France will be moving to a current year tax at source system starting on January 1st, 2019: this was confirmed by the French finance minister and tax administration, after several weeks of mixed messages.
This historical change regarding the timing of the tax payments is paired with the transfer of the responsibility of calculating, collecting and paying the income tax due on the compensation and benefits from the individuals and the French tax authorities to their employers, French or foreign, provided that the employees receive compensation and benefits taxable in France.
These new obligations transferred on the employers are challenging for companies, who need to adapt their payroll software, HR and payroll specialists’ skills, their organisation and their relationship/ communication with their employees.
Key information regarding the current year general withholding tax applicable as of January 1st, 2019
Scope of the current year general withholding tax
French withholding tax is applicable on the income paid as of 01/01/2019. There is no retroactive application of the withholding tax and no possibility to postpone the application of the withholding tax.
Income subject to the withholding tax
Provided that they are taxable in France, the following income falls under the scope of the new current year general withholding tax:
- Salary income (wide definition which includes any compensation or benefit paid by an employer to its employee, including equity income which is non-qualified for French tax purposes)
- Pension income (retirement or alimony)
- Various types of allowances (health, insurance,…)
- Income received by independents
- Rental income
A compensation or benefit paid by an employer to its employee is taxable in France when it fully or partly relates to a professional activity performed in France (workdays in France) or in the absence of any French workday when a tax treaty or another international agreement states that the taxation should occur in France.
As a result, any compensation or benefit paid by an employer to its employee as of January 1st, 2019 who is fully or partly working in France will be subject to the withholding tax.
Employers required to assess, collect and pay the withholding tax on the compensation and benefits paid to their employees
All employers, i.e. French and foreign employers, are subject to these new withholding tax obligations.
These obligations are applicable even if the employee is not paid via a French payroll.
The 2 cases where the employer is subject to these new obligations of withholding tax on compensation and benefits
- The employee is a French tax resident and performs his/her professional activity partly or fully in France and he/she has an employer located in France or outside of France.
– Consequently, an employer located outside of France who has sent on assignment an employee to France is subject to these new obligations of withholding tax, even if the employee is paid via a French payroll.
– Regarding the internationally mobile employees, this case covers both the inbounds (employees assigned to France) and the outbounds (employees assigned outside of France but still considered as French tax residents and with workdays in France).
- The employee is a French tax resident and performs his/her professional activity fully abroad but a tax treaty or an international agreement allows France to tax the salary income received and his/her employer is located in France (if the employer is located outside of France, the tax due is directly withheld from the bank account of the employee by the French tax authorities).
NB: employers of non-resident of France for tax purposes employees receiving some of their compensation/benefits in relation with French workdays are mostly (with the exception of the commercial flight crew members and some public agents) out of the scope of the new general current year withholding tax on salary income since they are already subject to a non-resident tax withholding.
Rate of the current year general withholding tax
The tax rate of the new current year general withholding tax is determined and communicated by the French tax authorities to the employers.
The employers are NOT authorized to apply a tax rate different from the one communicated by the French tax authorities.
This tax rate is either:
- By default: the average income tax rate of the household of the employee determined by the French tax authorities based on the previous French income tax returns filed by the employee (Year N-2 tax return for the tax rate applicable to the salary income paid from January to August of Year N, Year N-1 tax return for the tax rate applicable to the salary income paid from September to December of Year N)
- Upon option of the employee:
o A tax rate adjusted to the average income tax rate of the household for the Year N.
- The option is made by the employee who has to contact the French tax authorities via the tax authorities online portal and provide them with his current year income information in order to enable them to determine a new tax rate to be communicated to the employer.
- The request of adjustment which will reduce the tax rate is subject to conditions and if the withholding tax has been underestimated, the employee will bear penalties and late interests.
o A tax rate individualized between spouses. The employee has the possibility to request from the French tax authorities that they calculate and communicate to his/her employer a tax rate corresponding to his/her average tax rate if the income of his/her spouse is excluded from the calculation.
This request has been designed to respond to the needs of the married or PACSed couples (tax returns are filed jointly in France) who have a significant difference regarding the amount of their individual income in order to help the spouse with the lowest amount of individual income to keep an acceptable individual net pay and ensure that the employer is not made aware of the other sources of income of the household via the household tax rate information.
- Upon option of the employee or if no tax rate can be determined by the French tax authorities:
This corresponds to the new taxpayers (or more precisely to the employees who do not have an individual French tax record for the last 3 years).
The French tax authorities cannot use a previous French income tax return to determine and communicate a tax rate to the employer. In this case, the French tax authorities will request from the employer to apply the neutral tax rate which is the tax rate from the tax rates and brackets table published by them.
This may also correspond to the taxpayers that have a household tax rate in the records of the French tax authorities but have requested from the French tax authorities that they communicate a neutral rate to their employer.
The tax rate will be determined by the employer based on the tax rates table published by the French tax authorities and based on the monthly amount of taxable salary income paid to the employee.
NB: This tax rate will need to be applied also if the French tax authorities cannot find the tax records of an employee based on the references provided by the employer to obtain the tax rate (see below the process).
The tax rates from the table published by the French tax authorities correspond to a tax rate as single without any dependents. If the employee has actually already a French tax record and has a family, this may lead to a major increase of payment of French income tax (regularized later once the situation is settled). In this context, extra care should be taken in the initialization process for the implementation of the withholding tax.
The employer has to apply the tax rate communicated on the taxable compensation and benefits paid on a monthly basis to the employee (see below the base of the current year general withholding tax) in order to assess and collect the withholding tax from the income payable to the employee and transfer the funds collected to the French tax authorities on a monthly basis.
NB: the tax rate communicated by the French tax authorities to the employers is a confidential information as defined by the French criminal code and the employer is therefore subject to the French professional confidentiality rules. This means that any misuse or divulgation of this information is punished by a fine of maximum €300,000 and 5 years of imprisonment (criminal offense). As a response to the critics of the new current year general withholding tax, the authorities in France made clear that they will effectively prosecute any breach of confidentiality. In this context, we recommend to very strictly follow these confidentiality rules, keep the tax rate confidential and use it only for the calculation of the withholding tax.
Basis of the current year general withholding tax
As already indicated, the employer will be required to apply the tax rate communicated by the French tax authorities on the salary income paid as of January 1st, 2019.
The net taxable salary income considered as the basis for the calculation of the withholding tax is the gross amount of compensation and benefits paid monthly less the mandatory social security and retirement employee contributions (French or foreign).
This determination of the basis is the responsibility of the employer, no assistance is provided by the French tax authorities.
Some remuneration items are excluded from the scope of the monthly tax withholdings for residents of France, such as income from qualified equity plans (stock-options and performance shares).