The draft tax bill for 2021 has been presented by the government and will be going through the legislative process with a view to be adopted by the end of December 2020.
A few provisions are of particular interest for the internationally mobile workforce, in particular the about-face in non-resident withholding reform.
What is the Change?
A reversal of the non-resident withholding reform has been proposed.
French source compensation, pensions and annuities paid to non-residents are subject to withholding tax. The system was significantly reformed. More specifically, non-residents were to be moved into the new French withholding system currently applicable to tax residents (Prélèvement à la Source or PAS/PASRAU) starting 2023
The proposal would maintain the status quo for non-residents. That is,
- For compensation, standard withholding brackets/rates of 0%, 12% and 20% remain applicable and will not move to the personalized individual PAS tax rate determined by the French tax administration (FTA); with income subject to the 0% and 12% being final taxes.
- For French qualified share plans, withholding specific rates (30%) or compensation rates above remain applicable and do not move to the personalized individual PAS tax rate determined by the French tax administration (FTA);
- The mechanism for reporting remains a current year tax filing outside of payroll and does not move to a payroll or other employer debit arrangement;
- The average minimum annual tax rate increased to 30% last year will remain and will not revert back to the previous rate of 20%.
Who will it impact?
- Employers and other payers of French source income to individuals non-resident of France.
- Administrators of Equity based compensation plans.
- Non-residents with taxable French source income.
When will it come in to effect?
The measure will apply to cancel the reform which was intended to take place between 2021 and 2023. In sum, it for the most part maintains the status quo. The increase minimum non-resident tax rate which was applicable for the first time in 2020 on 2019 income remains unchanged.
Other measures
Temporary supplementary allowances for gifts.
An exemption for inter-vivos gifts made to descendants, or in absence of descendants, nephews and nieces would be increased from € 100 000 to € 200 000 during the period running from July 15, 2020 to June 30, 2021, as long as those funds are invested within 3 months in the capital of a small business managed by the donnee.
Flat tax – penalty in the form of an increase of 25% of taxable basis
A flat tax on investment income was introduced in 2018, amounting to 30% (12.8% income tax plus 17.2% social surtaxes). Reinforcing anti-tax abuse measures, in the event such distributions are not made further to a legally compliant procedure such that considered “occultes” or “irrégulières”, the tax basis will be increased by 25%. The penalty will apply for income earned in 2020.
Deloitte’s View
The maintenance of the status quo for non-residents may come as a relief to employers who would struggle with the new withholding tax system (PAS/PASRAU) which would have required registration with the French tax administration, monthly digital filings and automatic debits at personalized tax rates to satisfy the withholding requirements. The current system can be administered, for example, outside of a payroll or withholding platforms through trimester filings with standard brackets and rates, with a payment sent to the French tax administration through wire transfer.
Non-residents remain taxable on French source income at a minimum average tax rate of 30%, which was increased last year from 20% previously. This rate applies to common French source income such as French real estate rental income, and compensation (including equity based compensation) for services performed in France.
With respect to gift tax allowances, we take the opportunity to remind individuals taking up residency in France that, subject to a tax treaty, they could be subject to estate tax as well as gift tax on inter-vivos gifts made. Furthermore, heirs or legatees residing in France for more than 6 of the previous 10 years could also be subject to French estate and gift tax even where the deceased or donor is resident of another country.
Finally, France is increasing its anti-abuse arsenal regularly, and taking an increasingly rigorous approach in tax audits.