Monthly Income tax withholding for tax residents – Postponement of the implementation and study on impact for companies

Pursuant to the 2017 Finance Act, a monthly income tax withholding system for tax residents was adopted on December 20, 2016 and was due to apply as from January 1st, 2018. In this respect, several decrees implementing this measure have been issued in early May 2017. On June 6, 2017, the Prime Minister announced the postponement of the entry into force of the withholding tax to January 1, 2019.

At the request of the Business Delegation of the Senate (“Délégation aux Entreprises”), Deloitte Société d’Avocats delivered a study on June 26, 2017 concerning the impact of the income tax withholding for companies. This study took the form of a survey with around 500 responses and, of interviews with companies of different lines of business. The survey report is available on the Senate website

Nicolas Meurant (Lawyer, Partner), Julien Pellefigue (Economist Partner) and Annaïg Delannay (Lawyer) presented the conclusions of this study and answered the questions of senators during a public meeting on June 28, 2017 at the Senate.

The following points should be highlighted :

Assessment of the additional administrative cost

Determining the overall specific additional cost of the measure appeared impossible due to the incomplete preparation of the interviewed companies at the date of this study.

Nevertheless, the implementation cost (for the first year) has been evaluated to 1.2 billion euros, and the recurrent cost (linked to the day-to-day management of the income tax withholding system) to roughly 100 million euros per year. Based on a depreciation of the initial investment over a period of ten years, the annual cost should amount to approximately 220 million euros, which is around 0.3% of the overall income tax collected in France. 70% of this cost would be supported by the very small companies (“TPE”, less than 11 employees), by the effect of multiplication of a limited fixed cost by a huge number of companies.

Approximately 50% of the cost of the measure corresponds to additional income for specialized services providers (Certified Accountant, Software Company) and 50% to an increase of employee related cost, notably payroll cost, for companies.

Impact on wage dynamics and business competitiveness

On the basis of an experience carried out in the United States in 1992, a negative impact on household consumption and an increased pressure on wages in sectors where the labor supply is the smallest compared to demand, cannot be completely excluded.

Cash flow increase linked to the delay between the collection and the repayment of the tax levied

The law provides the possibility, for TPE to remit the collected income tax not on a quarterly basis rather than on a monthly basis. This represents an average financial gain of 12 euros for each company. Thus, this legal provision does not appear as a solution to the recurring problem of financing small companies in France.

Three potential sources for deterioration of relations within the company have been identified

  • The interference of companies in employees’ private life by indirect disclosure of elements related to their patrimonial and personal situation
  • Potential wage claims as a consequence of the reduction of the net monthly remuneration of the employee
  • Risk for the employer to be held accountable if the employee does not benefit from the income tax credit that will ensure the neutrality of the transition year on certain compensation elements
Nicolas Meurant

Nicolas Meurant, Partner, has over 23 years’ experience providing advice to corporations and individuals in individual tax and Global equity area, in the structuring of shareholding schemes, as well as […]

Julien Pellefigue

Julien Pellefigue, Partner, is an Economist in the Transfer Pricing department of Deloitte Société d’Avocats. He has more than 13 years of consulting experience both in economic consulting (transfer pricing […]