Income Tax: implementation of current year income tax payment through tax withholding at source (Article 60 of the 2017 Finance Law)
The following will be applicable from January 1, 2018.
For self-employed income (business, non-business and farming income), the “withholding at source” will be implemented via current year installments payable by the taxpayer: the amount will be determined beforehand by the French tax authorities based on the last known income to them.
Amount of the installment
The computation methodology of the current year installment is inspired from the payment of social contributions (URSSAF) by self-employed individuals.
The amount of the installment payable in Year N for the income earned in Year N is (Article 204 H.-1.2- of the French Tax Code):
- for the months of January to August N: determined based on the last known income i.e. the income earned in Year N-2 and reported in May N-1 (on the N-2 French income tax return);
- for the months of September to December N: then updated based on the income earned in Year N-1 and reported in May N (on the N-1 French income tax return).
Thus, for the first year of implementation (2018), the income earned in 2016 and reported in 2017 will be used to determine the amount of the current year installment due for the months of January to August 2018. Such installments will be then updated based on the 2017 income reported in 2018 for the months of September to December 2018.
In case of a year to year variation of the self-employed income, the taxpayer will have the opportunity, upon request, to adjust the amount of the current year installment to be withheld. This request has to be filed with the French tax authorities during the tax year concerned, based on the current year situation and an accurate estimate of all income earned during the given year.
Periodicity of the installment
Such installments will be payable on a monthly basis (over twelve months), or on a quarterly basis upon option of the taxpayer, through the taxpayer’s bank account held in a financial institution in France or in the SEPA area (Single Euro Payments Area).
Foreign source income
The foreign source self-employment income is subject to a current year income tax installment in France upon payment, except when such income is not effectively taxable in France.
Considering the tax treaties to avoid double taxation which have been signed by France and the other countries, a current year installment is payable upon perception of the income only if France has the effective right, or shared right, of taxation on such income in application of the double tax treaty provisions. Therefore, the current year installments are not be due on income which is tax exempt income either in application of the French domestic tax law or further to the double tax treaties signed by France with the source countries, such as the foreign source in-come exempt with progression or those benefitting of a foreign tax credit.
French source income earned by French nonresident individuals with a permanent office in France
The income tax on French source income received by a French nonresident taxpayer is payable in the same condi-tions as described above. The implementation of the withholding at source, notably regarding the payment practi-calities of the current installment, have not yet been determined.
Social Security: adjustment and regularization of the social security contributions installment payments
New calculation practicalities of social security contributions have been applicable since January 1, 2015. From now on, once the self-employed income has been reported online through the French social return (DSI), there is a final calculation of both the contributions due on income of Year N-1 (regularization) as well as an adjustment of the provisional contributions due on the income earned in Year N.
Social security installment payments of Year N are initially based on the income earned in Year N-2 with the rates applicable in Year N-1; then, such payments are adjusted in Year N based on the actual income reported on the Year N-1 French social return (DSI).
Therefore, the final social security contributions on the self-employed income earned in 2015, which were reported on the French social return filed in June 2016, were regularized in 2016 and the provisional social security contribu-tions due on the 2016 income have been adjusted accordingly. Such contributions (regularization on the 2015 in-come and adjustment on the 2016 income) were paid in August and November 2016.
- Final assessment in Year N of the social security contributions due on Year N-1 income: if the provisional contributions paid in Year N-1 are in excess with regard to the final assessment, the balance due is either reimbursed to the individual or offset against any outstanding installments payable in Year N on Year N income.
In case there is a balance due by the individual on the income of Year N-1, the contributions are collected via equal installments payable in the same periodicity as the installments payments due for the provisional contributions on Year N income (either monthly or quarterly payments if the self-employed individual has opted for them).
- Adjustment of the provisional social security contributions due in Year N on income of Year N: if the provi-sional contributions after adjustment is lower than the contributions already paid earlier in Year N, the dif-ference is reimbursed to the individual.
If the adjusted provisional contributions are higher, they are collected via equal installments payable on a monthly or quarterly basis depending on the payment schedule the self-employed individual has opted for.
- Modulation: in case of significant variation of self-employed income from year to year, the individual may lodge a written request along with an estimate of his current year income so that the provisional contribu-tions can be recalculated based on the estimated current year figure provided.
Enhanced communication between the French RSI (“Régime Social des Indépendants”: social authority for Basic Health) and the French tax authorities
A Decree dated July 8, 2016, relating to the strengthening of the contributors’ rights has implemented a procedure to enhance the communication between the French tax authorities and the French RSI (French social authority for basic health) with regard to the information concerning the income earned by self-employed individuals. Provisions detailed below are applicable to audits carried out as of July 11, 2016:
- In case of correction of the self-employed income reported by the individual on the French tax return by the French tax authorities: the information is provided to the French RSI so that the final social security contri-butions due on the income of Year N-1 are reassessed and the provisional contributions due on the income of Year N are readjusted.
- Further to an audit leading to a reassessment of the French social security contributions (RSI): in case of discrepancy between the income reported to the French tax authorities and that resulting from the correc-tion by the French RSI authority, this information is communicated to the French tax authorities once the formal notification has been sent to the individual.
Finance Law for Social Security: collection by the French social authorities URSSAF of the RSI contributions
French social security contributions on self-employed income are assessed and collected separately by the URSSAF (family allowance, CSG and CRDS) and the RSI for basic health contributions.
The 2016 Social Security Finance Law has extended the prerogatives of the URSSAF to collect the basic health contributions falling under the scope of the RSI.
The assessment and collection of basic health contributions, as well as the litigation would be handled by the URSSAF at the same time as the collection of their contributions due by self-employed individuals. Such procedure will become effective once a decree is enacted, between January 1, 2017 and January 1, 2018.
Finally the 2017 Social Security Finance Law cancels the prerogatives split between the URSSAF and the RSI in order to set up their joint liability on the collection of the social security contributions relating to income earned by self-employed individuals.