Background
The first client had received an exceptional dividend, significantly higher than the distributions received in previous years.
The second had realised a large capital gain on selling shares from several Restricted Stock Unit (RSU) plans granted by his employer.
In both cases, a significant part of the income was subject to the flat-rate tax (PFU), whose income tax component is 12.8%. Despite a high amount of tax, the average tax rate could therefore remain below the 20% minimum rate set by the differential contribution on high incomes, or CDHR.
The clients wished to know whether they were liable to this contribution, assess the treatment of their exceptional income and calculate the instalment due in December.
Our approach
- 01
Checking whether the households fell within the scope of the CDHR
We first estimated each household’s reference tax income, then applied the adjustments specific to the CDHR.
The contribution applies to taxpayers domiciled in France for tax purposes whose adjusted reference income exceeds:
- €250,000 for a single, widowed, separated or divorced person;
- €500,000 for a married couple or civil partners taxed jointly.
We then compared this income with income tax, the exceptional contribution on high incomes (CEHR) and the other taxes taken into account in calculating the CDHR.
Key point. Exceeding the €250,000 or €500,000 threshold does not automatically mean the contribution is payable. The CDHR is due only if the taxes taken into account remain below 20% of the adjusted reference income.A relief mechanism also softens the threshold effect where the adjusted reference income is between €250,000 and €330,000 for a single person, or between €500,000 and €660,000 for a couple taxed jointly.
- 02
Analysing the dividend and the RSU gains separately
For the first client, we examined the amount of the dividend, the distributions received in previous years and the circumstances that led to this exceptional distribution.
For the second, we broke down the different components of the RSU gain:
- the portion possibly taxed as an employment benefit when the shares vested;
- the capital gain realised between vesting and the sale of the shares;
- the grant, vesting and sale dates;
- whether the plans and share sales were one-off or recurring.
This distinction was needed to determine which income entered into the calculation of the CDHR and the corresponding taxes.
- 03
Assessing whether the income was exceptional
The CDHR provides a specific mechanism for income that is exceptional both by its nature and by its amount.
We therefore checked whether each item of income:
- was or was not liable to be received every year;
- exceeded the average net income taxed for the three previous years;
- arose from a one-off transaction or from a recurring arrangement.
The large dividend could be exceptional where it resulted from a one-off distribution, unrelated to the company’s usual distribution policy.
The analysis was less certain for the RSU gains. Where grants and sales occur regularly as part of the client’s remuneration, the tax authorities could consider that the corresponding income is liable to be received every year. Conversely, a one-off sale of shares accumulated over several years could strengthen the argument that the income is exceptional.
Key point. High income is not necessarily exceptional income for the CDHR. The characterisation depends on its nature, its amount and the taxpayer’s own circumstances. - 04
Calculating the December instalment
On the basis of the income already realised and the amounts expected by 31 December, we estimated the CDHR due by each client.
The instalment is 95% of the estimated contribution. It must be declared and paid between 1 and 15 December of the year in which the income is received.
We took into account in particular:
- salary and bonuses expected at the end of the year;
- dividends and investment income;
- vesting gains and capital gains on the RSUs;
- foreign-source income;
- the taxes and tax credits taken into account in calculating the CDHR.
Key point. The calculation has to be made before all of the year’s income is known. The assumptions used must therefore be documented, particularly where the share price or the date of sale may still change. - 05
Securing the positions taken
For each client, we prepared a detailed calculation together with supporting documents showing:
- the nature and amount of the income received;
- the history of dividends or RSU gains;
- whether the transactions were one-off or recurring;
- the tax treatment of each component of the income;
- the assumptions used to calculate the instalment.
This documentation made it possible to explain the position taken and any difference between the instalment paid in December and the final contribution calculated the following year.
Outcome
After analysis, neither client was ultimately liable to the CDHR, and no instalment had to be paid in December.
For the first client, we were able to document the exceptional nature of the dividend in light of its amount, the circumstances of the distribution and the income received in previous years.
For the second, we separated the different components of the RSU gain and analysed separately whether each qualified for the exceptional income rules. Given the uncertainty attached to this characterisation, we also checked the effect of a more cautious approach on the amount of the contribution.
In both cases, the calculations made under the different relevant assumptions led to the conclusion that no CDHR was due and, consequently, that no instalment had to be paid before 15 December.
The clients were thus able to secure their position and keep the evidence needed to justify not filing or paying the instalment.
This case is inspired by a case handled by the firm, in light of the law and case law in force at the time of the engagement, and in the light of circumstances specific to it. It is presented for illustration purposes only: it does not constitute advice and does not predetermine the treatment that might be adopted in another matter.