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Individuals in France are subject to personal income tax, social security contributions, wealth tax, inheritance tax and local residence tax.

Generally, individuals domiciled in France are considered residents of France. An individual is considered domiciled in France if his/her principal residence, main place of business or professional activity or centre of financial interests is in France.

Taxable income and rates
Residents are taxed on worldwide income, whereas nonresidents are taxed only on French source income. Taxable income generally includes income from employment, business income, professional income, investment income and capital gains. Personal income tax rates are progressive up to a maximum of 40%, with consideration given to family circumstances. Various deductions and personal allowances also are permitted.

Both social security contributions and social security surcharges are deducted at source from salary payments. While contributions vary by business size, geographical location and business type, generally they average 40% of gross pay for employers and 15%-20% for employees.

Individual income tax is payable in the year after the income was earned. It may be paid in three or 10 instalments. All individual taxpayers in France must file an annual declaration of income by February/March for the previous year. Individuals must also declare any foreign bank accounts on their tax forms.

Individuals domiciled in France are liable for taxes on worldwide wages, salaries, fees and other income received in the normal course of their regular occupations. Non-French residents are only taxed on their French-source income.

Determination of taxable income
Individuals domiciled in France are subject to tax on worldwide wages, salaries, fees and other income received in the normal course of their regular occupation. They also must pay social security contributions and surcharges.

Some forms of unearned income on interest-bearing securities or on income invested in savings plans are taxed at a 15% flat rate at source. The rate may be higher if money is withdrawn within a few years of the investment.

Dividends are taxed as ordinary income
A number of deductions are allowed in calculating taxable income. All expenses connected with generating income are deductible unless reimbursed by the taxpayer's employer or otherwise. Taxpayers may opt to deduct all documented expenses or alternatively may take a flat-rate deduction. The deduction is 10% of income up to a maximum of EUR 13,501 (but not less than EUR 401).

An 18% final withholding tax is levied on the yield on fixed-income securities, money-market investments and some forms of officially encouraged savings.

Tax deductions are available for a variety of favoured activities and transactions. These include various forms of retirement planning, investment in local business start-ups and on borrowing to finance a new company, on income earned as a mentor for a start-up, for interest on loans taken out to finance transfer of a family business to other family members and for the purchase or medium-term lease of an environmentally friendly car.

There are deductions for school-age children, and 25% of the cost of care for children younger than age six may be deducted. Other deductible expenses, within certain limits, include alimony and support for dependents (children and parents), charitable donations and costs of residence in a long-term-care home, including for dependants. There are tax incentives for borrowers buying their first home and tax credits for investment in home improvements.

The amount of income tax payable depends, in part, on the number of dependents. A couple (married or cohabiting) without dependent children is required to calculate the tax as equal to that due on two incomes (two parts), each equal to one-half of the total income. A couple with two children pays tax equal to that due on three incomes (three parts), since each child is counted as one-half of a part.

Taxable capital gains include gains from the sale of movable property, land and buildings (but not bonds or the taxpayer's principal residence). Each taxpayer can carry out transactions worth EUR 25,000 annually without having to declare any capital gain on sale of shares. Above that amount, such capital gains (including on the first EUR 25,000) are taxable, but losses can be deducted. Capital gains on securities and similar transactions are taxed as income. Capital gains on property sales are taxed at 15% (plus special social security surcharges, which bring this to 26%). Deductions can be taken for the effect of inflation on property transactions. Other deductions include certain investment and legal costs. Payment of the tax may be spread over five years. Losses from the rental of real property (as well as mortgage interest payments) are generally deductible from overall taxable income, though there are ceilings depending on the type of investment.

France imposes a withholding tax on amounts paid to nonresidents for professional activities carried out in France. The tax is levied at progressive rates, from 0% on amounts up to EUR 13,583, 12% on amounts between EUR 13,583 and EUR 39,409, and 20% thereafter. The withholding tax will be refunded if the tax paid exceeds the amount that would have been due under normal domestic rules, but taxpayers must file a claim to obtain the refund.

Special expatriate tax regime
Foreign executives working in France may receive special exemptions, and different treatment of allowances granted to expatriates working in France is possible. The tax authorities take a generous approach to deductions for expatriates because they want to make France attractive for foreign investment. Individuals and their employers can maximise use of the existing deductions for up to six years. Generally speaking, deductions are available for items such as moving expenses, school fees, the additional costs of living in a separate location from a working spouse, agency costs incurred for renting an apartment, hotel costs on arrival and fees for professional advisers. Expatriates claiming such deductions may not claim the 10% flat-rate deduction for professional expenses but rather must deduct all these charges as documented expenses Deductions for tax equalisation allowances are also subject to the documented expenses regime.

Cost-of-living allowances for expatriates are tax-free, unless their basic salary is more than that of similarly-situated French executives. Only the amount of the cost-of-living allowance above the French salary level would then be tax-free. To benefit from this scheme, an executive must have arrived in France after 1 January 2004 and must not have lived in France in the previous five years. In addition, income that can be attributed to work carried out outside of France by these executives is tax-free up to an amount equal to 20% of the total income. Tax-free status is available for five years. Posted executives may deduct contributions to complementary pension schemes in another country for the same five years. 

Capital taxes
Households pay a wealth tax on net worth of more than EUR 720,000. This threshold applies per couple, not per individual. Some types of assets designed to fund retirement income are exempt and small deductions for dependents are allowed. Various property holdings outside France are exempt, although other assets are not.

The tax is levied on a sliding scale beginning at 0.55% on assets of EUR 720,000-1.16 million, rising to 1.8% on assets exceeding EUR 15 million. There is a mechanism to ensure that the amount of tax due on assets does not exceed 85% of net taxable income.

This calculation is not as straightforward when the value of assets exceeds EUR 2.3 million, but the principle is the same: tax can never exceed income.

Inheritance taxes are high and inheritance laws mean that it is not possible to dispose of property at will. Children and spouses have pre-emptive rights, and children may have pre emptive rights over a spouse.

Owner-occupants are liable for a tax on developed real property. This may be calculated by multiplying the rate set forth by the local authority on the property value of record

Source: Deloitte 

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