France's constitutional council has overturned a 75 percent upper tax rate on income above $1.32m, which was due to be introduced in 2013 by the socialist government.
The council's decision on Saturday, made in response to a motion by opposition conservatives, is a huge blow to President Francois Hollande who had made the rate his flagship tax measure as he sought to have the rich contribute more towards reducing the budget deficit.
While the planned upper tax band was mainly symbolic and would only have affected a few thousand people, it shocked
foreign investors and infuriated high earners in France, prompting some such as actor Gerard Depardieu to flee abroad.
The government had estimated the 75 percent tax rate could raise around $400m a year as it battles to bring down the public deficit to below a European Union ceiling of three percent next year in the face of stalled growth.
The Constitutional Council, which rules on whether laws are constitutional, said in a statement that the way the upper rate was set to be imposed was unfair in the way it would affect different households.
The French prime minister's office responded that the government would push ahead with plans to impose a 75 percent upper income tax and would propose a new measure after the rate was ruled unconstitutional.
"The government will propose a new system that conforms with the principles laid down by the decision of the Constitutional Council. It will be presented in the framework of the next Finance Act," Prime Minister Jean-Marc Ayrault said in a statement.