Residence and Territoriality
An individual is considered a resident of France for tax purposes if his or her home, principal location, professional activity or "centre of economic interests" is in France. Residents are subject to individual income tax on their worldwide income; non-residents are subject to tax only on their French-source income.

Taxation of Residents

Income Subject to Tax
The taxable income of individuals is determined at the family level, taking into account the combined income of husband, wife and any dependent children. Net income in each of several categories of income is computed, with the net results aggregated to yield taxable income. The categories of income are as follows:

- compensation;
- industrial and commercial profits;
- non-commercial income;
- agricultural profits;
- management income;
- investment income;
- real estate income; and
- capital gains.

Taxation of Residents

Compensation includes salaries, wages, pensions and annuities, net of social security charges. Taxpayers may claim a standard allowance of 10% on their employment compensation as an allowance for unreimbursed business expenses limited to a maximum allowance of FF 73,270 for 1994. An additional exemption is allowed equal to 20% the portion of income up to FF 667,000 for 1994. This 20% exemption is reduced to 10% on the portion of income from FF 469,000 to FF 667,000 if the employee holds more than 35% of the employer's share capital.

Individuals' industrial and commercial profits are generally subject to the rules that govern the taxation of companies, such as a requirement to use the accrual method of accounting, except that long-term capital gains from dispositions of business assets are taxed at a reduced rate of 16% plus a 3.4% social contribution (said Social Contribution including CSG at the 2.4% rate). Members of special bodies called "centres de gestion agrees" are entitled to exemptions equal to 20% of taxable profits up to FF 469,000 and 10% of taxable profits from FF 469,001 to FF 667,000.

Non-commercial income consists essentially of income from professional activities, royalties and fees. Taxable income constitutes the difference between receipts and expenses actually received or paid in the calendar year, if the taxpayer chooses to use the cash method of accounting. Use of the cash method is the principal difference between the taxation of commercial and professional activities. Long-term capital gains are taxed at a 16% rate plus a 3.4% social contribution (said social contribution including CSG at the 2.4% rate). Members of centres de gestion agrees are entitled to the exemptions described above.

Agricultural profits are subject to special tax rules because of the variability of farm income. Use of the cash basis method of accounting is permitted.

Deductible expenses for commercial, professional and agricultural activities are similar. They include the following:

- Cost of materials and stock.
- General expenses of a business nature (including personnel expenses, certain taxes, rental and leasing expenses, finance charges and self-employed persons' social security contributions).
- Depreciation expenses, determined under the straight-line or declining-balance method over the normal life of the asset.
- Provisions for losses and expenses, if the accrual method of accounting is used.

Management income is the amount received by managers (gerants) of certain types of companies who are also majority shareholders of such companies. Net taxable income is determined after deduction of actual professional expenses and of the additional 20% exemption described in the first listed item (including the limitation for 35% shareholders).

Investment income consists of interest and dividends received. A standard tax-free allowance of FF 8,000 for a single person and FF 16,000 for a married couple may be taken for dividends and interest received on French stock and bonds and for capital gains on sales of shares in a number of funds (OPCVM). The taxpayer may elect to have a final withholding tax imposed on French-source interest (prelevement liberatoire), which would exempt him or her from any further reporting requirement or income tax. The rate of this withholding tax varies from 15% to 50% depending on the type of investment.

Real estate income consists of the rents received. Taxpayers may claim an allowance of 10%, which is increased to 25% for a new building purchased from 1993 to 1997. The 25% rate applies only for the first 10 years of rental activity.

Capital gains from the disposal of shareholdings and real estate are subject to taxation.

Capital gains from sales of shares and bonds are taxed at a rate of 16% plus a 3.4% social contribution if total proceeds from those sales exceed FF 336,700 (1994 threshold). The FF 336,700 threshold always applies to total proceeds of all securities subject to the threshold. Sales of unquoted shares of companies in which the seller and seller's family held more than 25% of the shares throughout the previous five years are taxed at 19.4% without considering the threshold. Furthermore, the securities capital gains exemption threshold is reduced to FF 100,000 for 1994 and FF 50,000 for 1995 for gains on sales of shares in mutual funds (OCPVM). The standard tax-free allowance of FF 8,000 for a single person and FF 16,000 for a married couple may be taken. If the sale is of an interest in a partnership or proprietorship, no exemption applies and the rate is 16% plus 3.4% of additional social contributions for sellers who performed no activities for the entity. If activities were performed for the entity, however, the gain is treated as a professional capital gain, and ordinary progressive rates apply if the gain is short term.

Capital gains from the disposal of real property (and shares in real estate companies) held for two years or less are taxed as ordinary income. Gains from the sale of real property held for more than two years (long-term capital gains) are calculated as the difference between the sales price and the purchase price adjusted for inflation. The gain is then reduced by 5% for every year the property was held in excess of two years. A standard deduction of FF 6,000 is deducted from total gains in computing the tax. An individual is totally exempt from tax on gains from the sale of a principal private residence or, if the individual is not the owner of the principal residence, of a gain from the sale of a second home. Other exemptions may also apply.

To provide relief from progressive tax rates, one-fifth of a long-term capital gain from the disposal of real property is added to all other taxable ordinary income. The difference between the tax on that amount and the tax on ordinary income alone is multiplied by five and added to the tax calculated on ordinary income. The resulting amount is the tax payable by the individual.

