French News in English 

Published by France Now Association

Editor: Arvind Ashta

Editorial Committee:

W. W. Strangmeyer,

Emmanuelle Ashta




French News in English

June 2000, Monthly, Issue No. 38, 50 Francs


Housing, Cities and Transport: Background to a new bill

A new bill is before Parliament. It seeks to make far-reaching changes in the way of looking at housing, transport and city-development. This article provides you a background. The bill itself will be discussed only if it is passed into a statute.

Housing Statistics

The stock of real estate amounted to FF 21 trillion in 1996. In comparison, total national wealth was around FF 92 trillion and GDP was over FF 8 trillion.

About FF 14 trillion of French real estate is in the housing segment, the rest is non-housing buildings.

The total of shares in companies (FF 23 trillion), bonds (FF 6 trillion) and loans (FF 17 trillion) far exceeds the total value of real estate.

France has about 28 million houses or apartments for its population of 60 million people. Of these, 3 million are secondary residences and 2 million are lying vacant. The balance 23 million apartments or houses are effectively the primary residences of the 60 million persons.

Out of the 23 million primary residences, 12 million are owner occupied and 9 million are rented accommodation. The balance is miscellaneous status.

Out of the 9 billion rented establishments, a little over 4 million are rented from an individual, 4 million are social housing and the balance are rented from an enterprise. In short, half the people who do not own a house get cheap social housing. Even many of those who rent from individuals, may be financed to some extent by the State social security.

(Source: Report of J. Friggit: Dec 1997, Ministry of Equipment, Housing, Transport and Tourism)

Housing Policy

During the last few decades, three-fourths of new housing has been constructed with subsidies of one sort or another. Every year, 6 million French families receive some kind of housing assistance, totalling FF 5 billion. It is estimated that half of French families have the right to receive some form of housing assistance. Some of the more recent measures for housing assistance are the following:

* In 1991, the Besson law was passed offering personalised housing aid to those who could not afford decent housing. In 1993, this aid was generalised to all who met the income criteria, based on family size.

* Rent control has existed for the last twenty years, ensuring that landlords don't increase rents too fast and also ensuring that new rents fixed have some relation to those in the adjacent area.

* In 1993, social accession loans were introduced providing guarantees to lenders that the loans would be repaid and protecting the borrowers against the effects of non-payment or late payment of their reimbursements.

* In 1995, a zero percent loan was introduced to allow people to have a part of the credit required to buy an apartment on interest-free terms. Total Zero percent loans amounted to FF 7 billion per year for the last two years, financed by a 1% tax on enterprises.

* Since 1996, new social housing constructed bears a VAT of only 5.5%. For renovation of existing social housing, the VAT was lowered to 5.5% in 1997. Since 1999, this lower VAT of 5.5% has been offered to major renovations of all housing.

* Since 1999, a new subsidised interest loan scheme (termed PLUS, prêt locatif à usage social) is offered to organisations creating social housing. New housing or renovation of old housing qualifies as long as the landlord insures that rent will remain below ceilings established for each city. Ten percent of French households have been allowed to benefit from the PLUS scheme, even though they were over the existing ceilings. If this kind of exception continues to be made, about 75% of French families would eligible for subsidised housing.

* The transfer duties on housing have been reduced twice.

* The lease duty (droit de bail) has been scrapped.

In short, both supply-side and demand-side subsidies are provided to the housing industry. The objective is to ensure that everyone has access to housing. At the same time, with new construction, money is made by construction companies and employment is provided to those in the construction industry.

Now that most French people have some form of housing, the question is whether there is an excuse to go on subsidising the sector or should the money be spent elsewhere. Since few new products are catching the public's fancy (despite the media hype on internet), most big investors would like to continue in their traditional sectors and would like the government to find public arguments to continue subsidies to their sector.

To ensure that people are employed, the government in any case has to direct its efforts somewhere. If the money is to be spent in traditional sectors, the question is one of maximising the social returns within this constraint. In a new bill before the Parliament, the argument being used is that having provided the basic housing, it is now necessary to improve the quantity of people who have access to the subsidised housing and to improve the quality of the offer, for example by offering diversity or through renovations. Part of the objective of the new bill before the Parliament is, therefore, to further boost the construction industry, especially the housing sector.

