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Investment for Expats in France

Submitted: November 2013

As in any country, expats must beat inflation and taxes to preserve the real value of their savings.

As regards taxes on capital investment in France, this is generally an issue only if your savings are well above the €100,000 mark. French investment taxation is in fact one of the most progressive in the world in that small savers rely on generous tax breaks while the wealthy do not.

Inflation is actually a personal matter, as you must determine for yourself which inflation you want to beat. If you are a long-term immigrant, you are likely to be concerned with French inflation. If you plan to return to your home country, you might prefer beating the inflation rate of that country.

Remember that you invest for a purpose, and that this purpose is specific to you. If the purpose of your savings and investments is 100% outside France but you invest in any Euro-denominated assets, you are effectively making a currency bet.

Inflation in France

The European Central Bank (ECB) is strongly committed to price stability, i.e. inflation must be below 2% over the long-term. In practice, the ECB is solely concerned with inflation throughout the Euro-zone, which is nothing more than an aggregate. Member States may deviate from the Euro-zone average, sometimes strongly. However, France is unlikely to deviate much from the Euro-zone aggregate for France’s output accounts for too large a share of the Euro-zone economy.

France tends to have a below-average inflation rate. At present, French inflation (0.9%) is slightly above the Euro-zone average (0.7%).

For more information on monetary policy, see Foreign Exchange for Expats in France.

Savings accounts

Savings accounts are risk-free. French deposits are guaranteed by the Deposit Guarantee Fund (Fonds de Garantie des Dépôts et de Résolution) up to €100,000. The guarantee covers current accounts, savings accounts, and term deposits, if they are denominated in Euros or another EEA currency.

Easy-access savings accounts generally have a low yield (around 1.8%), but it is still above inflation. Don’t forget that this is gross interest, so taxes may apply thereon (up to a bit below 59%).

Regulated savings products

Any individual resident in France is entitled to open regulated savings products (produits d’Etat). Any expat should seriously consider regulated financial products. These are almost systematically available from all French banks, and you can only have one product of each type.

The most important regulated savings accounts are:

  • Livret A: pays tax-free, inflation-busting interest (1.25%). You cannot pay in any further if your balance exceeds €22,950.
  • LDD: pays tax-free, inflation-busting interest (1.25%). You cannot pay in any further if your balance exceeds €12,000.
  • LEP: pays tax-free interest at a higher rate (1.75%). You must prove that your income tax is below €769 per year. You cannot pay in any further if your balance exceeds €7,700.
  • Livret jeune: pays tax-free, ultra-high interest (2.5 to 4%). Only available for individuals aged between 12 and 25. You cannot pay in any further if your balance exceeds €1,600.

There are also hybrid products. Typically, these are signed up to as regulated savings accounts, wherein you accrue rights to take out a loan (droits à prêt) as you earn interest. The loan, if any, comes along with a bonus paid by the Government, and the proceeds must generally be used to buy your home or to make home improvements. These hybrid products are regulated by law, and they include:

  • PEL: pays interest well above inflation (2.5%), taxed at 15.5%. You cannot pay in any further if your balance exceeds €61,200. If you make any withdrawal in the first two years, any interest earned is reverted to what you would have earned in a CEL. The interest rate on any loan arising from a PEL is poor (4.2%) compared to the open market (3-3.5%).
  • CEL: pays interest below inflation (0.75%), taxed at 15.5%. You cannot pay in any further if your balance exceeds €15,300. The interest rate on any loan arising from a CEL is highly attractive (2.25%).

The last noteworthy regulated savings product is the PEA. This product is like a share dealing account, except that you can buy and sell EU shares tax-free for so long as the funds stay within the PEA. Taxation is deferred until you withdraw money from a PEA. However, do not expect any tax benefits if you make a withdrawal in the first 5 years.

Generally speaking, a PEA is highly tax-efficient only when funds are not withdrawn in the first 5 years. A common tip is to pay in €10 to open a PEA and leave it like that for a while. The biggest disadvantage with a PEA is that you can only sit on cash or invest in shares. If the stock market gets crazily overvalued, you cannot switch to an interest-paying investment without withdrawing money from your PEA.

Regulated products: practical tips

Apart from the basic savings accounts, French regulated investment products are quite complex actually. The discussion above is just designed to introduce expatriates to France’s “mainstream” regulated products. In practice, however, professional advice might be helpful.

Don’t forget that regulated products are specific to France. Consequently, a foreign taxman (e.g. the US Internal Revenue Service) will deny any tax benefit you would have under French law. Likewise, the French taxman will disregard any foreign tax-free product (like a Canadian TFSA).

Any regulated product must be closed upon ceasing to be resident in France for tax purposes, unless you move to another EU country. For more information on tax residence, see TAXATION – Overview of Tax Issues for Expats in France.