Deductions and Credits
The following are the most common expenses, contributions and investments for which tax credits or deductions from taxable income may be taken:

- Expenses incurred by an owner for major repairs on the owner's principal place of residence give rise to a tax credit equal to 25% of expenses incurred from 1 January 1990 to 31 December 1995, up to a limit of FF 10,000 of expenses for a single and FF 20,000 for a married couple. This limit is increased if the taxpayer has dependants. The same credit is available for heat insulation expenses incurred in buildings completed before 1982.
- The 1995 Draft Finance Bill provides for an increase of these tax credit limitations respectively up to FF15,000 and FF30,000 for expenses engaged after October 1,1994.
- Interest paid on loans incurred after 1 January 1984 for the purchase or construction of property or for major repairs or building facade renovation expenses of the principal residence give rise to a tax credit equal to 25% up to a limit of FF 15,000 plus FF 2,000 for each dependent individual, during a period of 5 years . If the loan is incurred before that time, the tax credit is 20% up to a limit of FF 9,000 plus FF1,500 for each dependent individual, during a period of 10 years.
- A tax credit for 25% of the part of a life insurance premium that represents savings, limited to premiums totalling FF 4,000 plus FF 1,000 for each dependent child. For contracts entered into abroad, savings are considered to be 80% of the premium paid.
- Charitable donations to associations or foundations of recognised public interest, up to a limit of 5% of total income, and donations to organisations of general interest and to political parties, up to a limit of 1.25% of total income, are eligible for a tax credit equal to 40% of their amount. Supporting documentation is required for all deductions claimed.
- The amount paid by an individual to subscribe to the equity of certain specified companies financing audio-visual productions may be deducted from net income, up to a ceiling of 25% of net income.
- Nursery expenses for children who are under seven years of age on 31 December of the tax year, up to a limit of FF 15,000 annually for each child, are eligible for a tax credit of 25% of the applicable amount.
- Expenses of legally-employed domestic employee for household help performed at the principal residence give rise to a tax credit of 50% up to a limit of FF 13,000.
- Subsistence allowances to children over 18 are deductible from 1994 income up to a limit of FF 27,120 for each child. This limit is doubled if the allowance is paid to a married child, provided the parent is the only person available to support the child and spouse. If the child studies at a university, the advantage resulting from the deduction must be equal to at least FF 4,000.
- Alimony and child-support payments resulting from divorce are deductible from income.
- Scholarship expenses of dependent children continuing their secondary or higher education are eligible for a tax credit of FF 400 for a child attending a junior high school, FF 1,000 for a child attending a high school or FF 1,200 for a student attending a university.
- Certain expenses paid in cash or in kind for the support of dependent parents are deductible from taxable income.
- Investments in new buildings that are intended for rental as principal places of residence for at least six years are granted a tax credit equal to 10% of the cost of the building. The credit is limited to FF 30,000 for a single person and FF 60,000 for a married couple. An amount equal to half of the applicable limit may be taken in the year of acquisition and the remainder in the following year. The credit applies to buildings purchased, constructed or begun to be constructed from 1 January 1993 to 31 December 1997.
- A tax credit is granted for 25% of the amount paid for subscribing to the capital of a new company up to maximum total capital of FF 40,000 for a single person and FF 80,000 for a married couple.

Computation of Tax
Personal income tax is computed using a procedure known as the family coefficient system which produces an income-splitting effect. Taxable income is divided by the number of allowances determined by the taxpayer's family situation, and the tax computed on that quotient is multiplied by the same number to determine the total tax. Single taxpayers are entitled to one allowance and married taxpayers two. One-half of an allowance is available for the first and second dependent children and one for each additional child. Tax savings resulting from the application of this system are limited, however. For example, in 1994 the tax savings for a married couple cannot exceed FF 15,620 for each additional half allowance claimed.

Rates of Tax
French income tax is levied at progressive rates up to a maximum rate of 56.8%. The tax rate tables take into account the family coefficient. Beginning 1 July 1993, all categories of income are subject to a social contribution tax (called CSG) at a rate of 2.4%. For some income, an extra 1% tax is levied.
The table below presents 1994 individual income tax rates for a married couple with no children.
	Taxable Income
Exceeding 	Not Exceeding 	Rate 	Tax on Bracket 	Accumulated Tax 
FF		FF		%	FF		FF
0		44,420		0	0		0
44,420		97,140		12	6,326		6,326	
94,140		170,960		25	18,455		24,781	
170,960		276,820		35	37,051		61,832	
276,820		450,420		45	78,120		139,952
450,420		555,460		50	52,520		192,472
555,460		56.8		-	-

Individual Income Tax Calculation
					Husband		Wife	Total
					FF		FF	FF
Salaries after social contributions 	800,000		200,000
10% deduction for professional fees,
limited to a deduction of FF 73,270 	(73,270)	(20,000)
					726,730		180,000
20% deduction for salaries,
limited to a deduction of FF133,400  	(133,400)	(36,000)
					593,330		144,000
Taxable salaries 					737,330
Interest received from French bonds	19,000
Standard interest allowance		(16,000) 
Taxable salaries and interest 					740,330

Tax on 	FF 555,460 (accumulated) 				192,472
	FF 184,870 at 56.8%					105,006
	FF 749,550 						297,478
Tax credit of 25% of life insurance 
premiums, limited to premiums of FF 4,000.			(1,000)
Net capital gains on securities*				45,000
Tax on FF 45,000 at 16%						7,200
Total income tax						303,678

* Net capital gains are taxable because total annual security sales proceeds of FF 450,000 exceeds FF 336,700.

The content of thisThe content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. For additional information contact Pierre Knoepfler on +33 (1) 46 93 70 00.