Several tax developments introduced by the recent French Finance Law will have a significant impact on individuals on international assignment and their employers. Among the key measures we discuss in this newsletter are the new withholding tax system that takes effect in January 2018, enhancements to the so-called “impatriate regime,” and changes to the income tax thresholds and credits.
Employers should begin assessing what impact the new rules will have on their payroll operations, international assignment tax programs, and tax equalization policies. Individual taxpayers and professional tax service providers should be familiarizing themselves with the new rules and should be prepared to have in place procedures to help them fulfil their compliance and service obligations as from 1 January 2018.
With the enactment of the French Finance Law1, the withholding tax system announced in GMS Flash Alert 2016-120 is now law and will be implemented with effect from 1 January 2018.
The withholding tax system will apply to French source compensation whether paid by French or foreign entities. Employers are responsible for withholding on a monthly basis the tax on the amounts of salaries they pay.
For income not subject to the withholding tax, such as non-French source employment income paid by non-French employers, monthly or quarterly income tax pre-payments will be required.
The withholding tax rate will be based on the average income tax rate that applied for the individual taxpayer in the previous year. However, individual taxpayers will be able to elect to apply a “neutral rate” that is based only on the compensation paid to them by their employers.
Individual taxpayers will be required to remit to the tax collector monthly pre-payments of income tax with respect to income such as rental income, business profits, etc.
Taxpayers will still be required to file an income tax return, and pay any additional amounts due or seek a refund of any excess tax paid.
Special transition rules apply to 2017 income. In practice, an income tax return will have to be filed in May 2018 in respect of the 2017 income. However, taxpayers will benefit from a special tax credit called CIMR (impôt exceptionnel de modernisation du recouvrement, which can be loosely translated as “tax credit for modernization of income tax collection”). This tax credit will cancel, at least in part, the French income tax due on non-exceptional employment income. An extensive list of what would be deemed “exceptional income” is included in the law. Anti-abuse measures would also be put into place in order to avoid an artificial shift of income from 2016 or 2018 to 2017. Types of exceptional employment income are – though not limited to – termination or severance payments, lump-sum payments, and deferred compensation.
Employers are encouraged to seek professional advice on how the rules will apply to the specific circumstances of their assignees in France, and communicate how the changes will impact those employees.
Having said that, it is important to point out that tax professionals with Fidal are aware that the implementation of the withholding tax system is still uncertain, even if the measure has been voted on and approved, due to the 2017 presidential election in France. Several candidates for the president are publicly opposed to the measure and have stated that they would repeal this system (if enacted) should they be elected.
France has a preferential tax regime for inbound assignees called the “impatriate regime”2 (see GMS Flash Alert 2015-013 (29 January 2015) for details).
To make France an even more attractive investment, commercial, and international assignment destination, the period during which “impatriates” benefit from this favourable regime has been extended to 31 December of the eighth year following the moment they take up their positions in France (instead of the fifth year, as is currently the case).
The impatriate regime provides an exemption from income tax on the assignment-related compensation paid to executives moving to France as well as on a fraction of the remuneration linked to overseas work-days.
In addition, such tax-exempt compensation will not be subject to Taxe sur les Salaires (the payroll tax that applies to remuneration paid by certain entities not fully subject to Value Added Tax, such as banks and insurance companies).
The changes apply to all assignments from 6 August 2016.
The Finance Law also increased the taxable income thresholds to keep in line with inflation.
The 2017 tax brackets and rates (applicable to 2016 income) are:
|Net taxable income (for a single taxpayer (or in French tax terms, per “single unit”))||Rate|
|Up to €9,710||0%|
|Over €9,710 to €26,818||14%|
|Over €26,818 to €71,898||30%|
|Over €71,898 to €152,260||41%|
1 See Loi n° 2016-1917 du 29 décembre 2016 de finances pour 2017 (the Finance Act, 2016) (in French) in the electronic version of the Journal Officiel n°0303 du 30 décembre 2016.
2 Sometimes called the “inpatriate regime.”
For additional information or assistance, please contact your local GMS or People Services professional or one of the following professionals with Fidal Direction Internationale in France:
Tel. +33 (0)1 55 68 15 66
Tel. +33 (0)1 55 68 16 96
The information contained in this newsletter was submitted by FIDAL Direction Internationale in France.
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