By regularly setting aside part of your income for investments, you can gradually build capital and create a significant financial cushion over several years. This approach allows you to benefit from compound interest and use tax advantages. France offers a relatively straightforward tax system for investments in securities such as stocks, bonds, and ETFs. Here are the key points you need to know:
Tax on Investment Income
Usually, investment income (such as interest and dividends) is taxed at a flat rate of 30%. This tax includes 12.8% income tax and 17.2% social levies. However, if you have a low income, you can opt for progressive taxation rates (in which case, the rate depends on your overall income). In rare cases where the taxpayer does not fall under the mandatory French social security, the social levies are 7.5% instead of 17.2%. This applies to expatriates who pay social taxes in other EU, EEA countries, or Switzerland.
PEA – Tax-Advantaged Investment Account
There is a special investment account in France called PEA ("Plan d’Épargne en Actions"). All investment income in this account is reinvested tax-free. If you hold money in a PEA for more than 5 years, you only pay 17.2% social levies when withdrawing funds, and income is exempt from income tax. If there are losses, they can be used to offset other capital gains or carried forward for 10 years. Investments via PEA are generally limited to French and European securities. However, certain European synthetic ETFs with a global investment strategy (such as MSCI World funds) may also be purchased due to technical tax reasons. The French version of the JustETF website allows you to filter funds marked as "PEA eligible". There is a contribution limit of EUR 150,000 for PEA. Ordinary brokerage accounts are called CTO – compte-titres ordinaire – and do not have these tax advantages.
Capital Gains Tax
When you sell your assets and make a profit, it is called capital gains. In most cases, this income is taxed at a flat rate of 30%. If you sell your stocks at a loss, that loss can be used to reduce taxes on future gains for up to 10 years.
Exit Tax
If you decide to leave France, a so-called "exit tax" may be imposed on certain large investments. This applies to those who have been a tax resident of France for at least 6 out of the last 10 years. Such tax may be charged on large shareholdings or financial assets worth over EUR 800,000.
Dividends
Dividends are payments that companies make to their shareholders. In France, they are taxed at the same rate of 30% as other investment income. However, if your overall income is low, you can include dividends in your tax return and pay less tax. If you choose to tax dividends at progressive rates, 40% of dividends from stocks are exempt from the 12.8% flat tax rate. This means that if your stock dividends are relatively high and your other income is low, you can reduce your tax burden by including them in your total income. However, this exemption does not apply to funds or ETFs, so dividends from such products will be fully taxed.
Ordinary Brokerage Accounts (CTO)
Ordinary brokerage accounts are called "compte-titres ordinaire" (CTO). Such accounts do not have tax benefits like PEA and are taxed on a general basis. It is also prohibited to invest in US ETFs and index funds through ordinary brokerage accounts or other channels in France, as they do not comply with European regulations. Therefore, French investors typically choose European ETFs available through PEA or CTO to gain access to global markets.
US ETFs and Index Funds
US ETFs and index funds are not available in the EU, which means that French investors cannot directly invest in such products. Instead, access to ETFs and index funds is possible through European alternatives that meet EU regulations.
Tax Treaty Between the US and France and Inheritance Tax Treaty
There is a tax treaty between the US and France. A reduced withholding rate of 15% may apply to dividends paid by US companies to French taxpayers if the proper paperwork (W-8 BEN) is filed with the broker. The withheld tax can be used as a tax credit on the French income tax return. There is also an inheritance tax treaty between the US and France. According to this treaty, inheritance tax in the US only applies if the deceased was a US citizen or resided in the US at the time of death. Otherwise, French rules should apply.
Accumulating and Distributing Funds
Many investors prefer accumulating funds, as they allow for deferred taxation. Accumulating funds reinvest profits, while distributing funds pay them out as dividends.
Pension Investments
There are tax advantages for pension savings in France. For example, life insurance (Assurance-Vie) provides tax benefits after 8 years of holding funds. There is also a pension savings plan (PER) that allows contributions with tax deductions.
Wealth Tax
There is no wealth tax in France on securities, except when underlying assets are real estate. Thus, wealth tax only applies to real estate if its value exceeds a certain level.
Tax Declaration
The tax year coincides with the calendar year. Tax returns must be submitted from April to May of the following year. Investment income must be included in the tax declaration (Form 2042). If you have foreign accounts or insurance policies, they must also be declared (Form 3916).
Inheritance and Gift Taxes
France has an inheritance tax, but spouses and certain partners are exempt. Direct heirs, such as children, can receive an exemption of up to EUR 100,000.
How to Avoid Overpaying Taxes on Investments in France
To avoid unnecessary costs and take advantage of tax benefits, it is important to carefully choose the type of account and investment product. PEA, Assurance-Vie, and PER can significantly reduce taxes on long-term investments. The choice between them depends on your financial goals, investment horizon, and tax situation.
Plan d'Épargne en Actions (PEA)
- Goal: Investing in European company stocks.
- Tax Benefits: After 5 years of holding, income is exempt from income tax; only social levies of 17.2% apply.
- Restrictions: The maximum contribution is EUR 150,000. Investments are limited to stocks and funds consisting of at least 75% European stocks.
Life Insurance (Assurance-Vie)
- Goal: A flexible tool for capital accumulation and inheritance.
- Tax Benefits: After 8 years of holding, there are tax benefits upon withdrawal; annual tax exemption of up to EUR 4,600 for a single person and EUR 9,200 for a couple.
- Flexibility: No contribution limits. The ability to invest in a wide range of assets, including funds, bonds, and real estate.
Pension Savings Plan (PER)
- Goal: Saving for retirement with tax deductions.
- Tax Benefits: Contributions are deducted from taxable income, reducing current tax. At retirement, funds can be withdrawn as a pension or lump sum, with taxation depending on the method of withdrawal.
- Restrictions: Funds are usually locked until retirement, except in certain situations (e.g., purchasing a first home).
Recommendations
- Short-Term Goals: Assurance-Vie offers flexibility and tax advantages for long-term holding.
- Long-Term Stock Investments: PEA provides tax benefits for investments in European stocks held for over 5 years.
- Retirement Savings: PER helps reduce current taxes and save for retirement, but funds are locked until retirement.
An optimal strategy may involve combining these products to achieve different financial goals. It is recommended to consult a financial advisor to choose the best option for your situation.
