As part of the 2017 proposed Budget, the French Government has confirmed that income tax withholding will be put into place for residents of France. Currently, French tax residents pay their income tax in the year following the year the income is received. As of January 1, 2018, income tax will be payable on a current year basis.
Therefore, in 2017, French tax residents will pay income tax on their 2016 income. In 2018, they will be required to pay French income tax on their 2018 income.
Which types of income will be subject to withholding ?
Wages, replacement income, and pensions will be subject to withholding called “prélèvement contemporain“. The payer of the income must withhold tax and pay it over to the French tax authorities on an ongoing basis.
For wages, employers are required to withhold on net taxable compensation (basically, after deducting social security contributions) each time a payment is made. If the employee qualifies for a favorable tax regime, our recommendation is to adjust the taxable basis to account for exemptions under the regime.
For self-employment and personal income, the individual taxpayer must pay income tax on a monthly basis (or if so elected, on a quarterly basis). The payment due directly by the taxpayer is called “acompte contemporain“ and is debited directly by the tax authorities from the individual’s bank account. It is based on the last available information in the tax authorities’ files as to the taxpayer’s income level and bank account details.
Capital gains and equity income (from qualified share plans) are not included in the types of income subject to withholding. Tax on these types of income is payable in the following year upon filing an income tax return.
What is the rate of withholding ?
The withholding tax rate on wages is provided to the employer by the French tax authorities on a monthly basis through France’s new payroll procedure, called DSN (Déclarations des Données Nominatives). The tax rate is determined by the French tax authorities based on the previous year’s tax return as filed by the taxpayer.
The rate applicable for income received from January to August each year is determined using the income declared two years before (Y-2). The rate is revised in September and is based on the income declared on the tax return (Y-1) filed in May. The revised rate applies to income received from September to December.
If no withholding rate is provided by the French tax authorities to the employer, the employer applies a standard tax rate “taux neutre“. Each year the standard tax rates are updated through the voting of the Budget. They depend on the level of income without taking into account the employee’s filing status or family size.
If the amount of tax withheld using the standard tax rate is lower than the one determined by the authorities, the taxpayer has to make top up payments on a monthly basis. In such cases, both the employer and the employee are responsible for making tax payments.
The standard tax rate will apply :
- when the taxpayer has never filed a French income tax return (for example, an assignee arriving in France)
- when the taxpayer specifically requests the use of the standard tax rate (an available option)
The taxpayer can ask to have his/her tax rate adjusted upward or downward if certain conditions are met.
What about foreign payroll and foreign employers ?
In the case of a foreign payroll where the foreign employer does not have access to France’s DSN payroll system, withholding of French tax is not required.
The taxpayer (i.e. the employee on foreign payroll) is required to pay his income tax on a monthly basis directly to the French tax authorities.
Penalties are foreseen for the employer as collecting agent and for the taxpayer.
What about the taxation of 2017 income ?
In order to avoid a double tax burden in 2018 (income tax due on 2017 income plus withholding on 2018 income), the Government has indicated that upon filing of their 2017 tax return, each taxpayer will benefit from a tax credit to cancel out the 2017 French income tax due on non-exceptional income.
In an effort to prevent aggressive tax planning, the tax credit will be calculated on non-exceptional income only. Exceptional income and income which is not subject to withholding will not benefit from a tax credit and will remain fully taxable in 2018 (upon filing of the 2017 tax return in May 2018).
Exceptional income which remains taxable in 2018 includes :
- Severance payments
- Corporate officer termination payments
- Company profit sharing and savings plans (« Participation » / « Intéressement »)
- Pluri-annual income (deferred compensation)
- Any income which is not deemed to be received on an annual basis
The proposed budget necessarily has an impact on :
- International Mobility Policies/Tax Equalization Policies for inbound as well as outbound assignees
- Variable pay
- Income to be received during 2017
