There has been a welcome simplification of the taxation of savings bonds, unifying the treatment of interest received, which is now classified as debt income. For savers, this clarification is essential in order to measure the net return on their investment. The system, which has long been complex, has now been harmonised, but it is important to understand the mechanisms to avoid any nasty surprises. For an overview of this financial instrument, see our complete guide to cash vouchers.
Taxation of income from savings bonds: debt income
For individuals resident in France, interest generated by savings bonds is treated as income from movable capital. Since successive reforms, the default system has been the single-rate withholding tax (prélèvement forfaitaire unique or PFU), but an option for taxation at the progressive income tax rate remains possible.
The principle of the progressive income tax scale
Initially, the Amending Finance Act for 2012 abolished the flat-rate withholding tax, making the proceeds of registered vouchers subject to the progressive scale of income tax. This principle remains, but it is now optional. When filing their annual tax return, taxpayers may opt to have all their income from transferable securities and capital gains taxed at the progressive rate. This option is global and irrevocable for the year in question. It may be advantageous for taxpayers whose marginal tax rate is lower than the PFU rate, particularly those who are not taxable.
Social security contributions and withholding tax
Irrespective of the tax option chosen, interest on savings bonds is subject to deductions at source. At the time of payment, the paying institution applies two separate deductions:
- Social security contributions, at the overall rate of 17.2 %.
- An income tax instalment of 12.8 %, corresponding to the flat-rate tax (prélèvement forfaitaire unique or PFU).
This advance payment of 12.8 % is not in full discharge of tax. It is deducted from the total amount of income tax due the following year. If the amount of the advance payment deducted exceeds the final tax, the excess is returned to the taxpayer. Households with a reference tax income below a certain threshold can apply for exemption from this withholding tax.
Cases of increased flat-rate deductions
In certain specific situations, the taxation of savings bonds is considerably tougher. The legislator has introduced flat-rate taxation schemes at greatly increased rates to penalise lack of transparency and combat tax evasion.
Payment in an uncooperative country
When the proceeds of savings bonds are paid into an account located in a State or territory considered by France to be an uncooperative jurisdiction (ETNC), an increased flat-rate levy applies. This dissuasive rate, currently set at 75 %, is designed to discourage financial flows to opaque jurisdictions. It applies whether the beneficiary is an individual or a legal entity, and is in full discharge of tax liability, meaning that it definitively extinguishes the tax debt on this income.
Anonymous beneficiaries: a dissuasive regime
Although the Order of 28 April 2016 removed the possibility of issuing anonymous savings bonds, securities issued previously and still in circulation may retain this characteristic. A particularly punitive tax regime has been maintained for these vouchers. In the event of payment to a beneficiary who chooses to remain anonymous, a special levy is charged. This levy includes not only very high taxation of the interest, but also taxation of the capital itself. The aim is clearly to encourage holders to lift their anonymity in order to comply with tax transparency requirements.
Taxation of capital gains on the sale of savings bonds
In addition to the interest received at maturity, savings bonds can be sold before their term. Gains realised on this occasion, known as capital gains, are also subject to tax.
Calculating the tax base
The capital gain on disposal is determined by the difference between the sale price of the bond, net of costs and taxes borne by the seller, and its acquisition price. This capital gain is subject to the same tax regime as the interest: by default, the single flat-rate withholding tax of 12.8 % (plus 17.2 % in social security contributions), or, by global option, the progressive income tax scale. The tax is due in the year in which the security is sold.
Allocation of capital losses
If the sale of a savings bond generates a loss, this capital loss is not lost. It can be offset exclusively against capital gains of the same kind, i.e. against gains from the sale of other vouchers or securities whose proceeds are subject to the same tax regime. This deduction can be made against capital gains in the year of disposal, and any balance can be carried forward to the following five years. This rule makes it possible to smooth out the tax burden by taxing only the overall net gain realised on a portfolio of similar investments.
Specific withholding tax
A special withholding tax mechanism, set out in article 1678 bis of the French General Tax Code, applies to the proceeds of savings bonds in certain situations, mainly when they benefit non-residents or legal entities.
Scope and rates
This withholding tax applies to interest on savings bonds that benefit persons who are not resident in France for tax purposes or entities whose registered office is located in France or abroad. For individuals domiciled in France, this withholding tax has been abolished. The rate of this levy is set at 15 %. It is deducted by the paying institution on behalf of the French Treasury. For non-resident beneficiaries, this withholding tax may, under international tax treaties, entitle them to a tax credit in their country of residence to avoid double taxation.
Legal entities and corporation tax
Legal entities subject to corporation tax that receive income from savings bonds also fall within the scope of this withholding tax. For them, this deduction is not in full discharge of corporation tax. It constitutes an advance payment which is deducted from the amount of tax due for the financial year in which the income was received. Any excess is refundable.
Although the taxation of savings bonds has been simplified, there are subtleties that you need to master if you want to optimise your investments. The choice between the single flat-rate levy and the option for the progressive scale, the management of capital gains and losses, as well as the specific rules for non-residents or anonymous situations, are all parameters that need to be considered. Sound advice is the best way to navigate this regulatory framework. If you have any questions about the taxation of your investments or would like personalised assistance, our law firm, which specialises in banking and financial law, is at your disposal. Contact a Banking and finance lawyer of our team to analyse your situation.
Sources
- General Tax Code, article 1678 bis
- Monetary and Financial Code
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