Last updated on 7 de April de 2023
France is famous for its high taxes. We analyze the most important Taxes in France to understand what workers, investors, corporations, and consumers pay. We also touch on real estate and other topics.
Content
- Introduction
- Taxes on Earned Income
- Capital Income Taxes
- Tax on Real Estate Wealth
- Real Estate Transfer Tax
- VAT
- Corporate Tax
- Public Finances in France
- Conclusion
Introduction
France is the second largest economy in the European Union and seventh largest in the world, according to the IMF. It enjoys a great reputation for its quality of life and cuisine, making it a very appealing destination.
However, France is also famous for its excessive taxation. This is why it is so important to become familiar with a country’s fiscal system. Doing so will allow us to understand why things are the way they are.
France’s official currency is the Euro. As a result, it shares monetary policy with the rest of the countries within the Eurozone, including Germany, Italy, Spain and the Netherlands.
According to WorldData.info, the cost of living in France is about 4% lower than in the United States, 12% lower than in the United Kingdom, and 4% higher than in Germany.
We will start our analysis by looking at taxes on earned income in France.
Taxes on Earned Income
Earned income in France is subject to 4 different types of tax
First, employers must make social security contributions based on the employee’s gross salary, which are akin to payroll taxes. Second, employees also make social security contributions of their own.
Third, employees must also pay social charges. These are not to be confused with social security contributions. They are a fixed percentage of the worker’s gross salary.
Finally, workers also have to pay income tax. Income tax in France has progressive rates, making those who earn more, pay a higher percentage of their salary in tax.
Let us see how each of these 4 ways to tax earned income works:
Social Security Contributions paid by the Employer
The contributions that corporations must make to the French social security are among the most onerous in the world. There are 12 main concepts for which companies must pay social contributions. In most countries, this is broken down in just 3 or 4 concepts.
The French social security covers things like health care, disability insurance, unemployment, vocational training, apprenticeship and, obviously, retirement. Each of these concepts has its own rates, as well as minimum and maximum contributions.
The easiest way to see how much companies pay in terms of social security contributions is to compare the applicable contributions with the employee’s gross salary. When we do that, we see these payroll taxes are about 40% of the employee’s gross salary.
The following table shows precisely that information. The minimum monthly wage in France for 2023 is €1,709 for full-time workers, which corresponds to a gross annual salary of about €20,508. Social security contributions are low when employing someone for minimum wage but increase rapidly when the employee’s salary is slightly higher.
In fact, for medium and upper-middle incomes, the percentage is higher than 40%. The percentage is slightly lower for the highest incomes because the contribution for certain concepts is capped:
These social security contributions are higher than what corporations have to pay in similar countries such as Germany or Spain. They are also much higher than payroll taxes in the United States.
Additionally, French workers are also subject to very high social security contributions themselves.
Social Security Contributions paid by the Employee
Workers in France also have to pay into the social security system and make a number of contributions, especially related to the retirement system.
When it comes to general pension payments, workers have to make two contributions: 6.9% of their gross salary with a maximum base of €3,666 per month (€43,992 per year) and 0.4% of the total gross salary.
On top of that, additional contributions must be made to the ARRCO-AGIRC pension system. This is in place to supplement general pensions funded with social security contributions. ARRCO-AGIRC contributions are 3.15% of the gross salary up to €3,666 per month (€43,992 per year), and 8.64% for the part of the gross monthly salary between €3,666 and €29,328 (€43,992 per year and €351,936 per year).
As if that were not enough, in 2019 an additional concept was introduced: the contribution for the overall balance of the pension system. The first €3,428 per month is taxed at 0.86%, and the amount between €3,428 and €29,328 at 1.08%.
The following table summarizes all the payments that workers must make to the social security in France. You will also see the maximum amounts that can be paid for each concept:
In the next section we analyze a type of income tax that only exists in France: social charges. These are in addition to social security contributions.
Social Charges
Social charges are another tax levied on income. These taxes have a fixed flat rate, meaning that everyone pays the same percentage, unlike in a progressive structure, where the tax rate increases with the level of income.
In this section we will talk about the rates applicable to earned income. In another section we will look at the rates applicable to capital income.
Even though they are called Social Charges, they are not part of the French social security system. This means they do not generate any rights to collect payments in the future. Revenue from social charges is usually spent on services such as health care or unemployment benefits.
