France’s draft Finance Bill for 2025 - balancing fiscal justice and economic growth
Matthias Heyberger
Operandi, Paris
Sara Kociemba
Operandi, Paris
France’s financial trajectory faces uncertainty as mounting debt and a record-high deficit raise concerns about the country’s economic stability. The situation is exacerbated by a hung parliament that has left the government in a state of near paralysis, following the dissolution of the National Assembly by President Emmanuel Macron on 29 June 2024 and the early legislative elections. These developments have created a fragmented political landscape, with partisan divisions hampering meaningful fiscal reforms.
Prime Minister Michel Barnier finds himself lacking the solid parliamentary backing necessary to navigate this challenging environment. His government is under increasing pressure to strike a delicate balance between stimulating economic growth and ensuring fiscal responsibility, all while contending with fierce budget debates that threaten to unravel any consensus.
As France prepares its 2025 Finance Bill, the need for a comprehensive plan that addresses both pressing economic issues, such as the high public debt and inflation, but also ensures sustainable economic growth in the long term, is paramount. Social crises also fuel the debate, recalling recent events such as the ‘yellow vests’ movement, farmers’ protests and the mounting public discontent over pension reforms and cost-of-living pressures.
On 10 October 2024, the government presented the draft Finance Bill for 2025 (projet de loi de finances pour 2025). The Bill aims to limit the public deficit to five per cent of the gross domestic product in 2025, instead of an expected seven per cent public deficit under the current rules, through a €19bn revenue increase taking the form of several new taxes. The government has outlined specific objectives for the Bill, including cuts to public expenditure, while ensuring that essential state services remain intact and efficient, and enhancing equity in the tax system by implementing targeted and temporary contributions from those who are financially able to assist in recovering public finances.
Targeting the rich
In alignment with the government’s commitment to fiscal justice, the Bill introduces targeted measures aimed at high-income French resident individuals and companies.
Among these is a proposed minimum tax of 20 per cent for individuals with a high income, affecting those whose taxable income exceeds €250,000 for single individuals or €500,000 for couples and whose average tax rate falls below this threshold (Article 3 of the Bill). This minimum tax contribution would be adjusted to ensure that these taxpayers effectively pay at least a 20 per cent rate, taking into account their personal income tax contribution.
Additionally, the Bill proposes a temporary exceptional contribution on substantial profits earned by certain large companies with turnover exceeding €1bn over two consecutive fiscal years ending on or after 31 December 2024. When determining if this contribution applies, the turnover threshold is assessed without consolidating the revenues of international group members, unless the company is part of a French tax consolidated group. In such cases, the consolidated turnover of all the companies within that French tax group, as defined under Article 223 A or 223 A bis of the French Tax Code (FTC), is taken into account. For taxpayers with revenue between €1bn and €3bn, the application of the contribution will lead to an effective corporate income tax (CIT) rate of 30.98 per cent for the first fiscal year and 28.4 per cent for the second fiscal year (including the 3.3 per cent surcharge on CIT). For taxpayers with revenue of €3bn or more, the effective CIT rates are 36.13 per cent and 30.98 per cent (including the 3.3 per cent surcharge), respectively.
Shipping companies benefiting from the flat-rate tax regime outlined in Article 209-0 B of the FTC (tonnage tax) with an annual income of €1bn or more, without income consolidation under this provision, would also be subject to a specific exceptional contribution for the two consecutive fiscal years ending on or after 31 December 2024. In practice, this tax should only apply to the French shipping group, CMA-CGM.
In line with the previous measures targeting high-income individuals and large corporations, the Bill also plans to introduce a tax on share buybacks applying to companies based in France that have reported revenues exceeding €1bn in the previous financial year (in some cases on a consolidated basis). This measure is the equivalent of the taxation of share buybacks introduced in the United States by President Joe Biden as of January 2023. The proposed tax rate is set at eight per cent, which will not be deductible for tax purposes. The tax will be enforced for capital reductions occurring on or after 10 October 2024. Certain transactions will be exempt from this tax, particularly those involving capital reductions intended for employee shares or minor share buybacks that facilitate mergers or demergers. This reflects the government’s desire to encourage employee participation and support corporate restructuring, without imposing a heavy tax burden.
Extension of the French tax residency qualification based on treaty provisions
The government also intends to firm up the tax rules for non-residents. Indeed, Article 23 of the Bill updates Article 4B of the FTC, which defines the conditions for an individual to be considered a resident of France for tax purposes. It now clarifies that even if a person meets one or more of the French criteria to qualify as French resident, they will not be considered a French tax resident if, under the provisions of international double taxation treaties, they are regarded as a resident of another country.
French employee stock ownership plans (BSPCEs): exclusion from equity saving plans and taxation in the case of reinvestment
In response to recent case law from the French Administrative Supreme Court (Conseil d’Etat, 8 December 2023, No 482922, and CE, 5 February 2024, No 476309), the Bill proposes significant changes to the BSPCEs regime (Bons de souscription de parts de créateur d’entreprise, a type of employee stock ownership plan for young companies utilised in France) and, more generally, the stock options and subscription rights regime, through Article 25. First, officially to prevent the addition of tax benefits, this article formally prohibits the inclusion of BSPCEs, most subscription rights, stock options and shares acquired through these mechanisms in regard to equity savings plans (Plan d’épargne en actions or PEA), which allow for the exemption from personal income tax of dividends and capital gains realised within the plan. This restriction was previously outlined in administrative guidance, but was overturned by the courts.
