France's 2025 Budget: Tax Hikes targeting the Rich and Spending Cuts to Address Deficit

| Image Credits: Michel Jean Barnier, a French politician who became France Prime Minister of France on 5 September 2024,  by the European Parliament. 

In a bid to reduce its growing deficit, the French government has introduced a draft budget for 2025, which targets €60 billion in savings. The budget plan proposes €40 billion in public spending cuts, while €20 billion will be sourced through tax increases and new levies.

These measures are part of the government's strategy to reduce France's fiscal deficit to 5% of GDP in 2025, down from the expected 6% in 2024, with a long-term goal of returning to the EU's required 3% threshold by 2029.

One of the main components of this plan includes significant tax hikes on high-income individuals and large corporations. The new taxes, described as "exceptional" and "temporary," are designed to generate additional revenue from the wealthiest households and companies with substantial profits.

NEW TEMPORARY TAXES ON WEALTHY INDIVIDUALS

Among the most notable proposals in the 2025 budget is a new temporary tax for high earners. French residents with annual incomes exceeding €250,000 for individuals and €500,000 for couples are expected to contribute more to the state’s coffers. This measure is forecast to bring in €2 billion in revenue in 2025 alone.

These taxpayers already face an exceptional contribution known as the "contribution exceptionnelle sur les hauts revenus" (CEHR), introduced in 2011. The CEHR currently imposes a levy of 3% for single taxpayers earning over €250,000 and 4% for incomes above €500,000. This progressive tax applies only to the income exceeding these thresholds.

The draft budget proposes a further surcharge to ensure that wealthy individuals pay a minimum effective tax rate of 20%. This additional levy will be applied retrospectively to income earned in 2024, pending parliamentary approval.

IMPACT ON LARGE CORPORATIONS

In addition to individual tax hikes, large corporations will also face new burdens under the 2025 budget. Companies with a turnover exceeding €1 billion will be subject to corporate tax surcharges for two years. This measure targets around 440 companies operating in France. 

Additionally, a tax on share buybacks for companies with a similar turnover threshold has been introduced, further increasing the tax burden on France's largest businesses.

Also, revisions to the GloBE rules are being made to align with OECD administrative guidance.

EFFECT ON NON-RESIDENTS AND WEALTHY INDIVIDUALS LEAVING FRANCE

For non-residents, the budget clarifies the application of tax residency rules. Recent court rulings have raised uncertainty about how French domestic law would apply to non-resident taxpayers, but the new provisions ensure that tax treaties will take precedence over domestic residency laws. This move provides clarity for employers and taxpayers, particularly in relation to withholding tax obligations for individuals who are residents of another country under an international tax treaty.

There have been concerns that increased taxation could drive wealthy individuals out of France. Reports suggest that some high-income residents are considering moving their assets abroad or leaving the country. However, strict exit tax rules and the global tax obligations on French residents make this difficult. French residents are taxed on their worldwide assets, meaning that relocating abroad does not necessarily exempt them from France's tax system. 

The exit tax, which applies to unrealized capital gains for individuals holding more than €800,000 in assets, can further complicate decisions to move out of the country.

IMPACT ON INVESTMENT AND REAL ESTATE

Despite the proposed tax increases, there has been no significant drop in investment in French real estate. The market for high-end and ultra-prime properties has remained strong, with ongoing demand for properties valued at over €20 million. While some investors may explore alternative options such as Switzerland, Monaco, or Italy due to their more favorable tax regimes, many continue to view France as a stable and attractive destination for property investments.

For property owners, the wealth tax, which applies only to real estate assets, remains a significant consideration. This progressive tax, which ranges from 0% to 1.5%, applies to the value of worldwide property holdings for French residents. Combined with income tax, social contributions, and the exceptional contribution for high earners, the total tax burden on wealthy individuals can exceed 66%.

Additionally, new regulations are being introduced to limit the tax advantages associated with short-term rentals of furnished properties.

LEGISLATIVE PROCESS

The 2025 French budget reflects the government's commitment to addressing the country's growing fiscal challenges through a combination of spending cuts and targeted tax increases. While the wealthiest individuals and largest corporations will bear the brunt of these new measures, the government believes that these actions are necessary to stabilize the economy and reduce the deficit.

The initial reading of the bill in the National Assembly (the lower house of parliament) is scheduled to occur between 21 October 2024 and 19 November 2024. Following this, the Senate (the upper house) will review the bill before it returns to the National Assembly for another reading. The bill is expected to be adopted by 21 December 2024 and published in the Official Journal (Journal officiel) before the year’s end. 

SOURCES/RECOMMENDED READ: 

• Will France's looming tax hikes force wealthy citizens to move away? | Euronews

• FR – Draft Finance Bill for 2025