Two types of social charge contributions apply to earned income. First, the contribution sociale généralisée, known as CSG, takes 9.2% of the entire gross annual income, without any exempt amount or maximum base.
The second social charge is the Contribution au Remboursement de la Dette Sociale (CRDS) for which workers must pay 0.5% of their entire gross annual income.
Thus, social charge contributions cost workers 9.7% of their gross salary, regardless of how much they earn.
Income Tax
Finally, once social security contributions and social charges have been paid, earned income is subject to income tax, known as impôt sur le revenu. Interestingly, income tax affects higher incomes a lot more. Lower incomes are much more impacted by social charges.
To compute the base on which income tax is calculated, we take the gross salary and subtract what the worker has paid in social security contributions. The resulting amount is reduced by 10%, as a concession for work-related expenses, up to a maximum reduction of €12,650 (which corresponds to a tax base of €126,500).
The remaining amount is subject to 7 tranches:
- €0 to €10.777: 0%
- €10.777 to €27.478: 11%
- €27.478 to €78.570: 30%
- €78.750 to €168.994: 41%
- €168.994 to €250.000: 45%
- €250.000 to €500.000: 48% (3% extra above 45%)
- More than €500.000: 49% (4% extra above 45%)
The additional tranches of 3% and 4% above €250,000 and €500,000, respectively, were introduced just a few years ago. They are called Contribution Exceptionnelle sur les Hauts Revenus, and make France one of the countries with the highest marginal tax rates in the world. Remember that social charges are uncapped and should be added to these income tax rates.
It should be noted that, for single people without children, the first €16,140 are exempt from taxes, as that is the personal deduction. For a family of two adults and two children, the exempt amount for the whole family increases to €40,790.
Another advantage enjoyed by families is that income tax is not calculated for each adult separately. In fact, all income is combined and divided among the number of “parts” in the family. Adults count as “one part” and children as “half a part.”
Hence, a family with 2 adults and 2 children would have a total of 3 parts. If the family’s taxable amount was €100,000, this amount would be divided by 3 (€33,333) and taxes would be calculated on this amount.
Obviously, the resulting amount would then be multiplied by 3. But it is cheaper to pay 3 times the taxes payable on an income of €33,333, than paying once the taxes applicable to an income of €100,000€, due to progressive tax rates.
In the following section we analyze the final net salary that the worker receives after social security contributions, social charges, and income tax have been paid.
Total Tax Burden on Earned Income
The best way to analyze the total tax burden on earned income is to compare the amount of money finally received by the worker as net income with the total labor costs paid by the employer.
Thus, we will subtract social security contributions paid by the employer, social security contributions paid by the employee, social charges and income taxes from total labor costs. By doing this we can see how much money is ending in the worker’s bank account and how much in the state’s coffers.
The following table summarizes all that information. We can see, for different income levels, how much the company is spending to employ an individual, their gross and net salary, together with the total tax burden on earned income:
As we can see, the total tax burden is extremely high. There are two ways to describe this issue. On the one hand, we could say workers have to pay a lot of income-related contributions and taxes. On the other hand, we could simply say that employing people in France is very expensive for companies.
Someone earning just above minimum wage pays about 33% of their gross income in taxes. Lower-middle incomes pay almost half in taxes. Middle and upper-middle incomes pay more than 50%. And individuals with very high incomes pay about two thirds to the state.
The following graph illustrates how many Euro Cents a worker receives for each Euro that the company has spent to employ them, depending on their income level:
In the next section we analyze how capital income is taxes in France.
Capital Income Taxes
For those interested in generating income from their savings and capital investments, capital income taxes are very important. Let us see how they work in France:
Dividends, Interest and Capital Gains
Income received in the form of dividends and interest payments, as well as realized capital gains, are subject to a flat rate of 30%. This percentage can be broken down into 12.8% in income taxes and 17.2% in social charges.
Nevertheless, dividends received from corporations considered “very profitable” by the French government are subject to a 35% tax rate.
Tax payers with taxable incomes above €250,000 per year, regardless of whether that comes from labor or capital, must also pay an additional 3% charge (Contribution Exceptionnelle sur les Hauts Revenus), making their effective rate 33% or 38%.
