Legislative elections and taxation of wealth income: it is urgent to do nothing!

Walk

The anxieties of wealthy taxpayers are growing as the first round approaches. However, acting hastily in anticipation of a potential return to the progressive scale risks doing them a disservice. Explanations.

As soon as it came to power, the current majority fundamentally changed the taxation of wealth income: since January 1, 2018, passive income (dividends, interest and capital gains from the sale of securities) is now subject to a flat rate. income tax of 12.8% (replacing taxation on the progressive scale of income tax whose marginal rate reaches 45%) to which is added a liability to social security contributions of 17.2%, i.e. total taxation of 30% (commonly called “flat tax”).

Taxation of income from assets

As part of the campaign for the early legislative elections, the question of taxation of wealth income is central. Thus the New Popular Front proposes the establishment of a progressive scale of 14 brackets with rates of up to 85% for the highest incomes as well as the elimination of the flat tax for property income (which would be reintegrated into the progressive scale of income tax); the National Rally also discussed the abolition of the flat tax with taxation of passive income at the progressive income tax scale; Finally, the presidential majority, although it does not intend to return to the flat tax, has announced that it wants to amend the taxation of certain capital gains, particularly on share buybacks, by establishing a progressive tax rate depending on the length of ownership. of the latter.

Thus, whatever the majority that emerges from the next elections, the taxation of income from assets could be profoundly modified, in particular with more unfavorable measures for high incomes, and this as soon as a corrective finance law for 2024 is published, which could be voted on as early as the summer. The latter could be coupled with measures provided for in the finance law for 2025, which will be adopted in December 2024.

Tax advance

Faced with this uncertainty, concern is growing among taxpayers who are tempted to make massive dividend distributions or transfers of securities in the hope that carrying out such a transaction before the change in the tax regime for income from assets will allow them to retain the benefit of the flat tax. This temptation is all the greater since the current taxation of dividends suggests that the tax is paid upon distribution, and not upon the annual income declaration.

Indeed, when distributing dividends, the paying company deducts the flat tax of 30% from the dividend paid, which it pays directly to the Treasury in the month following the distribution. During his annual income declaration, the taxpayer declares the amount of dividend received as well as the withholding tax paid: the latter being equal to the tax due, no additional tax is therefore to be paid by the taxpayer.

However, it is essential to remember that this payment is only an advance on tax and does not, under any circumstances, discharge the payment of the latter. In concrete terms, a taxpayer who receives dividends in July 2024 would see a 30% withholding tax made when the said dividend is paid. However, if it were decided by the new majority that this dividend should be taxed at the progressive income tax scale (current marginal rate of 45%) to which would be added social security contributions of 17.2%, then the taxpayer could be forced to pay a tax balance corresponding to the difference between the final tax and the withholding tax made, the prior payment of the withholding tax not releasing him from his tax obligations. Such a situation is the consequence of what is called the “small retroactivity” of the tax law. In concrete terms, the event giving rise to income tax is set at December 31 of the year. Also, taxation is based on the tax rules applicable on December 31, and not those applicable on the day the income is received.

Collateral damage

It is therefore urgent to wait rather than rush into operations that will not only not be immune to a possible abolition of the “flat tax”, but could also have negative collateral effects on the tax front. Indeed, and even if none of the parties has spoken on this issue, there is currently an exceptional contribution on high incomes (CEHR) at the marginal rate of 4% which is based on the taxpayer’s annual reference tax income (i.e. the total amount of annual income received) and whose rate could also be revised upwards as part of a supplementary finance law for 2024.

In this scenario, taxpayers who have made massive dividend distributions in 2024, in addition to being faced with a more unfavorable tax regime than the current flat tax, could see the amount of their CEHR explode due to an income reference tax unnecessarily increased by the amount of distributions. Beyond having emptied the coffers of their companies for nothing, taxpayers, moreover, would see the sums thus reinstated into their private assets potentially subject to ISF in the event of its return, another tax element of the campaign legislative elections. Smart tax planning and haste don’t mix.