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Taxation of capital gains realised by individuals domicilied in France

Capital gains may be realised by individuals in the course of managing their private assets or in the pursuit of a business activity.

Capital gains realised by private individuals

The taxation of capital gains realised by private individuals applies to capital gains on real property and capital gains on the sale of transferable securities or shares.

Capital gains on a disposal free of charge are not taxed as such, but are included in the assessment base for capital transfer duty (see Taxes on personal assets, p. 61).

Capital gains on real property

Capital gains realised on the sale of real property or property rights by individuals in the course of managing their private assets are liable to income tax at 16%.
Capital gains realised on the disposal of securities of companies not liable to corporation tax whose assets mainly comprise real property or property rights (“predominantly property companies”) are subject to the same rules.

The notary is responsible for making the return and paying the corresponding tax on the seller’s behalf when the transfer is made.
The taxable event is the sale of the property or the rights relating to it. The capital gain is therefore established for the year in which the sale takes place, whatever the terms on which the price is paid.
Certain capital gains are expressly exempted, such as those that arise, under certain conditions, from the sale of the taxpayer’s main residence or sales of properties for which the price does not exceed €15,000.

The taxable base is equal to the difference between the sale price and the purchase price paid by the seller (or the market value if the property was acquired free of charge), plus, where relevant, certain limitatively listed expenses and charges. Relief equal to 10% of the gross capital gain is deducted for each year of ownership of the property after the fifth year. In practice, this relief means that capital gains on the sale of a property owned for more than fifteen years are exempt.

In principle, capital losses on property sales cannot be set off against either capital gains of the same kind or overall income. Exceptionally, capital losses and gains may be set off in certain limitatively listed cases, such as where the sold property was acquired by successive fractions.

A fixed allowance of €1,000 is deducted from the capital gain.

The tax on the capital gain must be declared and paid to the mortgage registry of the place where the property is situated before the land registration formality.

No declaration needs to be made if the capital gain is not taxable because it is expressly exempt or because it is eligible for relief for time of ownership or if the sale generates no capital gain or a capital loss.
Under most international tax treaties concluded by France, capital gains on the sale of property are taxable, by virtue of an exclusive right or not, in the country where the property is situated. Where no such treaty exists, capital gains realised by a resident of France on the sale of property in another country are taxable in France.

Capital gains on the disposal of transferable securities and shares

Capital gains on the disposal of transferable securities and shares realised by persons domiciled for tax purposes in France are taxed at a proportional 18% rate15 where the annual amount of disposals by the tax household exceeds a certain limit. This threshold, updated each year, is €25,730 for the taxation of income in 2009.

Beyond this threshold, capital losses during the year can be set off against capital gains of the same nature in the same year or in the following ten years.

For the purposes of calculating income tax, relief equal to one-third of capital gains or losses on the sale of shares in European companies that are liable to corporation tax or an equivalent tax or for which the taxpayer has opted for liability to corporation tax realised as of 1 January 2006 is deducted for each year in which the shares are held as of the end of the sixth year. In other words, capital gains on the sale of shares held for more than eight years at the date of sale are exempt from income tax.

For the purposes of such relief, ownership of the shares is reckoned from 1 January of the year in which they were acquired (or as of 1 January 2006 for shares acquired before that date), which means that the allowance will effectively apply to disposals as of 2012.

For senior managers of small and medium-sized enterprises who sell their shares in their business on taking retirement, the allowance applies in advance, i.e. as of 1 January 2006.

NB: The length-of-ownership relief applies only to income tax. Social levies remain payable on the entire amount of the capital gain realised by the seller.

Business capital gains

Business capital gains are profits of an exceptional nature made on the sale of fixed assets by industrial, commercial, craft, agricultural or non-commercial enterprises.

A distinction is drawn between long-term and short-term capital gains (or losses). Short-term capital gains (or losses) are generally included in the base of the taxable profit liable to progressive rates of income tax, while long-term capital gains are taxed at a reduced rate equal to 28.1% (income tax for 16% and social levies for 12.1%).

The distinction between the long-term and short-term regimes is made according to the following rules:

• for non-depreciable assets, capital gains (or losses) are deemed to be short-term where the assets are disposed of within two years of being booked. In other cases, capital gains are long-term;

• for depreciable assets, capital gains (or losses) on disposal are deemed short-term in principle, however long the assets have been held. However, if the asset has been held for longer than two years, the portion of the capital gain greater than the amount of the depreciation expense is deemed to be long-term.

• Business capital gains realised by a taxpayer exercising an agricultural, commercial, industrial, craft or liberal profession may be totally or partially exempt under certain conditions:

– on the sale of an individual enterprise or complete branch of activity16 where the activity has been pursued for at least five years and the value of the sold assets does not exceed certain thresholds;

– on the retirement of an individual where the activity has been pursued for at least five years: this exemption applies only to income tax at the 16% rate and does not apply to social levies (at the 12.1% rate), which remain payable.

– An allowance of 10% per year of ownership after the fifth year may be deducted from long-term capital gains on the sale of property allocated by the enterprise to its own operation, meaning that they are entirely exempt after fifteen years.

Capital gains realised by very small businesses are totally or partially exempt where the professional activity has been pursued for at least five years and turnover does not exceed certain thresholds.

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Posted by on Aug 17 2010. Filed under Capital gains, Capital gains. You can follow any responses to this entry through the RSS 2.0. You can leave a response or trackback to this entry

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