Article 28 of the Finance Act for 2018 institutes a new system for taxing personal income and capital gains paid to individuals. Already used by a large number of countries in Europe (including Germany, Italy and Spain), the flat tax is termed a single fixed-levy withholding (or “PFU”) under French law.

What is the PFU?

The PFU applies to amounts paid to individuals. It is a 30% withholding, including a fixed-levy rate of 12.8% of income tax, to which are added social security withholdings of 17.2%.

The stated goal is to simplify and streamline taxation on income from capital by setting up a single withholding. The PFU applies to taxes on income received later than 1 January 2018. At their option, taxpayers shall be entitled to carry on being taxed according to the progressive scale.

The scope of the single fixed-levy withholding

The PFU is now applicable to the following income from investments:

– dividends,
– directors’ fees and other compensation given to members of boards of directors or supervisory boards,
– revenue from fixed-income investments, such as interest from partners’ current accounts,
– the amounts distributed by unit trusts and income from investments in real estate investment funds,
– revenues resulting from the first sale of temporary usufruct associated with the investment revenue category.

Conversely, the PFU does not apply to revenues that are exempted from income tax such as revenues paid by certain savings accounts (e.g., Livret A), or certain life insurance revenues, the revenues from capitalisation bonds or endowment contracts or life insurance contracts associated with premiums paid up to 26 September 2017, and to revenues accounted for in determining the taxable profit of an industrial, commercial, artisanal or agricultural undertaking, or a non-commercial profession.

The PFU applies also to the capital gains from sales of investments and corporate rights, and to the revenues from premiums paid on life insurance contracts since 27 September 2017.

Dividends

The taxpayer who receives a dividend on 3 January N will incur a fixed-levy withholding not constituting full discharge (Fr. “non libératoire”) (termed “PFNL”) of 12.8% and social security withholdings of 17.2%, due by 15 February N, at the latest. In May N+1, when he is filling out his income tax return, the taxpayer will have the possibility of opting for taxation of dividends according to the progressive scale.

The fixed-levy withholding not constituting full discharge (PFNL) is a tax credit that will be counted – at the taxpayer’s choice – against either:
– the single fixed-levy withholding (PFU): the PFU of 12.8% is neutralised by the PFNL, of the same amount, already paid, or
– the income due according to the scale: the option for the progressive taxation (only if that is more advantageous) leads to taxation that is lower than the PFNL, so the taxpayer is reimbursed the difference.

If at first sight the PFU seems more advantageous, it should be noted that the taxpayer loses the advantage of the 40% fixed-levy reduction that remains vested when the income is subject to the scale. The option implies a prior calculation.

E.g.: For a dividend of € 10,000 gross, taxed at the marginal rate of 14%.
PFU: € 10,000 x 12.8% + € 10,000 x 17.2% = € 3,000
Scale: (€ 10,000 – 40%) x 14% + € 10,000 x 17.2% = € 2,560
The option for the scale is more advantageous than the PFU.

Realised gains on sales of investments

The PFU now applies to all capital gains on sales of investments and corporate rights. It is applied to the total net capital gains, after attribution of the capital losses sustained in the same year, plus those sustained in respect of the ten prior years and after fixed reduction for retiring managers. The proportional reductions for holding time on capital gains on sale of securities as of 1 January 2018 are no longer applicable. An option for taxation according to the progressive scale of income tax remains possible for capital gains on sale of securities purchased prior to 1 January 2018, with the benefit of the reductions for holding time, running from 50% to 85%. Therefore, each year the taxpayer will have to assess the trade-off to select the more favourable taxation arrangement. It should be noted that the option for taxation according to the progressive scale is expected to apply to all revenues in the scope of the PFU.

E.g.: For a sale of investment securities held for nine years (reduction for holding time of 65%) which generates a capital gain of € 10,000, taxed at the marginal rate of 30%.
PFU: € 10,000 x 12.8% + € 10,000 x 17.2% = € 3,000
Scale: (€ 10,000 – 65 %) x 30 % + € 10,000 x 17.2% = € 2,770
The option for the scale is more advantageous than the PFU.

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