This article provides insights into the French financial system and the tax-efficient savings and investment options available to residents and investors in France.
France has one of the highest personal income tax rates and the most complicated tax rules in Europe, which has a significant impact on local individual investor preferences.
France offers several government-regulated savings options, including flexible savings accounts (Livrets), investment plans (PEA), and quasi-insurance products (Assurance Vie), which provide substantial tax benefits to households and ensure their popularity among residents.
In addition to tax-efficient options, individuals can consider conventional savings instruments, such as French government debt obligations (OATs, OATi) and corporate bonds, that are subject to a flat tax rate and offer quite lucrative income rates over long maturities.
Should you be moving to France, it makes sense to delve into the peculiarities of the French financial system. Being a local resident it becomes quite obvious that investment and savings opportunities are significantly influenced by the government's regulatory and taxation policies.
Let's start with the fact that France has one of the harshest household tax systems in Europe, if not in the world. For instance, in 2022, France (55.4 percent) ranked second among OECD countries for the highest top statutory income tax rates in Europe. The estate, inheritance and gift tax rates in France are also among the highest, and the tax application rules are nothing close to being straightforward. No wonder tax-free savings and investment vehicles are so popular in this region. Let's start our overview with the basic banking products, such as savings accounts and deposits.
In France, there is a wide choice of savings accounts, which can be divided into two main types: Fixed-term savings accounts (known as "dépôts à terme"), where money is deposited for a set period of time, and Flexible or Instant-access savings accounts (referred to as "Livrets"), which offer greater accessibility for depositing and withdrawing funds.
Flexible savings accounts, also known as "Comptes sur Livrets", are government-regulated instant-access savings accounts offered by most major banks in France. These accounts are tax-exempt and typically offer relatively low-interest rates. However, they are treated as quite efficient savings instruments when taxes are taken into account. At the same time, typically only one instance of these specific accounts is allowed to be held by a single individual (sometimes a child).
In effect, the French government sets the conditions under which banks can offer these schemes. The French central bank, the Banque de France, is responsible for setting the interest rates on Livret accounts and can adjust these rates in response to changes in the economic environment, including inflation, market conditions, and monetary policy.
Therefore, an average single household resident in France can deposit up to 69900 in Comptes sur Livrets if no children are taken into account and if this household is not related to a low-income taxpayer.
At the same time, certain banks, predominantly online and neobanks, often advertise promotional interest rates on non-government regulated savings accounts that exceed the standard average rates. These promotional accounts are commonly referred to as "Super Livrets". In addition, banks offer fixed-term savings accounts, which are essentially term deposits. Both of these products are not as tax-efficient as “Government Livrets”. Therefore, their interest rates should be compared on an after-tax basis.
By utilizing savings vehicles such as Livret A, LDDS, and LEP, individuals can retain significant cash holdings while earning competitive interest rates without the burden of taxes or social charges. These accounts offer advantages to all savers and are recommended to be fully leveraged. For French residents considering investments in financial markets, these are the most efficient options to be utilized:
The PEA provides investors with an opportunity to diversify their investment portfolio by including various financial assets. Functioning similarly to a standard securities account, a French PEA distinguishes itself through a unique set of tax advantages and specific payment conditions. Essentially, it serves as a streamlined stock savings plan, encompassing both a securities account and a cash account. This cash account is debited when acquiring securities and credited when selling them or receiving dividends from companies.
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The primary advantage of the PEA, as with Livrets, lies in its favourable tax treatment. After holding investments for five years, profits from PEA investments are exempt from income tax. Attempts to access the funds within the first five years usually result in the closure of the account, but greater flexibility is allowed after this initial period. It's important to note, however, that being "income tax-free" does not mean it is exempt from 'social charges,' which typically amount to 17.2%.
It's crucial to be aware that PEA investments are subject to market risks, while the main investment focus is tilted towards shares and collective investments, which means that the value of investments can fluctuate or even decrease. It is really unfortunate, that one cannot buy bonds as part of the PEA plan for the purpose of diversification to enhance profit-risk profile of the PEA portfolio.
Assurance Vie is similar to a life insurance policy in that it serves as an investment wrapper but is not connected to life insurance per se. Its popularity stems from its flexibility, lack of investment limits, and significant benefits related to income tax, social charges, and inheritance tax.
In addition, Assurance Vie is exempt from capital gains tax and allows investors to bypass French succession laws. However, the contract holding period must reach 8 years to achieve benefit from the most favourable taxation. Similar to the previously mentioned PEA, Assurance Vie can be used to invest in market-based collective funds and structured products. However, it also provides access to guaranteed funds and cash holdings, offering greater flexibility for effective financial planning.
French investors can also use the international version of Assurance Vie, which retains the same tax benefits. This allows for access to various currencies, multilingual paperwork, and easy transferability if one should decide to leave France.
One can open an Assurance Vie policy through various financial institutions and insurance companies, such as BNP Paribas, Crédit Agricole, Société Générale, AXA, CNP Assurances, and AG2R La Mondiale, and others. While it's more accurate to describe Assurance Vie as tax-efficient rather than tax-free, it often surpasses PEA in terms of tax advantages over a 10-year period, as it mitigates the impact of social charges, a benefit not available with PEA. Consequently, the international assurance vie is particularly popular among expatriates in France. In fact, this vehicle is so popular, that it accounts for 39% share of French households’ financial assets, which emphasizes, what a great effect is executed by the government tax policy on the savings preferences of individual investors.
Should all tax-efficient options be utilized, individuals are driven to consider other conventional savings instruments if they wish to expand the volume of their portfolio beyond the pre-set limits of government regulated investment vehicles. One such option could be French government debt obligations, known as OATs (Obligations Assimilables du Trésor), which also have some tax-efficient features. Since 1 January 2018, capital gains and investment income have automatically been subject to personal income tax at a flat rate of 12.8%, which is in most cases is lower than the personal income tax bracket rate (although an individual can choose the irrevocable option to use the latter, but it will then be applied to the while declared aggregate income). In addition to that social security contributions tax at an aggregate rate of 17.2% is also applied. The same tax terms for individuals apply to OATi - inflation-indexed French Treasury bonds, which can be used to hedge unexpected CPI spikes. Curretly the average after-tax yield on government bonds is 3.3% for those available in small lots.
Corporate bonds are also a good investment option, while for corporate bonds, there is an option to apply the flat rate withholding tax, known as the Prélèvement Forfaitaire Unique (PFU). The current PFU rate is 30%, which includes both income tax and social contributions, similar to government bonds. However, this flat rate may be adjusted for high earners with a maximum marginal tax rate of 4%. It is also worth noting that long-term gains may benefit from a more favourable tax rate. Therefore, it makes sense to consider longer maturity corporate bonds, which can offer significantly higher yields and tax benefits over a longer holding period. Presently investment-grade corporate bonds offer on avaerage a 3.9% after-tax yield for small lot investments.
Should you consider purchasing government or corporate bonds to enhance your investment portfolio, you can always use Bondfish as your personal navigator in the world of debt investments. Through our service you can easily identify suitable instruments and quickly facilitate for the acquisition process.