Hollande responds to French tax tensions

French president François Hollande has disappointed the private equity industry by insisting there will be 'no exceptions' to his controversial income tax hike.

French president François Hollande confirmed his desire to increase the tax burden on France's top earners in a TV interview last week, insisting there will be “no exceptions” to his 75 percent tax on annual income of more than €1 million.

However, he did offer some consolation to critics of the plan, with the suggestion that the rate would probably be dropped after two years as the French economy recovers.

The contentious proposal was a cornerstone of Hollande’s successful election campaign. But since there had been no firm details of the plan, it was not expected to be implemented, according to one French tax lawyer. 

“Most people believe that it doesn’t make sense. But this was one of his very strong announcements and people now see him stuck by this proposal and that he has to implement it,” added the lawyer.

Another fear for private equity professionals is that creating a new income tax band could also lead to a reclassification of capital gains, following Sweden’s lead. Currently the French regime treats carried interest as capital gains, taxed at a rate of 33.5 percent; but there is a risk this could be reclassified to income if the 75 percent rate is implemented, the lawyer warned.

This would be a big blow to the industry because as recently as 2009, under President Sarkozy, changes were made to existing legislation indicating that carry’s tax status was not under threat.

Hollande’s affirmation came a day after France’s richest man, luxury magnate Bernard Arnault of LVMH, announced that he had filed for Belgian citizenship – which he claimed was not to avoid French taxes.

The fear that this could spark a mass exodus of French top earners led to reports that the French government would water down the measure. However, it promptly denied this. 

This has led to even more confusion, the lawyer said; since nobody is quite sure what the government is going to do, it's difficult to predict what will happen next, he added.