. These provisions would be applicable to the sales or disposals of shares subscribed for pursuant to BSPCEs occurring as from 10 October 2024. 

Clarification of the interaction between tax treaties and French provisions defining French tax residency

Article 4 B of the French tax code provides a definition of the French tax ‘domicile’ based on several alternative criteria (home or principal place of residence in France, principal professional activity in France, or centre of economic interest in France). A taxpayer may therefore be considered domiciled in France for tax purposes pursuant to Article 4 B, but non-French tax resident pursuant to the relevant double tax treaty (e.g., a taxpayer having their permanent home in the other country, while having the centre of their economic interest in France). 

In a decision dated 5 February 2024, the French Administrative Supreme Court ruled that the French tax code provisions applicable to non-French tax domiciled taxpayers pursuant to Article 4 B (e.g., certain withholding taxes) were not applicable when the taxpayer is considered as French tax domiciled pursuant to Article 4 B, even though he is non-French tax resident pursuant to the relevant double tax treaty. The draft Finance Bill for 2025 would override this court decision, by providing that a taxpayer who is non-French tax resident pursuant to double tax treaties could not be considered domiciled in France for tax purposes. 

What are the next steps? 

The draft Finance Bill will be debated before the French Parliament as from October 21, 2024, and amendments to the draft provisions or new provisions may be proposed and voted on during this process. It is expected that the Bill will be voted on by both chambers in the course of December, although the expected timeline could be impacted if the Government triggers the fast-track procedure (so-called “Article 49.3” procedure).