Urban policy

A 1983 law, modified in 1991, largely dictated urban policy. Essentially this urban policy regulation requires some form of social housing in each commune instead of concentrating the poor people in little ghettos and shantytowns. The socialist view is that planning the future shape of city lets us choose our destiny, instead of the "laissez-faire" ideology where we would have to just wait and see what shape urbanisation, in this case, takes us. The socialist viewpoint would like a more balanced city, more secure, less polluted, less anonymous, and less segregated socially and spatially.

To respond to all the aspects of economics, environment, transport, etc. the law has been modified successively so many times, that it is no longer a coherent whole. The city, which was supposed to integrate people, is slowly breaking up in segregated quarters, especially on the peripheries, where the erstwhile city approaches the erstwhile rural areas. In fact, the laws of suburbs, governed by individual communes, are neither very clear nor coherent with that of the city. Which is why, the government wants to bring in the concept of agglomeration, to permit planning of the expanded city. This, however, means reducing the power of the communes.

85% of French people, or 50 million people, live in urban areas. Of these, 29.5 million persons, about half of the population, live in agglomerations of more than 50,000 people having at least one commune of more than 15,000 residents. In all such agglomerations, social housing is an average of 23.2% of total housing. However, 1006 communes belonging to these 113 agglomerations do not have even 20% social housing, indicating that the poor are congested in some areas, while the rich do not want to see them.

People travel more and more. Two-thirds of total travel is by car. Large commercial centres are mushrooming and the small shopkeeper is disappearing. To take advantage of low rent, multiplexes are developing on the peripheries of cities. As a result, the centre of the city is losing its population as well as commerce.

Alongside, the transformation of more and more aspects of life into the financial and economic sectors has meant that inequalities have risen, segregation has occurred and employment has increased. The question is how to balance the questions of city centres and their traditional tax sources with new tax resources coming in, the rejection of social housing by some areas (Neuilly), and spreading the cost of urban modernisation and enlargement.

The new bill would like to reinforce coherence of urban policies, calm city politics, link intra-city transport policy to a durable development considering environmental issues, and insure a diversified housing of quality.

Transport policy

An average Frenchman used to travel 17 km per day in 1982. In 1994, he travelled an average of 23 km per day. To do this, he took the same time, indicating an increase in the speed of transport. Most of the distance travelled was to go to work and back (9 km in 1982, 14 km in 1994). With the increase in distance travelled, the importance of the automobile has increased from 48% of all travelling to 63%. Corresponding inversely with this, the share of walking and bicycles has gone down.

The increased use of automobiles has led to major congestions, increase in pollution and parking problems. The policy of according priority to the automobile sector (go faster, farther) created negative environmental effects. This in turn required huge treatment expenditures comparable to the subsidies that would have been required to creating social transport.

Tax changes

During his television appearance in March, Lionel Jospin indicated that the VAT would be reduced to 19.6% and that the Personal Income Tax would be lowered for lower tax-brackets. The Budget Amendment Bill now specifies that the rates for the first two tax-brackets of the Personal Income Tax have been lowered by 1% each: 9.5% instead of 10.5% and 23% instead of 24%.

The Regional Part of the Housing Tax (Taxe d'habitation) is also being scrapped, as promised.

Other proposals include scrapping the 4.8% transfer duty on sale of forests until 2002, for forests expected to be replanted within the next five years.

The regime of the deferment of capital gains tax for gains reinvested in the shares of new companies is being examined and is open to public debate.



Introduction to French Taxation

Over the next few issues, we hope to be able to present a brief overview of French taxation, permitting expatriates to understand the French tax system and to make some essential tax planning decisions, so that they have a better chance of surviving and being as internationally competitive as a local businessman. As a start, in this issue, we present some basic notions and concepts.

TAXATION: According to the Penguin dictionary of economics, a tax is a compulsory transfer of money (or occasionally of goods and services) from private individuals, institutions or groups to the government. It may be levied upon wealth or income, or it may appear in the form of a surcharge on prices. Taxation is one of the principal means by which a government finances its expenditure.