Bond investing

Given the attractiveness of regulated savings products, expatriates should really think twice before investing in bonds. Yields may be comparable, but bonds are fully taxable (up to 59%).

French Government debt is also referred to as “OAT” (Obligation assimilable du Trésor). It is nearly risk-free, i.e. France is very unlikely to default on its debt. On the downside, OATs offer a poor yield.

Excluding taxes and capital gains, OATs need to have a maturity of at least 5 years in order to match French inflation (0.9% in October 2013). At best, you could get 2.2% on a 10-year bond or 3.3% on a 30-year bond. As Euro-zone inflation is currently at low levels (0.7% in October 2013), one could reasonably expect it to return to the ECB’s 2% target over the foreseeable future.

Government bonds are subject to market variations. Bond prices rise when the market demands a lower yield, and they shrink when the market demands a higher yield. Market interest rates are strongly dependent on global macroeconomic factors. Typically, they should move downwards when the global pool of money grows much bigger, whereas they tend to rise when global liquidity dries up.

As the Euro-zone is subject to high deflationary risks, the ECB would have a case to print more money into the open market. It would result in lower market interest rates and higher inflation.

Alternatively, you can invest in Euro-zone Government bonds or in corporate bonds. These can be safer (e.g. German bunds) or riskier (e.g. BBB corporate bonds or Italian Government debt). A riskier bond may attract a higher yield (typically above 3.5% on a 10-year bond).

French securities (costs)

Do consider carefully the applicable transaction costs if you wish to trade securities in France. Here are the main costs you should be aware of:

  • Broker’s commission fees
  • Financial transactions taxes (0.2% on companies whose market capitalisation exceeds €1bn)
  • Minimum commission fees (from as little as €1 per transaction)
  • Any other applicable fees that may be charged by your broker.

Online stockbrokers may charge cheaper fees than high street banks. For an overview of France’s online stockbroker market, click here.

French shares (overview)

France’s main index is the CAC40. French share prices are still well below their 2008 peak, let alone if you adjust them for inflation. This is because the crisis has forced the market to price in lower corporate earnings. As of today, it is largely possible to find CAC40 shares with a dividend yield (before tax) in excess of 4%.

In fact, you should feel free to be critical of today’s market expectations, no matter any previous share price moves. This is because the French market tends to be overoptimistic with regard to corporate earnings. In practice, it can take years for the market to fully/accurately price how bad (or how good) a company is. Experienced French investors tend to say that it’s better to “let the storm rage when a share falls”.

Be wary of volatility when you invest in securities. Volatility is heavily dependent on the underlying risk. However, higher risk normally means higher reward, and some securities may be low-risk. Additionally, stock market variations are very dependent on interest rates. If they are going up, stock prices should go down. At the moment, French interest rates are at record low levels, but they might rise if the ECB tightens monetary policy. See Foreign Exchange for Expats in France.

You are responsible for deciding how much risk you want to take on. On the stock market, your emotions are your enemy. You must control them rather than let them control you. Do not, under any circumstances, let (natural) psychological factors make you take irrational decisions.

Financial returns

From a financial point of view, the real return on investment consists of:

+ Net dividend or coupon yields
+ Net capital gains (or losses)
-  Taxes
-  Inflation

When a company reinvests its business profits, the net dividend yield is lower but this may be offset by higher capital gains potential over the long run.

Technically speaking, an investment can be highly profitable despite low coupon/dividend yields if the interest rate demanded by the market edges further down, or if the market expects a higher dividend in the future.

FX risks for expatriates

As an expatriate, you don’t necessarily want to be a speculator. If you park your money in a currency which you eventually intend to spend, you have little FX exposure. Otherwise, you are effectively making a currency bet. A lot of money can be made on currency bets, but a lot can be lost as well.

Example

Rachel is a British citizen who has been posted to Paris for two years. She will return to the UK later on.

Her net salary is €40,000 per year, but she intends to spend only €30,000 per year. She thinks it would be appropriate to save an additional €5,000 for a rainy day whilst she is in France.

Rachel is effectively making a currency bet if she fails to convert 40,000*2 – 30,000 *2– 5,000 = €15,000 into British pounds.

Investing outside France

It’s perfectly fine if you park your investments outside France, but you will have to report them to the French taxman. See Money Transfers for Expats in France.

Generally speaking, it is best to invest in a country with which France has signed a Double Tax Convention (DTC). In any case, non-cooperative jurisdictions (Etats et territoires non coopératifs) should be avoided unless you really have no choice. Note that the concept of “non-cooperative jurisdictions” is designed to crack down on opacity, not low tax.

Retaining overseas assets might be helpful if you plan to return to your home country. That should spare you the money transfer hassle.

For more information on offshore investments, see our section on alternative investments.

 

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