In this region of France, taxpayers do not have to file tax returns or pay income tax. They benefit from significant tax breaks on property taxes and capital gains on real estate.
While French taxpayers are busy filing their tax returns, some are wondering how much they’ll have to pay the taxman this year. Miles away, in the heart of a French paradise, some residents are completely free from these concerns. For them: no tax returns to file and, most importantly, no income tax to pay.
This exceptional territory is French Polynesia, an archipelago in the South Pacific. Thanks to Article 74 of the Constitution and Article 13 of the Organic Law of February 27, 2004, this overseas territory enjoys complete fiscal autonomy. In short, local authorities set their own tax rules.
Residents of the archipelago are not subject to the progressive income tax brackets applied to residents of mainland France and most other overseas departments. Instead, they pay a territorial solidarity contribution (CST). Similar to withholding tax, this contribution is deducted directly from the income paid to Polynesians by their employers or other organizations. The tax rate for this contribution ranges from 0.5% for income up to 150,000 Pacific francs (equivalent to 1,257 euros) to 28% for income exceeding 2.5 million Pacific francs (equivalent to 20,962 euros). To give an idea, according to the scale, an employee earning a monthly income of 400,000 Pacific francs (3,354 euros) will pay a contribution of 11,250 Pacific francs, or just 94 euros per month.
With regard to real estate, the Polynesian tax system also differs from the traditional property tax system. The equivalent of the property tax on built properties amounts to 10% of the rental value of the property. Municipalities may also add “municipal surcharges” that can increase this amount by up to 50%.
But the real advantage lies in the exemption conditions. New constructions, reconstructions, and extensions are eligible for a full property tax exemption for 5 years, followed by a partial exemption of 50% for an additional 3 years. It is only starting in the 9th year that the property is fully taxed. In addition, unfurnished rental properties benefit from a 25% deduction (of the rental value). This deduction rises to 30% for furnished rentals.
Finally, the capital gains tax regime on real estate is perhaps the most attractive aspect of the Polynesian tax system. When an owner sells their property and realizes a profit, only that capital gain is taxed. If they have owned the property for less than 5 years, the tax amounts to 50% of the capital gain realized. The tax rate drops to 20% if the owner has owned the property for between 6 and 10 years.
Furthermore, after 5 years of ownership, a 20% annual deduction is applied to the taxable base, leading to a total exemption after 10 years of ownership. To better understand this, let’s take the example of an owner who purchased a property for 10 million Pacific francs and sold it 7 years later for 20 million Pacific francs. Our owner has therefore realized a capital gain of 10 million Pacific francs. He benefits from a 40% deduction, reducing his taxable base to 6 million Pacific francs. Applying the 20% tax rate, his capital gains tax amounts to only 1.2 million Pacific francs, or just 12% of his gross capital gain.