While it seems obvious what is tax and what is not, there is an awkward boundary. The TV licence is effectively a tax; but are contributions to the State Earnings-Related Pension Scheme? And would compulsory saving to purchase, say, a pension, not be equivalent in spirit to taxation? Or, if the government were to apply high prices to the output of nationalised industries, in order to raise revenue? The essential question is one of separating taxation from all kinds of levies and from other sources of government income. In France, one uses different words to distinguish these concepts from each other. Some words are impôt, taxe, droits, redevances, cotisations. The impôt is what conforms most closely to the notion of a tax. Nevertheless, the use of exact terminology is largely confined to academics and the politicians and administration do not always reflect the terminology differences. A French citizen would be rather confused to find that most of what are termed "taxe" are really "impôt": for example the most important French Tax, the VAT, is clearly an "impôt", but is called a "Taxe sur la valeur ajoutée". It is not the only exception (Taxe d'habitatoin, taxe sur les produits pétroliers). Subject to this remark, it may be useful to retain a brief notion of the different terminology.

Impôt: It is a levy imposed by the State, the localities or by some public establishment on the taxpayers based on their ability to pay. It is clearly defined and without any identifiable consideration, with a view to covering the public expenses or for intervening in economic and social policy. It has to be created by a statute of Parliament.

Taxe: It is a levy charged by other than the State or local government or public authority and imposed either by a State law or by the administration's authority. The reason for imposing the fee may be economic, professional or social. It is usually charged by professional organisations.

C.E. Ass. 20 dec. 1985, 28 277 (Syndicat national des industriels de l'alimentation animale).

The Office national interprofessionnel des céréales (ONIC) was a public establishment, even if it had to undertake some industrial or commercial activities. As a result, a taxe imposed by it was in reality an impôt and had to be annulled.

C.E. Ass. 26 oct 1990, 61 172, 63861, 63862 (Union fédérale des consommateurs)

The Caisse nationale de l'énergie (CNE) was allowed to undertake some financial activities to regulate the market for petroleum products. It could impose a tax to finance research. However, a look into the objectives for this particular tax indicated that these included discouraging the use of petroleum products and thus reducing the deficit of the country. The objective of the tax therefore exceeded the objective of financing the establishment. It was therefore an impot and not a taxe. The tax was therefore declared illegal, not having been created by Parliament.

Redevance: It is also a fee or a due, usually charged for a clearly identifiable or individualisable service, usually denoting the television licence fee. There is a consideration.

C.C. 23 June 1982, 82123, Rec. 99

The Agences financières de bassin were public establishments who were allowed to charge a fee to meet their expenses. The fee was destined to cover the totality of their expenses for the period and charged to those whom they had to control. The Constitutional Council decided that this is not a fee based on service and therefore not a redevance. Levied by a public establishment, it could only be an "imposition of any nature" and therefore an impôt, which therefore had to be promulgated by law.

In fact, the redevances or fees have to be for specific services rendered. If the service is rendered by the State, the fee has to be instituted by a Decree of the C.E, while for localities and public establishments, it is the deliberative organ of the organisation that has to take the decision. In France, the receipt of Customs Duties go the EU.

Droit: This is similar to the notion of duty corresponding to a right, used invariably to protect society from the act of another. This is used notably for customs and for producing certain goods. The customs duty is paid for the right to import certain goods, thus protecting local producers. The excise duty on cigarettes or on alcohol is paid for the right to produce these goods, in spite of the effects on the health of those who consume them.

Cotisation: These are contributions to the financing of the social security system. The contributions are paid by individuals and their employers, based on their professional income. However, in recent years, this has been enlarged and generalised to all forms of income: from which the name "Contribution Sociale Généralisée". Here also the consideration is the welfare payments given under certain conditions.

Assessment and Collection: In France, the authority which decides how much you pay and the authority which collects the tax are different, to prevent abuse of power. What complicates things further, is that some taxes are collected by different bodies, for reasons of practicality. For example, the Customs authorities collect the VAT on imports, the tax on petroleum products and the excise duties. The local taxes are collected by the State administration and then forwarded to the concerned locality.