For those with taxable incomes greater than €500,000, the additional charge will be 4%, taking their effective tax rate all the way to 34% or 39%.
If someone only receives income from capital, and their income is low, they can choose to pay taxes using the progressive tax rates applicable to earned income. This can be beneficial in cases where the sum of income tax and social charges would end up being less than 30%.
Rental Income
Net rental income is taxed the same way as other forms of capital income. That means rates range from 30%, or potentially lower for lower income taxpayers, all the way up to 34% with those with high incomes.
It should be noted that all costs associated with owning the property can be expensed and hence used to reduce taxable income. As a result, if we have a mortgage on our real estate investments, interest paid is tax-deductible.
Tax on Real Estate Wealth
Until 2018, France had a wealth tax, very similar to the one that exists in a few other European countries such as Spain and Norway. However, it was decided to abolish the wealth tax and replace it with a tax on real estate wealth. With this reform, other types of assets were no longer taxable.
This tax on real estate wealth must be paid by owners whose real estate assets are valued by the French State at more than 1.3 million euros.
If our net real estate assets are above that figure, the first €800,000 are exempt from taxes. For the amount between €800,000 and 10 million, the tax rate will be 0.5%. Anything over €10 million will be taxed at 1.5%.
One thing we should bear in mind is that this tax takes into account both real estate assets in France as well as abroad.
Real Estate Transfer Tax
Buying a home is the most important investment decision for most people. And it often comes with associated taxes. In France these vary depending on whether the home is new or second-hand.
For second-hand home transactions in most French provinces, the buyer must pay 5.80% of the value of the property in registration taxes. This tax rate is slightly lower in a few provinces of the country, at 5.09%.
When it comes to transactions involving new construction homes, the buyer must pay 20% in VAT, and 0.7% in real estate registration taxes.
In addition, while notary fees are paid to notaries, they are regulated and set by the government. Notary fees are mostly determined by the value of the property, even though the rate is higher for lower-value properties. As a general rule, notary fees will hover around 1% of the value of the transaction.
VAT
VAT taxes the consumption of goods and services in France. And it is one of the taxes that achieves the most revenue for the government. As in most European countries, VAT in France has different rates, which means not all products and services are subject to the same taxes.
The following table shows all VAT rates in Frances, as well as the most important goods and services for each of them:
Thus, VAT in France is very much in line with what we find in most European countries.
Corporate Tax
Corporate tax is levied on corporate profits. France is considered one of the most onerous countries for companies. Remember that companies in France already have to pay the equivalent of about 40% of their staff’s gross salaries in social security contributions.
Regarding corporate taxes, there are two applicable rates, following a progressive structure.
Companies with profits of more than €763,000 in a year are subject to a rate of 31.3%. Those with profits below that figure must pay 28% in corporate tax.
Public Finances in France
Before concluding this analysis about taxes in France, we must take a look at the state of the country’s public finances.
We have seen taxes are generally high for everyone: workers, investors, companies, consumers and even real estate owners. The question is whether the French government is able to meet all its obligations with the tax revenue it achieves.
In order to answer this questions, the best thing is to take a look at the level of public debt. This will tell us how much the country owes relative to the size of its economy, as well as the trend of public debt.
The following graph shows the level of public debt in France since 1980, relative to the size of the economy:
As we can see, public debt has gone up almost uninterrupted for the last four decades. Current debt levels have already exceeded 120% and the trend is very worrisome.
According to The Heritage Foundation, France ended the year 2022 as the second country with the highest tax burden in the world, at 45.4% of the country’s GDP. It is difficult to imagine tax revenues can increase much more beyond that.
These are the countries with the highest tax burdens in the world:
France clearly has a public spending problem. In fact, the French government experienced its last fiscal surplus in the early 1970s.
This means France will have to take tough measures at some point in the future. Spending cuts are likely to be necessary. And that can come hand in hand with political and social problems.
Conclusion
We have confirmed France is a country with high taxes. Taxation levels are similar to those in Scandinavian countries. But, unlike those countries, the French government is also highly indebted, making its economy way less dynamic.
If you are considering moving to France, taxes is not the reason you would want to move there. France has plenty to offer in terms of quality of life, but this comes at a very high cost.
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And if you are interested in learning how taxes work in other countries, check out this section:
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