2025 Budget Bill: What Will Change for Individuals

The 2025 budget bill was presented to the Council of Ministers on October 10. It includes several measures concerning personal income taxation. 

It is important to note that all of the provisions presented here are subject to change during the budget debate in Parliament. In addition, other measures could be introduced and included in the final text adopted before the end of the year.
 

The bill provides for a 2% adjustment to the income tax brackets to account for inflation. This adjustment, which applies to income earned in 2024, is accompanied by a corresponding adjustment to certain thresholds and deductions.
 

In addition to this adjustment, the main provision of the draft budget bill concerns the introduction of a differential tax on high incomes. This measure establishes a minimum income tax rate of 20% for taxpayers residing in France with an income exceeding €250,000 (single individuals) or €500,000 (couples filing jointly).
 

These thresholds are also those applicable to the exceptional contribution on high incomes (CEHR), which has been in effect since the taxation of income for the year 2011. The CEHR is calculated at a rate of 3% on the portion of income between €250,000 and €500,000 for a single person and on the portion of income between €500,000 and €1,000,000 for married couples filing a joint return. The CEHR rate increases to 4% for the portion of income exceeding 500,000 euros for a single person and 1,000,000 euros for a couple filing a joint tax return.
 

The differential tax on high incomes will, like the CEHR, be calculated based on taxable income. Taxpayers whose combined income tax and CEHR amount is less than 20 percent of their taxable income will be required to pay the difference as part of this new tax.
 

The text stipulates that this one-time contribution will apply for three years, that is, for the taxation of income in 2024, 2025, and 2026. In practice, this contribution should not affect taxpayers whose income is primarily subject to the income tax scale, since their effective tax rate is already higher than 20 percent.
 

Conversely, this tax should apply to taxpayers with income taxed at a flat rate, such as dividends. In fact, dividends are generally subject to a flat tax of 30%, which breaks down into a 12.8% flat-rate income tax and a 17.2% social security contribution. Added to these rates is the CEHR for taxpayers who are subject to it, meaning that, for them, the marginal tax rate on a dividend could reach 34%.
 

For these same taxpayers, under the differential contribution mechanism, the marginal tax rate on a dividend would rise to 37.2% (12.8% flat income tax + 4% CEHR + 3.2% differential contribution to reach the 20% minimum income tax rate, plus 17.2% in social security contributions).
 

The same marginal tax rate of 37.2% should apply to capital gains on securities and corporate interests, unless they can be considered exceptional income. In this regard, the draft bill provides that income which, by its nature, is not likely to be received annually and whose amount exceeds the average net income of the past three years shall be included in the tax base for calculating the differential tax only to the extent of one-quarter of its amount.
 

It follows from a ministerial response dated June 27, 1991, and a ruling by the Council of State dated June 15, 2005, that capital gains realized in the course of managing a securities portfolio do not constitute exceptional income. Conversely, it appears from a ruling by the Council of State dated November 23, 2020, and a ministerial response dated June 9, 2016, that when a capital gain results from a one-time transaction that is not likely to recur annually, it may be considered exceptional income.
 

It will therefore be necessary to await any clarifications that may be provided—either during the parliamentary debate or later by the administration—regarding the concept of exceptional income in order to determine whether the differential tax is likely to apply to all capital gains on securities and equity interests or only to certain types of such gains.
 

Finally, it should be noted that the text provides that income from redemptions of life insurance policies that were subject to the withholding tax shall not be included in the tax base for the differential tax due on 2024 income. It should be noted that only income derived from premiums paid before September 27, 2017, may still, upon opting in at the time of surrender, qualify for the withholding tax. 

This exclusion from the tax base for the differential contribution—limited to redemptions made in 2024—was undoubtedly intended to ensure that the provision could not be struck down by the Constitutional Council. Indeed, according to a decision by the Constitutional Council issued on December 29, 2012, once income has been subject to a final tax, it is not possible to retroactively revoke the finality of that tax.
 

Finally, with regard to personal income tax, it should be noted that the draft finance bill amends the rules for calculating capital gains on real estate for individuals who rent out furnished properties on a non-professional basis. It should be recalled that landlords are considered non-professional if their income from furnished rentals is less than either €23,000 per year or the total other professional income of the tax household.
 

Non-professional landlords, in the event of the sale of a furnished rental property, are taxed under the capital gains tax regime for individuals and not under the regime for business-related capital gains. Under the individual tax regime, when calculating capital gains, the cost basis is not reduced by any depreciation that may have been deducted from income derived from the furnished rental. The draft finance bill reverses this benefit and provides that non-professional furnished landlords must, when calculating the capital gain realized upon the sale of the property that was rented out, deduct from their cost basis the amount of depreciation that was previously deducted from the rental income.

(Source: Stéphane Jacquin, Managing Partner and Head of Wealth Engineering at Lazard Frères Gestion)