Direct and indirect taxation

One way of differentiating between different taxes is whether they are direct or indirect. According to public finance experts, a direct tax is one for which the ultimate burden of the tax corresponds to the formal incidence of the tax. In an indirect tax, the taxpayer can shift the burden of the tax elsewhere. Normally, a direct tax is a tax on income or wealth. An indirect tax is one on prices. However, this compartmentalisation is not without ambiguity. Companies may pass on their tax burden of direct taxes to shareholders, employees, suppliers or customers.

Sources of Tax Law

Constitution: The legitimacy of French taxation is defined by articles 13 and 14 of the Declaration of the Rights of Men and Citizens of 1789. Article 13 requires an equitable distribution of taxes among the citizens based on their capacity to pay. Article 14, dealing with consent to taxation as opposed to an imposition, established that French citizens have the right to debate, by themselves or through their representative, the need for the public contribution, to freely accord their consent, to follow up on the use of the funds, to determine the tax-rate, the tax-base, the collection system and the duration of the tax. These provisions apply to what the French term "impôt". These taxes therefore need to be passed by law. This is reinforced by Article 34 of the French Constitution which states that statutes determine the rules concerning the base, the rates and the methods of collection of taxes of all types. The other "taxes", fees and contributions are not bound by this constraint, and can be created by the executive.

Statute: Article 34 of the Constitution also requires that Finance Acts determine the resources and obligations of the State in the manner and with the reservations specified in an institutional Act.

Besides the changes to French taxation every year, outlined in the budget, the Parliament also passes all kinds of procedural tax laws. These are contained in a separate code known as the Tax Procedures Code, of special use to lawyers and tax professional. We will restrict ourselves to a study of the General Code of Taxation.

The General Code of Taxation contains Laws, Decrees, Orders and regulations, all emanating from different sources. The laws come from parliament, the regulations may come from some public authority, decrees may come either from a Conseil d'Etat decision or by a government decree, the orders often come from a minister or from a group of ministers. While all care is taken to retain the sense of the law, a decree of codification turns the law into a codified section or clause. There may be differences between the law and the code. In such a case, the original law prevails because it is that which is passed by Parliament.

Decrees and orders: From all this it is clear that the role of the executive power, i.e, the government, is to enforce or to execute the laws decided by parliament. For this, it may pass decrees and orders which precise the modalities of the tax.

Circulars: The interpretation of law raises many issues. Often, to avoid disputes and confusion, the administration may pass a circular indicating its interpretation of a law or a decree. The taxpayer does not have to agree to the interpretation and can challenge it. However, if the circular is annulled by the Conseil d'Etat, the taxpayers who followed the irregular circular are still entitled to benefit from it. The administration cannot revise assessments based on the fact that its earlier position was wrong.

Treaties: Article 52 of the Constitution contains the general stipulation that treaties are negotiated and ratified by the President of the Republic. However, for specific matters enumerated in Article 53 of the Constitution, including treaties that commit the finances of the State, treaties are to be ratified by an Act of Parliament. However, once ratified, the Treaties supersede the law of the country, if the other partners apply it. This means that external treaties supersede internal laws. For taxation, Double Taxation avoidance agreements are particularly important.

C.E. Sect. 13 mai 1983, 28831

Ratified treaties over-ride national law. This includes Double tax avoidance agreements. Therefore, a person cannot be taxed independently by the tax authorities if he is residing abroad. The criterion of deciding residence is established in the treaty.

* If the exemption is limited to the tax paid in the other State, the judge has to see what tax will be due to the other State, and allow for the balance to be taxed in France.

* The other State has to apply the treaty reciprocally. However, the judge cannot decide if it is doing so. The judge has to forward the Question to Quai d'Orsay.

* A treaty is valid only after publication in the J.O.

* A retroactive convention is allowed if the law ratifies it with the retroactive clause.

The European Union: EU law is also as binding as a treaty.

C.E. Ass. 3 Feb., 1989, 74052, Compagnie Alitalia

It concerned deductibility of VAT on gifts and services provided free to passengers in transit. Alitalia claimed that EU did not disallow these. In addition, the sixth European directive required harmonisation of some points. And what was included in the list of things to be disallowed in this EU directive did not include the gifts provided by Alitalia to its transit passengers. So, Alitalia should be allowed to reduce the VAT on these items for calculating its VAT due. Alitalia won.

