Can François Bayrou improve France’s public finances without increasing the tax burden, which is already at a record level in Europe? It's hard to believe, given the critical situation facing the country’s new prime minister. The budget deficit, which was 5.5% of gross domestic product in 2023, could reach 6.3% in 2025, according to Moody’s forecasts. The agency downgraded France’s debt rating by one notch to Aa3, from Aa2.
The new government will have to navigate between the need to reduce the deficit and the risk of a political and social backlash in the event of tax hikes. Bayrou’s predecessor, Michel Barnier, was banking in particular on a minimum tax of 20% for the wealthiest households--aimed at those who manage to substantially reduce their effective tax rate by using certain tax schemes.
Among the measures that were under discussion before the fall of the Barnier government, several could also come back on the table:
- extending the real estate wealth tax (impôt sur la fortune immobilière, IFI) to movable assets, creating a de facto global wealth tax;
- raising the flat tax rate applied to capital income, in particular dividends, interest and capital gains (sales of shares, company shares, etc.);
- taxation of share buy-backs;
- an increase in inheritance tax;
- tightening the conditions for exit tax, which applies to unrealised capital gains when changing tax residence;
- the introduction of a targeted universal tax. Proposed by the chairman of the National Assembly’s finance committee, Eric Coquerel (La France Insoumise), this scheme aims to make expatriates pay the difference between the tax they would pay in France on the same income and that paid in their country of residence. Unlike the American model of nationality tax, this mechanism would only apply for a limited period after departure and in certain low-tax countries.
We’re still a long way from the waves of departures seen under Hollande or Mitterrand.
All these measures, taken together, can lead to tax exile and, in the last two cases, even to the abandonment of French nationality in order to escape tax. Typhanie Afschrift, a tax lawyer at the Brussels, Geneva and Luxembourg Bars, sees nationality tax as the “ultimate spectre.” “But it doesn’t have to be in place to cause people to leave France: fear is enough. People sometimes consult me to ask what nationality they could easily take in anticipation of this.”
The practitioner confides that on the evening of the second round of the French parliamentary elections ), she received calls from shocked French people considering relocating to Belgium. “It was caricatural. Many didn’t follow up, realising that Jean-Luc Mélenchon wouldn’t be prime minister. Everything will depend on future policies, but for the moment, we’re more in a reflection phase. We’re still a long way from the waves of departures seen under Hollande or Mitterrand.”
Among the discussions to follow, Afschrift mentions the increase in taxation on income from securities. “This could lead to the departure of entrepreneurs, but also of annuitants, who would also be subject to these new taxes on their capital. And these people will not necessarily stay in the EU. Destinations such as Switzerland or the United States are appealing to these demographics, with some taking a positive view of Donald Trump’s election.”
Luxembourg is more attractive to senior executives than to the very wealthy.
What about Luxembourg? Julien Treffort, a personal tax partner at PWC Luxembourg, has not seen a recent wave of French people moving to the country. “Many are still examining their options. Asset transfers--placing part of their wealth with a Luxembourg bank or in a Luxembourg life insurance policy--sometimes precede a transfer of residence. Furthermore, Luxembourg is more attractive to senior executives than to the very wealthy.”
Nevertheless, PWC has observed a number of relocations to Luxembourg. “Many people are wondering. We are thinking in particular of those who already work for a Luxembourg company but are still tax residents in France and who decide to take the plunge and move to Luxembourg. The political and tax context in France can be a trigger. For its part, Luxembourg has just amended the recruited by Luxembourg employers, making our country particularly attractive to the people concerned.”
Treffort expects an increase in the number of French relocations, as well as some British ones. The budget presented by the Labour government will lead to an increase in the tax burden for both working people and wealthy individuals. Among the measures announced are the abolition of the ‘non-dom’ regime, an increase in the taxation of capital gains and a rise in the taxation of carried interest received by private equity professionals.
This article was originally published in .