Flat Taxation: How Does the PFU (Prélèvement Forfaitaire Unique) Work?

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Since January 1, 2018, flat taxation has been applied to capital income in France through the Prélèvement Forfaitaire Unique (PFU), also known as the Flat Tax. This system simplifies the taxation process for savings and investment income, excluding real estate profits. Here’s everything you need to know about how it works, which financial products are impacted, and the key benefits of this system.

What is Flat Taxation (PFU)?

The flat tax, or Prélèvement Forfaitaire Unique (PFU), was introduced by the 2018 finance law to simplify and reduce the tax burden on savings and capital income in France. With a total rate of 30%,it covers both income tax (12.8%) and social contributions (17.2%).

One of the key features of it is that it does not depend on your income tax bracket or overall taxable income. Instead, the rate is fixed, making it easier for individuals to understand their tax obligations without needing to navigate complex progressive tax systems.

Which Financial Products Are Affected by it?

Flat taxation applies to income generated from various financial products, including:

  • Dividend income: From stocks, equity shares, and other investments that yield variable returns.
  • Fixed-income investments: Such as bonds, debt securities, and term deposits.
  • Capital gains: On the sale of securities, including stocks and bonds.
  • Life insurance income: For policies purchased after September 27, 2017.
  • Home savings plans: Such as the Plan Épargne Logement (PEL) and Compte Épargne Logement (CEL).

However, certain regulated savings products are exempt from flat taxation, including:

  • Livret A
  • Livret d’Épargne Populaire (LEP)
  • Livret Jeune
  • Livret de Développement Durable et Solidaire (LDDS)
  • Older PEL and CEL accounts (those established before 2018)

How Does Flat Taxation Apply?

The application of flat taxation depends on the type of financial product and when the income or gain is realized.

Flat Taxation on Dividend Income

For dividend income, flat taxation is applied when the payment is made. The income is subject to a non-liberating flat tax of 12.8%, which serves as an advance payment on income tax. When filing your annual tax return, you must declare the gross income, and the final tax assessment will occur then.

Flat Taxation on Capital Gains

The flat tax applies to capital gains made from the sale of securities, after deducting any capital losses. If you incur a loss, it can offset your capital gains for the year and be carried forward for up to 10 years.

Unlike dividend income, it on capital gains is applied at the time of the annual tax filing.

Flat Taxation on Life Insurance

For life insurance policies purchased after September 27, 2017, it applies to the interest earned. Like other capital income, this is taxed in two stages.

A non-liberating flat tax is applied when the income is earned, with rates of 12.8% for contracts less than eight years old, and 7.5% for contracts held for eight years or longer.

For contracts lasting at least eight years:

  • 7.5% for gains up to €150,000.
  • 12.8% for gains exceeding €150,000.

Social contributions of 17.2% are also added to this tax.

Can You Opt for Progressive Taxation Instead of Flat Taxation?

While it is applied by default, you can opt for the progressive income tax scale when filing your tax return. To do so, check the option (box 20P) on the 2042 tax form.

This option applies to all income and gains subject to it. If you selected this option in the previous year, it will be pre-checked in your next tax return.

Benefits of Choosing Progressive Taxation Over Flat Taxation

If you choose the progressive tax scale over it, you can benefit from:

  • For dividend income: A 40% tax deduction on eligible distributed income, and the ability to deduct related expenses and previous-year deficits.
  • For capital gains: Possible deductions based on the holding period of the asset (for titles acquired before 2018), along with the ability to deduct part of the social contributions on capital gains from the overall taxable income.

Conclusion: Why Choose Flat Taxation?

The flat taxation system, or PFU, simplifies tax obligations for individuals earning income from savings and investments. With a fixed rate of 30%, it offers transparency and ease of management, especially for those with diverse investment portfolios. However, individuals may choose the progressive income tax scale if it benefits their specific financial situation.

By understanding how flat taxation works, investors can make informed decisions about their tax filings and optimize their financial planning.