Investing in European Stocks with the Equity Savings Plan (PEA) While Benefiting from Favorable Tax Conditions
Your Objective
While accepting the risk of capital loss, you hold a securities account with funds invested in shares (or similar securities) of French and/or European companies. Income and capital gains are exempt from tax after holding the securities for more than 5 years; however, social contributions are still due.
In detail
The Equity Savings Plan (PEA) can be subscribed to by any major tax resident in France. Its
as well as for receiving dividends. There are three main types of PEAs: the Classic PEA, the PEA Insurance (similar to the Classic PEA), and the PEA-PME.
A person can hold a Classic PEA/Insurance and a PEA-PME. However, one cannot simultaneously hold a Classic PEA and a PEA Insurance.
Classic PEA (or Banking PEA)
Contributions made are intended to acquire French or European shares, UCITS (SICAV or FCP, FCPI), or ETFs (Exchange-Traded Funds).
Withdrawals made before the 5-year holding period result in the loss of the tax advantage, and a withdrawal before 8 years leads to the automatic closure of the PEA. It’s important to note that the opening date is considered for tax purposes, not the date of contributions. The amount of contributions is limited to €150,000 per account; however, the value of the PEA can exceed this amount as dividends or other products are not counted toward the limit.
PEA Insurance
The operation of this type of PEA is very similar to the Classic PEA, but it only allows the acquisition of units in UCITS whose eligibility is defined by the insurer. The investment limits are the same as those of the Classic PEA, along with the implications related to withdrawals.
PEA-PME
Investments made under this plan are reserved for financing small and medium-sized enterprises (SMEs) and mid-sized enterprises (ETIs). The PEA-PME follows the same operational rules as the Classic PEA; however, the main differences concern the contribution ceiling, which is set at €225,000, and the nature of eligible securities.
Advantages
- No minimum amount is required to open a PEA.
- Married or civil partnership couples can each open one.
- Adult children dependent on the household can also open a banking or insurance PEA: this is known as a young person’s PEA, with a limit of €20,000 until the child is no longer a dependent.
- Tax exemption on capital gains if no withdrawals are made during the first 5 years; only social contributions are due.
- Social contributions are only payable in case of withdrawal or closure of the PEA.
- The possibility to combine a PEA (max €150,000 in contributions) and a PEA-PME (max €225,000 in contributions).
- PEA Insurance may allow for the receipt of a tax-exempt annuity at retirement, but the capital is not recoverable, and in the event of death, it is included in the estate.
OptiFi’s Opinion
The PEA is an interesting way to gain exposure to French and/or European stocks within an attractive tax framework. The exemption from capital gains tax occurs after 5 years (compared to 8 years for life insurance).
Additionally, continuing the tax comparison with life insurance: a PEA does not provide exemption from inheritance tax.
Moreover, and perhaps most importantly, the restricted eligibility of securities makes the PEA inherently “concentrated.” Indeed, achieving positive performance may be challenging if European stocks are underperforming! We see this as the main drawback of the PEA.
For this reason, we primarily recommend the PEA as a complement to other investments, particularly a life insurance policy. The idea is to lighten exposure to European stocks within the life insurance policy to avoid redundancy and optimize the overall tax efficiency of your savings.
Finally, we want to draw your attention to the transaction/arbitration fees in your choice of contract, especially if you are active in buying and selling!
