Legislative elections and taxation of income from assets: 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.

Since coming to power, the current majority has made major changes to the taxation of income from assets: since 1 January 2018, passive income (dividends, interest and capital gains from the sale of securities) has been subject to a flat rate of income tax of 12.8% (replacing taxation at the progressive income tax scale with a marginal rate of 45%), to which is added a social security contribution of 17.2%, i.e. a total tax of 30% (commonly referred to as the “flat tax”).

Taxation of wealth income

As part of the campaign for the early legislative elections, the issue of taxation of income from assets is central. Thus, the New Popular Front proposes the establishment of a progressive scale with 14 brackets with rates of up to 85% for the highest incomes as well as the elimination of the flat tax for income from assets (which would be reintegrated into the progressive scale of income tax); the National Rally has also discussed the elimination of the flat tax with taxation of passive income at the progressive scale of income tax; finally, the presidential majority, while it does not intend to return to the flat tax, has announced that it wants to amend the taxation of certain capital gains, in particular on the repurchase of securities, by establishing a progressive tax rate based on the length of time the latter are held.

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 carry out massive distributions of dividends or transfers of securities in the hope that carrying out such an operation before the modification of the tax regime for income from heritage allows you to retain the benefit of the flat tax. This temptation is all the greater since the current taxation of dividends suggests that payment of tax occurs upon distribution, and not during the annual income declaration.

Indeed, when distributing dividends, the paying company withholds the flat tax of 30% from the dividend paid, which it pays directly to the Treasury in the month following the distribution. When filing his annual income tax return, 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 payable by the taxpayer.

However, it is essential to remember that this payment only constitutes a tax advance and is, in no case, discharge of the payment of the latter. Concretely, a taxpayer who receives dividends in July 2024 would see a 30% withholding made when paying said dividend. 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 social security contributions of 17.2% would be added, then the taxpayer could be forced to pay a balance of tax corresponding to the difference between the final tax and the withholding tax paid, 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. Concretely, the taxable event for 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 hastily carry out operations which not only will not be immune against a possible abolition of the “flat tax”, but could have negative collateral effects on the tax level. Indeed, and even if none of the parties have expressed themselves on this question, there is currently an exceptional contribution on high incomes (CEHR) at the marginal rate of 4% which is based on the annual reference tax income of the taxpayer ( ie the total amount of annual income received) and the rate of which could also be revised upwards within the framework of a amending 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 reintegrated 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.