Reduction in tax: explanation, computation, and levels
Tax abatements are reductions in the taxable base, given by the French tax authorities, with the aim of decreasing taxes. They can come in the form of a fixed amount or a percentage. Here's everything you need to know about tax abatements in France!
Why does the French government offer tax abatements?
The government provides tax abatements for several reasons:
- Lighten the tax burden: Not all revenues are taxed the same way; some incur specific costs or charges, while others concern vulnerable groups. By applying a tax abatement to these revenues, the government acknowledges the existence of unavoidable expenses or unique situations that justify a lower taxable income.
- Encourage certain behaviors: The government uses tax abatements as an economic or social incentive tool. By reducing the taxable base on certain types of income, it encourages taxpayers to engage in behaviors deemed beneficial to the national interest, such as investment, family support, and economic stability.
- Foster fairness: Tax abatements contribute to fiscal equity by considering family charges, personal, or professional situations. This allows for a degree of progressivity in taxation.
What are the different types of tax abatements?
There are various types of tax abatements in France, with their form, quantity, and ceiling varying depending on the situation:
- Fixed tax abatement: This type is set by the tax authorities and is a fixed amount in euros, subject to annual adjustments.
- Proportional tax abatement: It is expressed as a percentage of the amount declared and deducted from it when calculating the taxable amount.
How do tax abatements work in France?
Base phase: Determination of the gross revenue or value
Before any abatement is applied, the gross amount that could potentially be taxed is determined. This can include income, capital gains, or transferred values (in inheritance or donation contexts).
Middle phase: Application of the abatement
The abatement is then applied to the gross amount. If it is a fixed abatement, a specific amount is subtracted; if it is proportional, a percentage is deducted from the gross amount. Sometimes, the abatement is subject to a limit.
End phase: Calculation of tax on the reduced base
After the abatement is applied, tax is calculated on the reduced amount:
- Income tax: Progressive tax brackets are applied to the abated base.
- Inheritance or donation taxes: The corresponding rates are applied after the abatement.
- Capital gains: The abatement reduces the taxable capital gain before the proportional tax (or withholding tax) is calculated.
The more significant the abatement, the smaller the taxable base, and consequently, the lower the tax the taxpayer will have to pay.
Who can benefit from a professional tax abatement?
Tax abatements can benefit various taxpayers, as there are specific conditions that grant eligibility. For example:
- Retirees, people aged 65 and over, and disabled people are eligible for a specific tax abatement.
- All employees, regardless of their salary level, benefit from a proportional 10% abatement for their professional expenses, without the need for justification. Depending on their expenses, they can opt for the actual expenses regime instead.
- Self-employed individuals benefit from a variable allowance rate based on the activity performed.
Tax abatements on real estate capital gains in France
Allowances based on the holding period
The mechanism is based on gradual allowances, depending on the number of years a property has been owned:
- 6% per year for the 6th to the 21st year of ownership
- 4% in the 22nd year
- Exemption after 22 years
These allowances apply to properties owned for more than 5 years.
Exceptional allowance on capital gains for specific sales
An exceptional allowance of up to 85% can be applied to capital gains realized upon the sale of real estate located in tense areas or within the perimeter of an urban renewal operation. The buyer must commit to building a collective residential building within a four-year period. The allowance rate is:
- 60% for tense areas
- 75% within an urban renewal operation
- 85% if at least 50% of the constructed area is intended for social or intermediate housing
Key takeaways
- Flat-rate and proportional tax abatements exist in France with varying forms, amounts, and ceilings.
- Eligibility varies depending on professional, personal, or family status, and the nature of the income.
- With a tax abatement in place, the taxable base is reduced, thus lowering the tax amount payable.
- The tax administration determines these abatements automatically during the calculation of thetax, so no additional steps are needed from the taxpayer.
References
- "Concentration de la fiscalité des revenue fiscaux de l'actif," France Stratégie, 2021. https://france-strategie.fr/francais/systeme-de-taxation/services-de-l-economie-de-la-france-strategie/concentration-de-la-fiscalites
- "Subsidies, exemptions, and tax credits in France," PwC, 2022. https://www.pwc.com/fr/en/tax/business-tax/subsidies-exemptions-and-tax-credits-in-france.html
- "Fiscalité sur le patrimoine immobilier," fiscimmo.gouv.fr, n.d. https://fiscimmo.gouv.fr/s-aguerez-vous-au-nouveau-regime-patrimonial/
- "Allocations familiales, allocations sociales et prélèvements forficatoires," Service-Public.fr, 2021. https://www.service-public.fr/particuliers/actualites/a33642
- "Le regime fiscal des precieuses monnaies," fiscimmo.gouv.fr, n.d. https://fiscimmo.gouv.fr/question-de-plomerie-certitude-dans-le-choix-de-vos-pierreries-precieuses/
- In the realm of personal finance, tax abatements in France can provide significant relief, with both fixed and proportional types designed to lighten tax burdens, encourage certain behaviors, and foster fairness.
- Business owners may also benefit from tax abatements, particularly in real estate investment. For instance, there are allowances based on holding periods for properties, and exceptional allowances for sales in specific areas, which can reduce capital gains taxes substantially.
