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Presented as an instrument of tax simplification, the withholding tax , planned to apply from January 1, 2018, is intended to replace the current system of tax payment the year following that of income collection. Established by the finance law for 2017, adopted on December 29, 2016, it only concerns individuals liable for income tax .
Implementation of withholding tax planned for 2018:-
The introduction of withholding tax consists of a tax levy on income subject to income tax, either by withholding tax or by installments.
However, the switch to withholding tax eliminates the gap between the receipt of income and the payment of the tax due on this same income the following year.
With this in mind, in order to ensure the transition and avoid double deduction in 2018, the legislator has planned to “erase” the income from 2017 taxation by setting up a CIMR tax credit which will be granted on income non-exceptional items received in 2017.
Exceptional income received in 2017 is not affected by the CIMR tax credit and will therefore give rise to payment of tax. Anticipating a desire to take advantage of the “white year” in 2017, only non-exceptional taxable income and profits will benefit from the CIMR tax credit. The premiums will therefore for the most part not be affected by the CIMR. Especially since the legislators went even further to fight against the optimization of this exercise by extending the recovery period of the transition year by an additional year, to bring it to 4 years.
A contested reform:-
Strongly criticized even before its introduction, withholding tax does not present any direct advantage as such for the taxpayer.
It now imposes on employers, and in particular businesses, a certain number of obligations as collectors.
Note that these consequences will not be trivial for the employer, forced to mobilize their time and staff to compensate for what amounts to a certain form of disengagement of the State; Today it is indeed a tax collector, to whom the State entrusts without compensation the task of collecting tax. Furthermore, the complexity of withholding tax leaves us speechless as to its future implementation, particularly due to the diversity of employees’ situations and their possible variation during the year.
Sanctions are also provided for the employer in the event of insufficient withholding, failure to declare or reimburse the withholding, and criminal sanctions in the event of violation of professional secrecy.
If there are advantages, they are not there either for taxpayers, who nevertheless remain subject to the obligation to declare their income and whose final taxation may nevertheless be subject to changes at the end of the year.
So why implement such a reform? What benefits does the government derive more generally from such provisions?
Several reasons are put forward, all economic. The desire to reduce the work of the tax administration, in a general movement to reduce its workforce, but also the generalization of the monthly deduction, which, although already adopted by a large part of taxpayers, has psychological advantages.
But more than that, the finance law for 2017 does not spare the taxpayer. Indeed, it provides for an exceptional provision aimed at limiting the deduction of work costs for the determination of net taxable property income in 2018.
The impact of the reform on property income Before 2017, an individual carrying out work on a property with a view to renting it out could deduct all of these expenses from their net taxable property income.
This practice will not benefit the taxpayer in 2017 since, due to the transition to withholding tax, the CIMR tax credit will eliminate the income tax due for 2017. In any case, due to a reform which is wants to simplify, the taxpayer no longer finds what he is looking for; it would therefore be unreasonable to advise him to plan to invest in rental housing over the next two years since he will not obtain the tax advantage that he hoped to obtain.
Under corporate law, companies are liable for corporate tax on profits made in France during an annual financial year. The taxed profit comes from the difference between the income derived from the activity of the company and the expenses resulting from this same activity.
Thus, a company formed to carry out a real estate transaction can deduct from its income all the expenses of the work it carries out. Certainly, if the major works must be capitalized over several years, the depreciation will allow taxpayers to find their way.
Interestingly and not least, the reduction in the corporate tax rate has just been initiated. A reduced rate of 15% applies today to companies making a profit of less than €38,120 for a maximum turnover of €7 million, when the normal IS rate increases in 2023 from 28% to 25% for the first €500,000 of profit for all companies.
The creation of a real estate rental company will thus allow its partners to deduct from their profit the cost of the work carried out while benefiting from reduced taxation at the rate of 15%, since their profit does not exceed €38,120.
It is for these reasons that it seems judicious to us to consider the creation of a company to carry out a rental investment operation, since it seems more interesting from a tax point of view, in the short and medium term, to invest in this area for an individual.
If with this in mind you are considering investing in rental real estate, we invite you to contact us to think about your investment project and find the best ways to implement it .
DAMY law firm – 2023