Tax Levels in France
27th Nov 2022
A new study compares the level of taxation in France with other countries in Europe.
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At first glance it is not an entirely flattering portrait, for it shows France having one of the highest tax takes in Europe.
According to the study by financial analysts Fipeco, tax revenues in France in 2021 were 47% of gross domestic product (GDP), second only to that of Denmark (48.8%). Only Belgium comes anywhere near either of them at 46%. Ireland has the lowest level of taxation, at 21.9% of GDP. The UK stands at 29%.
The average across the European Union is 41.7%, as shown in the table below.
France has been the European champion of taxation for many years. Nevertheless, the total tax take is down from 48.3% of GDP in 2017 to 47% in 2021 due to the policy of lowering taxes and social insurance contributions carried out by President Macron over the past 5 years.
Beyond the headline figures, the study shows the composition and distribution of the taxes in France, which will offer greater comfort to most households.
Thus, contrary to what may be perceived, tax revenues from income tax and social charges on households are below the European average. In 2021, they represented 9.4% of its GDP whilst the average in the euro zone was 9.7%.
Income tax, in particular, was substantially below the European average at only 3.3% of GDP. It is the peculiarity of France to have what is effectively a second income tax – social charges – that pushes it up to 9.7%.
However, as we have pointed out previously on these pages, many international owners of property in France are exempt from the social charges. In some cases, foreign income, such as pensions and rental income is also exempt from income tax in France, albeit that it will normally be taxable in your home country.
France also has a very progressive system of income tax, to the extent that around half the population do not actually pay the tax, although the top-rate of tax, over 50%, on the ultra rich is one of the highest in the world.
Capital gains and dividends are also heavily taxed, primarily as a result of the impact of social charges. Once again, however, under European laws EEA and UK nationals escape the full wrath of the full panoply of social charges on such gains.
Robert Kent of Kentingtons financial advisors in France, states that: "Many UK nationals are amazed to see that their tax bills fall by as much as 30% when they move to France."
In terms of indirect taxes on consumption, such as VAT, they are slightly higher in France than most other countries in Europe, at 12.3% of GDP. The average in the eurozone is 11.1% and in Germany 10.1%. The standard rate of VAT in France is 20%, which compares favourably with most other European countries, but which is offset by other taxes on energy, tobacco, alcohol and insurance etc. Taxes on fuel are particularly high in France.
The problem for France is the level of taxes on the business sector, which are generally higher than elsewhere in Europe.
Thus, social security contributions paid by employers is 10.2% of GDP, the second highest figure in the eurozone after Estonia. Other studies have shown that employers pay around one-third of labour costs in social security contributions, although the level depends on the employment group and the size of the labour force as various rates apply. Lower employer social security contributions are also payable on those only receiving a low wage.
The level of social security contributions on small businesses is also high, at around one-third of income. The rates were reduced marginally since last month, as we reported in our article Reduction in Social Insurance Charges for Small Business Owners.
Other taxes on business amount to 4.5% in France, down from 5.1% in 2020, but still 2.2 points higher than in the eurozone and 3.5 points higher than in Germany.
Nevertheless, in terms of taxes on profits of companies, France compares favourably with most other countries in Europe, at 2.9% of GDP, compared to over 3% in Germany, Netherlands, and Belgium. The overall company tax rate in France fell from 44.4% in 2017 to 25.8% in 2022.
The rate of taxation on company profits has reduced over the past three years, and President Macron also plans to abolish the business rates (Cotisation sur la Valeur Ajoutée des Entreprises – CVAE) for large companies, which will take place over two years in 2023/24. The savings to business will be over €8billion, a huge saving for over half a million companies.
Similarly, for households, the taxe d'habitation on principal residences is being phased out and will end in 2023. The television licence fee has also been abolished.
The transformation appears to be having a significant impact. In 2021, France attracted a record number of foreign investment projects, up 24% over 2020, making it the leading recipient of foreign led investment in Europe for the past 3 years in a row.
Naturally enough, such significant cuts in tax, with no compensatory reduction in public expenditure, has alarmed the French national auditor, who has expressed some scepticism on government estimates of projected growth to pay for it all.
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