Jurisprudence: What is most important is the jurisprudence of the Conseil d'Etat that is binding on the tax administration. However, sometimes, the tax administration, finds ways to continue to follow its own interpretation.

C.E. Plén. 31 mar 1978, 1683, Richard

The VAT is charged on sale of goods and sale includes delivery. For certain ships, the VAT rate became applicable on 1.1.69. A shipping company decided that it would sell the uncompleted ships to its customers before that date. The customers of course agreed. The VAT authorities did not and taxed them in the next year's sales because the goods had not been completed and delivered in 1968. The C.E. agreed with the administration's interpretation.

Some rules of judicial interpretation:

* The original text of the law has to be examined and not the links provided in the code.

*The law is inserted into the code by a decree of codification. The administrative judge therefore has to ensure that the codification does not modify the law.

*It is only if the text of the law is vague, that preparatory texts are examined.

* Exclusions to the general rule, e.g. exonerations from a tax, are to be interpreted strictly.

* Dispositions relating to penalties are also interpreted strictly.

* The judge looks at other laws to ensure conformity of his interpretation.

* When a new tax is created, it is applied on transactions occurring after the creation of the tax.

* Changes to the tax base or a tax-rate are applied prospectively.

* For income taxes, the rates and bases are applied to the income of the financial year, and not to the years before. For personal income tax, this year is the year before the 31st December when the rates are announced; for corporate income tax, it is the corporate year-end date that determines the tax rates.

* The period of reopening old declarations is determined with respect to the law pertaining on the 31st December of the year (année d'imposition). In French law, "année d'imposition" is the financial period in which the income is earned.

Over the next few issues, we hope to look at Corporate Income Tax, Personal Income Tax, VAT, some other national taxes and major local taxes.

Bernard Arnault loses money as closes down is going in for liquidation after less than a year of being in business. needed USD 30 million immediately to survive in the business of avant-garde clothing. No one believed they would survive, considering that monthly sales never even came close to USD 1 million. 300 people will lose jobs, with a negligible indemnity. The funeral rights are being entrusted to KPMG. A competitor claimed that the reason for failure was an aggressive image of a global range, which was not backed by depth. In the market for clothing, the rule is simple: one shop for one market. A second error was not availing of experienced people in this market and not engaging a financial controller. Nevertheless, their aggressive approach allowed them to attract attention and they obtained the right to keep famous brands such as Speedo, Elles, DKNY, Vans and Timberland.

Founded in 1999 by a trio of Swedish entrepreneurs, Ernst Malmsten, Kajsa Leander and Patrik Hedelin, claimed to be the first truly global Internet retailer of fashion and sportswear. Described by Elle magazine as the "literary rock stars of Europe", Kajsa and Ernst went into partnership in the early 90s, orchestrating a series of cultural projects initially in their native Sweden and later around the world. In 1996, they set up Leander Malmsten, a publishing house with the specific aim of introducing up-and-coming authors to the Swedish market. With signature dust jackets and an innovative stable of authors, Leander Malmsten soon built up a reputation as Scandinavia's premium publishing boutique. Following this early success, in August 1997 Kajsa and Ernst set up the Internet bookstore A phenomenal hit, exceeded all expectations, rapidly becoming the world's third largest online bookstore after Amazon and Barnes & Noble. In 1998, was sold to Swedish Cooperative KF, one of the largest retail and media companies in Scandinavia, and is now with the Bertelsmann group.

The failure of is about USD 135 million down the drain for investors, notably Benetton, J.P. Morgan, Goldman Sachs, Bain Capital, SEDCO Capital, Millennium and French luxury king Bernard Arnault who owned 8.5% of (around USD 11 million). Of course, this is merely 3% of about Euro 330 million invested in different internet sites by Bernard Arnault via Europaweb, including (perfumes), 38% of Liberty Surf (internet server), 51% of Aucland (Auction house), 20% of Artprice (Data base for auctions), 48% of WineandCo (Wine) and 80% of Zebank (banking). Europaweb has a total funding of Euro 500 million, a third of which is yet to be used.

It is obvious that not all Internet start-ups will make profit. The Business to Consumer section, especially, is likely to have many difficulties. Nevertheless, the experience is a base for caution not just for investors but for employees also. This caution is likely to reduce the chances for investment in many viable Internet start-ups.