Several measures were adopted by the French parliament for the 2016 amended French Budget, the 2017 French Budget and the 2017 French Social Security Budget. You will find below an overview of the most relevant measures.
Measures that directly impact employers
Monthly French income tax withholdings for tax residents of France will apply from January 1st, 2018
The monthly French income tax withholdings for tax residents of France has been adopted and will need to be implemented by employers from January 1st, 2018. This has been confirmed by the “Conseil constitutionnel” (the French Supreme Court) on December 29th, 2016.
A tax credit will be granted in 2018, in relation to income received in 2017, in order to avoid the payment of two years of income tax in 2018. The modalities of application of this tax credit have been determined in the 2017 Finance Act. Safeguard measures have been designed to avoid company owners to maximize the amount of their 2017 tax credit by deferring income to 2017.
The overall scheme is quite complex. We will communicate separately in detail on it.
The share based compensation – New tax regime applicable to performance shares
New provisions will be applicable to free and performance shares granted further to a decision taken by the extraordinary shareholders’ meeting after the publication of this finance law, i.e. December 30th, 2016.
- Acquisition gains remain taxed in the category of capital gains for the portion not exceeding € 300,000
- Acquisition gains will be taxed in the category of wages and salary for the portion exceeding € 300,000
Based on the above, the “holding period” tax relief (which can reach 65 % for shares that are held for 8 years or more from the date of vesting) would no longer apply to the acquisition gain exceeding € 300,000.
Furthermore, the additional contributions (CSG/CRDS) rates will remain 15.5 % for the acquisition gain up to € 300,000 and 8 % over this limit.
Employer contribution rate increased to 30 % / 10 % employee contribution is reinstated
The employer contribution payable at the time of the acquisition (vesting/release) of free and performance shares will be increased to 30 %, versus 20 % currently.
The 10 % employee contribution is reinstated for the portion of the gain exceeding € 300,000 taxed as salary income.
As a consequence, free and performance shares that are granted further to a decision taken by the extraordinary shareholders’ meeting after December 30th, 2016 will be taxed at a combined rate that can reach 64,7 %.
International Mobility – The favorable impatriate tax regime
Extension of the French tax code’s article 155B (“155B”) providing for a favorable tax framework for impatriates
The impatriate tax regime is now applicable until December 31st of the eighth year following the year duties began in France (versus five currently).
NB. The impatriate tax regime enables the exemption from French income tax of elements of remuneration that are linked to the impatriation to France (“impatriation premium”) and of the part of the remuneration that relates to an activity performed outside of France (up to certain limits). For employees that are recruited directly from abroad by a French employer, the amount that can be exempted can be fixed at 30% of the remuneration, if the employee opts for it.
This new provision applies to taxpayers meeting the criteria defined in 155B and who took up their duties in France on or after July 6th, 2016. Taxpayers who took their duties in France before July 6th, 2016 are not allowed this extension.
Exemption from wage tax
The elements of remuneration exempt from income tax under 155B (“impatriation premium”) are also now exempt from wage tax for the same period of time and provided that the taxpayer meets the conditions to take advantage of the impatriate tax regime.
This provision applies to wage tax due on the remuneration received after January 1st, 2017 and for taxpayers who took up their duties on or after July 6th, 2016. This is a particular relevant measure for the financial services and insurance industries.
International Mobility – New penalty for failure to produce a certificate of coverage, during an audit.
A new penalty is introduced for each employee exempt from French social security and covered under the social security system of another country if they fail to show a valid certificate of coverage in case of an audit by the labour inspector. The amount will be the monthly social security ceiling (i.e. € 3,269) and shall be doubled in the event of a new breach occurring within two years of the notification date of any previous non-compliance. This penalty will be recovered by the social security administration.
The penalty will be waived subject to the following conditions being satisfied during the audit:
- company produces a certificate of coverage request receipt
- company produces the certificate of coverage delivered by the foreign authorities within the two-month period following the initial application.
This provision will enter in force as of April 1st, 2017.
Clarification of the taxation method for social security contributions in case of deferred compensation
From April 1st, 2018, social security contributions and CSG contributions will be due for the periods for which the income is allocated.
This means that the social security provisions applicable to deferred compensation will be due based on the period during which the related professional activity has been performed and not at the time of pay-ment of wages. No further clarification has been provided at this point.
Measures that impact individual taxpayers
Narrowing the 75 % ceiling for wealth tax purposes
The total of the income tax, additional taxes and wealth tax paid by a taxpayer in a given year cannot ex-ceed 75 % of their worldwide income for the previous year. This mechanism is called the “wealth tax ceil-ing”.
As of wealth tax due in 2017, distributed income to a corporate taxpaying company controlled by the tax-payer will be reintegrated in the calculation of the French wealth tax ceiling.
This reintegration will be effective only if the main purposes of the existence and use of this company is to limit part or all of the French wealth tax. The Conseil Constitutionnel has valided this measure but has added that the French tax administration will need to demonstrate that the income realized by the Com-pany and that are taken into account for the calculation of the wealth tax ceiling correspond to income or spending directly or indirectly made by the company on behalf of the taxpayer.
Reinforcement of anti-tax evasion measures
Reinforcement of tax penalties for failure to report abroad assets
The system of proportional penalties will be replaced by a single 80 % surcharge on all taxes due linked to an undeclared foreign bank account, life insurance contract or trust, exclusive of any other increase or lump-sum fine, for unfiled returns as of the application date of the law.
This 80 % surcharge cannot be lower than a fine of € 1,500 per undeclared foreign bank account / life insurance policy (€ 10,000 in case the bank account / life insurance policy is situated in a non-coopera-tive state) and € 20,000 per undeclared trust.
Modifying late tax penalties
The 10 % penalty for income tax, French wealth tax, occupancy tax and property taxes late payment is now applicable to taxes claimed via a notice of assessment in addition to via a tax bill (applicable as of January 1st, 2017). This will notably apply to late payment of wealth tax when it is due on global assets of the value of which exceed € 2,570,000.
For income tax, the two cumulative 10 % penalties for late filing and underassessment of the taxable ba-sis are replaced by a single 20 % penalty applicable to the tax due. The 40 % and 80 % penalties re-main due, respectively in case of an income tax return which is filed more than 30 days after the tax ad-ministration has requested the filing of such return, and in case occult activities are discovered by the French tax authorities.
Deloitte Société d’Avocats’ view
- We recommend that French companies actively start preparing for the implementation of the withholding tax, which will apply from January 1st, 2018 (unless a revised Finance Act for 2017 is voted before the end of 2017).
- The attractiveness of France is reinforced for employees sent on temporary assignment to France or hired from abroad, with special incentives for salary taxes, particularly high in the financial services and insurance industry.
- The “Macron” performance shares remains beneficial for both the employer and the employee even if the tax regime has been toughened for gains exceeding € 300,000.
- Increased vigilance should be applied to securing timely and appropriate documentation for employees remaining under a non-French social security system.
- The structuring of deferred payments (bonus payments, share settled incentive plans, dismissal packages…) in a cross-border context need to be re-examined for potential French social security and CSG / CRDS liabilities.
- The fight against fraud is reinforced by the increase in penalties, measures on wealth tax, automatic exchange of information, as well as the power increase of the tax authorities.