1 – Tax treatment of spot market securities
a) French Treasury bonds (OATs) and government bonds
* Rules applying to individual French residents
Article 28 of Act 2017-1837 of 30 December 2017 (2018 Budget Act) has altered the taxation of capital gains and investment income. Since 1 January 2018, capital gains and investment income have automatically been subject to personal income tax at a flat rate of 12.8% under the terms of Article 200 A (1) of the General Tax Code (CGI), in addition to social security contributions at an aggregate rate of 17.2%. Nevertheless, the taxpayer has the option of electing to have these gains and income taxed at the rate corresponding to their personal income tax bracket. This irrevocable option applies to all such gains and income and must be chosen when declaring aggregate income, in accordance with the provisions of Article 200 A (2) of the General Tax Code.
In the case of securities income, the interest on French Treasury bonds and on government bonds paid to natural persons with their tax residence in France is subject to a flat tax rate or the progressive income tax rate in the year following payment. In the year of payment such income is subject to a 12.8% withholding (“advance”) for income tax, in addition to the 17.2% withholding for aggregate social security contributions on investment income. This mandatory withholding is applied against the personal income tax liability for the year in which it was made. If the amount withheld is greater than the tax liability, the difference is reimbursed in accordance with the provisions of Article 125 A (V, 1) of the General Tax Code.
However, the following are exempted from the mandatory withholding:
- natural persons having their tax residence in France and receiving interest on French Treasury bonds and government bonds for which the paying institution is established in France, if their household base taxable income from the previous year was less than €25,000 for single taxpayers or €50,000 for couples filing joint returns, and if they request an exemption from the withholding before 30 November of the current year for interest payments to be received in the following year. This withholding exemption request shall be made by submitting a sworn statement to the paying institution indicating that the base taxable income shown on the tax notice relating to their income for the previous year is less than either €25,000 or €50,000, as the case may be;
- natural persons having their tax residence in France and receiving interest on French Treasury bonds and government bonds for which the paying institution is established in France, if their household base taxable income from the previous year was less than €25,000 for single taxpayers or €50,000 for couples filing joint returns.
In accordance with Article 157 (3°) of the General Tax Code, redemption premiums attached to negotiable bonds issued in France and authorised by the Minister for the Economy and Finance shall be exempt from personal income tax. However, this exemption does not apply:
- to premiums relating to securities issued after 1 June 1985, if they are equal to more than 5% of the par value;
- to premiums distributed or allocated after 1 January 1989 by an undertaking for collective investment in transferrable securities (mutual fund) covered by Article L214-2 et seq. of the Monetary and Financial Code, if they are equal to more than 10% of the amount distributed or allocated;
- to the redemption premiums defined in Article 238 f A (II) of the General Tax Code.
Therefore, the exemption for redemption premiums provided for in Article 157 cited above does not apply:
- to bonds issued after 1 January 1992;
- to bonds stripped after 1 June 1991;
- to tap issues if they were tapped after 1 January 1992 and said tap was paid after 1 January 1994.
In the case of capital gains booked on individuals’ sales of French Treasury bonds and government bonds after 1 January 2018, the gains are automatically subject to a flat 12.8% tax, or taxpayers can irrevocably opt to have all such gains taxed at the rate corresponding to their personal income tax bracket, in addition to the 17.2% aggregate social security contributions rate on investment income. The year’s capital losses may be offset only against taxable capital gains for the same year and of the same nature and for the gross amount, before any of the deductions mentioned in Article 150-0 D (1b or 1c) of the General Tax Code or Article 150-0 Db of the General Tax Code. If the balance is positive, the remaining capital gains shall be reduced by an amount equal to capital losses of the same nature incurred in previous years up to and including ten years in the past and the deductions mentioned in stipulated in the first paragraph of Article 150-0 D (11) of the General Tax Code. On the other hand, if the balance is negative, the capital losses that are not offset shall be carried forward under the same conditions for up to ten years.
* Tax treatment for unincorporated enterprises or partnerships subject to the real tax regime
- Interest on French Treasury bonds and government bonds are not counted in the taxable income of the enterprise or partnership: the provisions of Article 155 (II, 1, 1°) of the General Tax Code exclude income that is not generated by business activity. Consequently, such income must be deducted from the income of the enterprise or partnership and declared either:as securities income by the owner of the enterprise or by the individual partners on their personal income tax returns, in accordance with the rules set out above;
- by corporate partners subject to corporate income tax, in accordance with the rules applying to said tax.
* Tax treatment for non-profit organisations
A distinction is made between organisations that engage in profit-making businesses and those that do not:
- when the income comes from the non-profit business activity of the non-profit organisation, income from government bonds issued after 1 January 1987 is subject to a 10% corporate income tax rate. Capital gains on sales are not subject to corporate income tax;
- when the income comes from the profit-making business activity of the non-profit organisation or when the non-profit organisation is subject to corporate income tax for all of its activities, the income is taxed in accordance with the rules set out below for entities subject to corporate income tax.
