The 2023 French Budget Acts and Second Supplementary Budget Act for 2022
Two things leap out when reading the 2023 French Budget Act.
First, in substance, the Budget Act does not make any structural changes to how wealth is taxed. In this respect, it is in line with previous Budget Acts. But a lot has been going on with respect to wealth since 2020, with a slew of legal precedents, ministerial responses and the publication of administrative comments.
With respect to form, this Act differs from previous Budget Acts in that it was passed using article 49-3 of the Constitution, a mechanism that allows the government to force laws through parliament without a vote.
But none of this is surprising: don’t forget that this Budget Act was drafted in a turbulent global economic climate, a major energy crisis and rampant inflation. Consequently, the goal of the executive branch is to protect household purchasing power and respond to emergencies while keeping the budget on track.
But some measures are worth a closer look.
To protect purchasing power, the income tax rate was adjusted to take inflation into account, as it is every year. Given the current inflationary environment, the change in this year's rates was bigger than usual.
It was 5.4% for 2022 income tax. The marginal tax rate of 45% now applies to anyone earning more than €168,994 in taxable income.
Similarly, some minimums and maximums were re-evaluated: income-splitting, dependent children, tax relief limits, etc.
A similar measure for SMEs that raises the earnings limit will qualify them for a reduced corporate tax rate.
Businesses and companies subject to corporate tax are taxed at the ordinary rate of 25%. They can, however, take advantage of a lower rate of 15% on the first €38,1290 of income, as long as certain conditions are met:
Revenue below €10 million
Fully paid-up capital
At least 75% held by individuals
To take the impact of inflation into account for fiscal years ending on or after 31 December 2022, the €38,120 limit has been raised to €42,500, which can save up to €438 in corporate tax each year.
With respect to this measure, although the original amendment excluded real estate companies from benefiting from the lower rate, this restriction was not retained.
Finally, as announced, to support the economic activity of French companies and make them more competitive, the corporate value-added tax (CVAE) will be halved for 2023 and then eliminated entirely as of 2024. The CVAE applies to businesses and companies with revenue above €500,000, even though all businesses are required to file a CVAE return each year.
Keep in mind that this production tax brought in €9.7 billion in tax revenue in 2021 and is particularly high in France compared to similar taxes applied by other European countries.
Controlling energy spending and consumption is also a key concern and priority for government action, as can be seen in the tax measures to encourage energy retrofits.
First, the rental deficit amount that's deductible from total income was doubled from €10,700 to €21,400 for energy retrofitting work completed in 2023, 2024 or 2025. This is intended to encourage landlords to undertake energy retrofits that will convert rental units from class E, F or G (highly energy-inefficient housing) to class A, B, C or D.
Note that lawmakers have introduced a measure aimed at gradually prohibiting the rental of highly energy-inefficient housing starting in 2025 for class G units, 2028 for class F units and 2034 for class E units.
But taxpayers can’t opt out of the higher limit, which means they cannot choose the formula (deduction from overall income versus deduction from subsequent rental income) that works best for them. However, if the rental deficit isn’t deducted from overall income, it will be deducted from rental income for the next 10 years. That would result in even greater tax savings (equivalent to the marginal bracket + social levies).
We should add that, even though interest rates have gone up, it may be a good idea to take out a loan to complete this work and thereby take advantage of the leverage afforded by credit.
At the same time, as in 2022, the government will continue to offer the MaPrimeRenov’ grant regardless of income for comprehensive renovations. This grant is given to owners who complete energy retrofits on their property. In principle, it is calculated based on household income and the environmental benefit delivered by the project. However, in 2023 as in 2022, there is no income-based limit for owners that complete a comprehensive renovation provided the energy efficiency gain is at least 55%. Landlords, who were supposed to become ineligible after 31 December 2022, will remain eligible after that date.
As for businesses, a tax credit is offered to VSEs and SMEs for energy retrofits of buildings used by their tertiary-sector business. This provision, which ended on 31 December 2021, was reintroduced by the 2023 Budget Act for expenses incurred between 1 January 2023 and 31 December 2024. This tax credit is equal to 30% of the cost, excluding tax, of eligible expenses, and is capped at €25,000 for the entire two-year period.
Similarly, the 5.5% reduced VAT on energy retrofits was defined and rationalised. It applies to fitting, installation and maintenance services for electric vehicle charging stations on residential property.
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