Additionally, Article 25 of the Bill differentiates between the exercise gain (considered a ‘salary benefit’), the difference between the market value of shares at the time of exercise and the exercise price, and the sale gain from selling these shares. The exercise gain on its own will be subject to the 30 per cent flat tax (including personal income tax and social contributions). Previously, this treatment was applied to the entire gain on the sale of BSPCE shares, comprising both the exercise gain and the sale gain. The net sale gain will now be subject to capital gains on movable assets, according to the normal tax regime. Importantly, the classification of the sale gain as a capital gain is expected to lead to an exemption from French taxes for individuals domiciled outside France. However, the main effect and objective of this measure consists in the taxation of the exercise gain in the case of the contribution of the shares acquired through BSPCEs to another company, whilst the sale gain can benefit from a deferral or suspension of taxation. More practically, it would trigger a taxation of employees owning such shares, in case of reinvestment of these shares in a new vehicle in the context of an acquisition of their company. It is also an alignment with the tax regime applicable to shares attributed through free share plans or stock option plans. These changes came into force from 10 October 2024.
While these adjustments supposedly aim at reinforcing tax equity, they could hinder companies’ use of BSPCEs as effective tools for employee incentivisation, a key advantage for driving employee engagement and participation in the company’s growth. Moreover, they could make the reinvestment in terms of these employees complex in the event of an M&A transaction.
Other key measures
At the same time, the French government is demonstrating its commitment to fostering the growth and sustainability of domestic businesses through measures such as extending the preferential CIT regime for mergers to include transactions without an exchange of shares (Article 17 of the Bill), as well as the extension of the €500,000 fixed deduction on capital gains for retiring business managers until 2031 (Article 19 of the Bill).
The Bill includes a delay in the abolition of the tax on the added value of businesses (cotisation sur la valeur ajoutée des entreprises or CVAE), postponing its abolishment from the initially scheduled date of 2027 to 2030. Revenue stemming from this tax fund local public bodies, whose budgets are also currently under pressure. This adjustment reflects a significant shift from previous business-friendly measures and highlights the government’s current focus on cost-saving strategies.
The Bill also clarifies France’s stance on the Organisation for Economic Co-operation and Development’s (OECD) Pillar Two Global Anti-Base Erosion (GloBE) rules (considering the recent clarifications published in the OECD’s guidelines) and includes the transposition of EU Council Directive 2023/2226 (DAC8) on administrative cooperation and the automatic exchange of information on crypto-assets. A number of changes have also been made to the scope of the reporting obligations of lawyers in connection with the declaration of cross-border devices (DAC6), the reporting obligations of online platforms (DAC7) established outside the European Union, and the organisation of the sharing of information with customs and anti-money laundering and anti-terrorist financing authorities.
Adoption procedure and timetable
The first reading of the Bill is scheduled to take place in the National Assembly (the lower chamber of parliament) from 21 October to 19 November 2024. Following this, the Senate (upper chamber) will deliberate, before the Bill returns to the National Assembly for a final reading. The legislation is expected to be adopted by 21 December 2024 and should be published in the Official Journal of the French Republic by year end. Considering the absence of a majority among the National Assembly, the government is expected to rely, as was the case for the last Finance Bill, on Article 49.3 (a constitutional provision that allows the government to pass legislation without a parliamentary vote under certain conditions) to ensure the Bill’s adoption. However, the government spokesperson (Maud Bregeon) has suggested that this provision will probably not be used during the first reading of the Bill.
Reflecting the ongoing political instability in France, parliamentarians have submitted numerous amendments to the Bill (including from the party of the President), highlighting significant disagreements over the proposed tax measures and complicating the legislative process. Please note that we could not present these amendments in this article, but that we will issue an update once the Bill has been passed.
The Social Security Bill for 2025
The French government has also introduced the 2025 Social Security Bill to the National Assembly. One notable change is the exemption of apprentices earning less than 50 per cent of the minimum wage from social security contributions, a reduction from the previous threshold of 79 per cent (Article 7). Additionally, the Bill reorganises reductions in employers’ social security contributions to incentivise salary increases. The exemptions will gradually decrease as salaries approach the minimum wage, will increase for salaries between 1.3 and 1.8 times the minimum wage and will subsequently decline again for those that are paid up to three times the minimum wage (Article 6).
While these measures reflect the government’s ongoing commitment to fostering a more supportive labour market, there is a risk that the structure of the second measure may inadvertently discourage salary increases beyond 1.8 times the minimum wage. This could lead to a ceiling effect, where employers are hesitant to increase salaries further, potentially stifling wage growth for higher skilled workers.
Conclusion
In conclusion, the draft Finance Bill reflects the French government’s efforts to balance various interests, while navigating the uncertain political and social landscape. The proposed taxes on high-income individuals and companies could be counterproductive, as in regard to tax policy, focusing on the tax base is often more effective for maximising revenue than simply increasing tax rates. The Bill highlights the lack of clear political direction from the government and the ongoing parliamentary discussions will be crucial in assessing the real impact of these proposed measures on fiscal stability and economic growth in France.