—Angelique Devaux, French Licensed Attorney (Notaire)
At the end of every year, before wishing the traditional best wishes, the Constitutional Council of the French Republic renders its decision on the Finance Act for the year ahead. Eagerly anticipated by the Government and taxpayers, the decision endorses (wholly or partly) the budget of France for the coming year. Despite a 2013 period of fiscal restraint qualified as a ras-le-bol fiscal (tax dissatisfaction) by the media and French people, on December, 29 2013 the French Constitutional Council struck down 24 of 236 articles as contrary to the French Constitution. Two articles merit special attention since they clearly state a certain degree of willingness to tax the wealthy and put an end to an old policy of privileges: the Constitutional Council finally approved the 75% Millionaire Tax and repealed the “Corsican exception” on inheritance tax. Both decisions were taken in the light of principles of equality of taxation and vis-à-vis public burdens.
The 75% Millionaire tax
One of the most notable promises of the Socialist Presidential campaign in 2012 was the 75% Millionaire tax, struck down by the Constitutional Council a year ago, that put Francois Hollande and his Government in a particularly uncomfortable position. The 2012 tax proposed to tax individuals’ income, even though income tax is normally paid by a tax unit which could be made up of both spouses. The Council did not strike down the principal of the tax, but its calculation mechanism. Consequently, the French Constitutional Council judged there was a misreading of the principal of equality of taxation.
Despite being a polemical topic, the current Government resubmitted a new financial bill this year, which includes in a different language the 75% Millionaire tax. This time, Francois Hollande received Court approval for the exceptional Millionaire tax precisely of 50 percent (75 percent in combination with other taxes and social charges) on wages above 1 million Euros for the current year and the next one. Although contested by the opposing parliamentary group UMP on the basis of the unconstitutional retroactivity of tax law derived from Article 16 of the Declaration of 1789, the measure was not declared contrary to the Constitution: The Council ruled that although the tax is based on 2013 and 2014’s income, the tax is due in 2014 and 2015, thus, there is no retroactivity of the law.
Notwithstanding that the new tax is levied on particular persons and income, the 2014 budget Act has not been declared in contravention to the constitutional principle of equality of taxation. According to the recent decision, the Council reaffirms that the principle of equality, derived from Article 6 of Declaration of 1789, does not preclude Parliament from treating different situations in different ways, nor from deporting from the principle of equality for reasons of general interest provided that, in each case, the resulting differential treatment is directly connected with the purpose sought to be achieved by the statute. The new version no longer taxes individuals through the income tax, but instead places the tax on companies paying their employees a remuneration exceeding 1 million of Euros. The French Government paid attention to last year’s recommendations and took all necessary precautions to receive the green light from the Constitutional Council with the sole aim of making the wealthy contribute to the economy. According to Prime Minister Jean-Marc Ayrault, the new tax concerns about 470 companies and 1000 officers or employees. The expected return is about 210 millions of Euros, including 44 million from a dozen football (soccer) clubs.
The End of the “Corsica exception” on inheritance tax
Corsica Island, the territory of birth of Napoleon Bonaparte, is a French region situated in the Mediterranean Sea, which despite its annexation to France in 1769 still claims independence and a strong identity that pushes the Island to receive a special tax treatment from the State. Since an 1801 decision called “Arrêté Miot,” no penalty could be applied to heirs who did not file the inheritance form including Corsican real estate, or who did it late. Over time, real estate located in Corsica was de facto exonerated from the inheritance tax. It was not until a 1999 financial act for reforming the situation that it began to be remedied. However, the restoration of taxation was not absolute as a transitional regime still remains, which allows for no inheritance tax between 2002 and 2010 and a reduced tax until 2016. Again this year, Parliament had voted an extension of the exoneration system until 2022; this extension did not pass the Constitutional Council. The Court struck down an extension of the exception because it leads to transmission of property exempt from the tax without any legitimate reason. In other words, the old system infringes the principle of equality before taxation and vis-à-vis public burdens. The Council does not consider Corsica different from the “continent”, and thus it cannot benefit from a different regime. So now, the French Island enters a common applicable inheritance regime with a tax on 100% of property value effective January 1, 2018.
On both of these issues, the Constitutional Council applied a consistent jurisprudence on equality of taxation: namely whether the difference in treatment can be justified by a difference of circumstances directly related to the purpose of the law, and whether the reason based in the general interest complied with the law and justified such a differential treatment.
Although equality is difficult to apply in matters of taxation, which is in essence an unequal area (France has a progressive system of taxation and a wealth tax), today it has become an instrument of economic policy of the French Government that was recently reaffirmed by Pierre Moscovici, the French Economy Minister. The principal of equality before tax is beginning to possess a special importance in tax law. Although, it is not the function of the French Constitutional Council to substitute for the legislative power, its jurisprudence does elaborate the law and its application.
The Millionaire tax has been designed to reduce France’s budget deficit, time will tell us if it is for a “temporary” period of time, or not. Regarding Corsica, the decision pushes the Island to react: a new text should be drafted quickly aimed at creating a specific inheritance allowance on Corsican properties, supported by Corsican notaries who continue to justify the exception of the Island by the typical character of the land. That proposal is expected, but Paris seems determined to terminate the privileges and all other old favors, and above all to repair the country’s finances.
Suggested citation: Angelique Devaux, The French Constitutional Council and the 2014 Finance Law, Int’l J. Const. L. Blog, Jan. 10, 2014, available at: http://www.iconnectblog.com/2014/01/the-french-constitutional-council-and-the-2014-finance-law/