This article was first published on Tax@Hand, and is reproduced on this blog with the authorization of its authors.
Article 3 of France’s 2023 finance law, now incorporated into article 204 C of the French tax code, amends the French withholding tax requirements for foreign employers of cross-border employees. Recent developments related to this measure raise questions regarding its application to UK employers.
The new measure
As from 1 January 2023, monthly PASRAU requirements (which require foreign employers to withhold tax on foreign wages that are taxable in France) no longer apply to foreign employers. However, foreign employers are still required to declare to the French tax authorities (FTA) at the end of every tax year the amount of compensation taxable in France for each employee so the FTA can compare the amount to what is reported on the employee’s individual income tax return for that year.
The withholding tax is then processed on a monthly basis via a direct debit from the employee’s bank account (“acompte contemporain” mechanism, which is already known to some cross-border workers).
Scope of application
This measure has a defined and restricted scope and only applies if:
The foreign employer is domiciled in an EU member state or a jurisdiction that has concluded a convention on mutual administrative assistance with France against tax fraud and tax evasion as well as a mutual assistance convention for the recovery of claims relating to taxes, duties, and other measures with a scope similar to that of EU Council Directive 2010/24/EU of 16 March 2010, and that is not a noncooperative state or territory; and
The employee, in accordance with article 13 of Regulation (EC) No. 883/2004, is not affiliated with a mandatory French social security scheme (i.e., the cross-border employee performs less than 25% of their work in France).
Should one of the above conditions not be met, then the regular PASRAU requirements apply.
Complexities for UK employers
The reference to article 13 of Regulation (EC) No. 883/2004, added by the Senate in the last version of the 2023 finance law, challenges the application of the new measure to UK employers.
Indeed, since the UK left the EU in January 2020, the social security rules have changed. Coordination on cross-border social security matters with the UK is now governed by the provisions of the Trade and Cooperation Agreement between the EU and the UK, which has been applicable since 1 January 2021. Consequently, since that date, Regulation (EC) No. 883/2004 no longer applies to new professional assignments between the UK and EU member states.
As from 1 January 2023, with regard to cross-border employees, UK employers:
- Are exempt from the PASRAU monthly tax filing, collection, and remittance requirements for employees who started a professional activity in the UK before 1 January 2021 and who are affiliated with the UK mandatory social security scheme in accordance with the EU regulation (in this case, it is the individual who has to pay the monthly income tax for compensation related to days worked in France); however, the UK employer still must register with the FTA to file an annual declaration on compensation taxable in France for each employee; and
- Must register with the FTA and fulfill the monthly PASRAU tax collection and remittance requirements for French taxable compensation for employees who started a professional activity in the UK after 1 January 2021 and who are affiliated with the UK mandatory social security scheme under the Trade and Cooperation Agreement.
This could result in some UK employers having multiple different French employment tax requirements when some employees are affiliated with the UK social security system in accordance with the EU regulation, while other employees contribute to the UK mandatory social security scheme in accordance with the trade and cooperation agreement.
For employees who are tax resident in France and perform all of their professional activities in France, UK employers continue to be subject to the PASRAU tax requirements as from the employee’s first day of work in France.
Initial FTA comments
On its website, the FTA explains that the new measure applies to employers located in one of the 27 EU member states, Iceland, Norway, or the UK for “wages paid to their employees who are French tax residents and who carry out their professional activity in one of these countries and in France, where the activity is not substantial.”
The FTA thus confirms that only French tax residents who are in the situations presented in article 30 of the 17 October 2019 withdrawal agreement between the EU and the UK are concerned (i.e., mainly those who were affiliated with the UK social security system before 1 January 2021 and have remained so continuously since). For employees affiliated with the UK social security system after 1 January 2021, UK employers remain subject to the standard PASRAU requirements (registration formalities, monthly declaration and payment, and annual declaration).