* Tax treatment of legal entities subject to corporate income tax
All of the earnings included in taxable income (interest, redemption premiums and capital gains booked on sales of securities) are subject to corporate income tax at the standard rate of 33 1/3% or 28% for the first €500,000 in profits for each 12-month period for financial years starting between 1 January 2018 and 31 December 2019, under the provisions of Article 219 (I, c) of the General Tax Code), plus the 3.3% social contribution on profits, where applicable.
In accordance with Article 84 of the 2018 Budget Act, the standard corporate income tax rate has been lowered to 31% as of 1 January 2019 for all profits after the first €500,000. Thereafter, it will be lowered gradually for all profits to 28% as of 1 January 2020, then to 26.5% as of 1 January 2021 and to 25% as of 1 January 2022.
- Interest earned on French Treasury bonds is taxable on an accrual basis rather than in arrears.
- A tax rule stipulates taxation of securities with redemption premiums according to an actuarial apportionment formula, if the average price at issue is less than 90% of the redemption value, meaning that the premium is more than 10% of the purchase price of the security in question. In such cases, the provisions of Article 238f E of the General Tax Code stipulate that the redemption premium and the interest paid yearly are taxed each year on the basis of an apportionment by actuarial calculation over the residual maturity of the security or contract at the purchase date.
* Tax treatment for institutional investors
- The credit institutions, finance companies and investment companies covered by Article 38a A of the General Tax Code that buy fixed-income securities held in an investment securities account or investment securities for a price that is different from the redemption price are subject to the provisions of Article 38a B of the General Tax Code: the gain or loss arising from the difference between the purchase price of the securities and the redemption price, plus or minus accrued interest at the time of purchase, is apportioned over the residual maturity of the security on the basis of an actuarial calculation.
- Article 38a B of the General Tax Codes stipulates that when insurance and accumulation companies buy bonds other than inflation-linked bonds at a price that is different from the redemption price, the loss or gain from this difference is spread over the residual maturity for the purposes of calculating the entity's taxable income. When several redemption dates are scheduled, the longest date is used. This apportionment is determined on the basis of an actuarial calculation.
For the purposes of these provisions, annual interest payments stipulated in the contract are also taxed on an accrual basis.
b) Inflation-indexed French Treasury bonds (OATi)
The tax treatment of inflation-indexed French Treasury bonds is very similar to that of fixed-rate or variable-rate bonds for individuals subject to personal income tax and for professional investors subject to corporate income tax (see tax treatment of French Treasury bonds and government bonds above), including securities with redemption premiums, but with certain specific features.
Under the provisions of Article 238f E (II, 3) (indents 2 et seq.), the redemption premium on securities with an inflation-indexing clause is calculated at the end of the year on the basis of the apparent redemption value, given the variation in the inflation index between the purchase date or contract date and the end of the year in question.
For credit institutions, finance companies and investment companies, the gain or loss arising from the difference between the purchase price of the securities, including accrued interest at the time of purchase, and the redemption price is apportioned over the residual maturity of the securities on the basis of an actuarial calculation, as is the case with non-inflation-indexed French Treasury bonds.
Annual interest payments on OATi are taxed on an accrual basis. The provisions of Article 38a Ba of the General Tax Code mentioned in a) above do not apply to inflation-indexed bonds held by insurance and accumulation companies. However, in the case of securities with redemption premiums, the provisions of the abovementioned Article 238f E II 3 (indent 2 et. seq.) do apply. Accordingly, the redemption premium on securities is calculated at the end of the year on the basis of the apparent redemption value, given the variation in the index between the purchase date or contract date and the end of the year in question.
Only a fraction of the premium amount stemming from the adjustment of the principal for inflation is taxable each year. This fraction is calculated so as to ensure payment of the residual tax liability on the premium over the residual maturity of the security by subtracting the previous years’ tax payments from the taxable premium.
c) Tax treatment for non-residents
Interest, annuities and all other income from bonds, government securities and all other negotiable debt securities issued by the government and held by non-residents are not subject to withholding taxes, in accordance with Article 132 a (for securities issued before 1 January 1987) and Article 119 a (1.) of the General Tax Code (for securities issued on or after 1 January 1987).
2 – International tax treaties with France
See international tax treaties between France and other countries.
( https://www.impots.gouv.fr/portail/les-conventions-internationales ).
1 Interest and redemption premiums on French Treasury bonds and government bonds are subject to levies at an aggregate rate of 17.2% for social security contributions on investment income.
2 For income received in 2013, the deadline for submitting the sworn statement to the paying institution was 31 March 2013 and it took effect upon submission.