Practical details of the withholding tax (PAS) in France related to global mobility.
Vaughan Avocats and the Welcome Office of Business France introduce the practical details of the imminent application of the withholding tax (PAS) in France related to global mobility.
What is withholding tax?
Income tax in France is currently paid in the year following that in which the income was received.
As of January 1, 2019, the government will introduce the modernization of the income tax collection by implementing the withholding tax regime. This new system will mean that income tax will be collected in the same year as the income is received. Tax will be collected by the employer from the monthly income paid, based on a rate calculated and notified by the tax authorities. The amount of this tax will be detailed on the pay slip.
This simplified method of tax collection is already in place in most major countries.
Who is affected by withholding tax and how will the reform be applied in situations of global mobility?
The withholding tax regime will apply to individuals whose country of residence for tax purposes is France.
Determining your tax residency
The main criteria for determining your tax residency under French law are the place of habitual residence of the manager or employee and their family and the center of economic and personal interests.
In the case of a foreign national who comes to work in France, there may be a conflict of residency - a contradiction between French law and the law of the country of origin. An international tax treaty, if one has been signed between France and the country of origin, resolves any conflict of residency.
Income from the activities of a French tax resident, paid by an employer based in France or abroad, shall be subject to withholding tax.
Are tax non-residents in France outside the scope of the withholding tax reform?
If the conditions of tax residency in France are not met, foreign employees are considered as non-resident for tax purposes. Unless otherwise provided for in a tax treaty, non-resident employees who receive income in France are subject to deduction at source1. Withholding tax does not apply to them.
Determining the tax base - reminder concerning the "impatriate regime”
Unless otherwise provided for in the applicable tax treaty, foreign nationals domiciled in France for tax purposes are taxed on all their French and foreign income.
They may also benefit from the impatriate tax regime2, which aims to attract executives and employees to France, whatever their nationality, by partially exempting part of their income provided that they have not been domiciled in France for tax purposes during the 5 calendar years prior to their assumption of duties. The maximum period for benefiting from the regime is 8 years.
The share of the income that can be exempted consists either of the impatriation allowance and the portion of the remuneration corresponding to the activity carried out abroad, capped at 50% of the total remuneration; or, optionally, only the portion of the remuneration relating to the activities performed abroad, within the limit of 20% of total net remuneration (excluding impatriation allowance).
If an impatriate employee travels abroad, it is important for him/her to keep a calendar of the number of days worked abroad and to notify his/her employer each month thereof, in order to ensure that exempted elements are taken into account.
The portion of the exempted income is not subject to withholding tax.
What tax rate?
The tax rate corresponds to that calculated when completing the latest French tax return. This rate can be individualised depending on the income of each spouse if the person concerned is married or in a partnership.
If no declaration has been filed, the default rate applicable is the neutral rate. This rate is determined based on a rate grid3 that does not take into account the situation, income and family members.
It may be adjusted upwards or downwards4 if it is inappropriate, in which case the employer shall be informed of the new rate, who is required to apply it within a maximum period of two months.
Arrival in France or return to France
Any employee who arrives in France, or who returns to France after a mobility of more than three years, is automatically taxed at the neutral rate.
This rate is sometimes inappropriate as it does not take into account the individual’s family situation or the fact that the year of arrival is a partial year with a favorable tax rate.
In order to obtain a personalized rate and a tax number, the new arrival or his/her legal advisor has the option of filing a 2043 form (paper version only) directly with the relevant Personal Income Tax Department5. The modulation rate online service and the 2043 form will be available on 2 January 2019.
Since December 6, 2018, the employer can declare a personalised rate for new hires or those returning from expatriation, for whom no declaration has previously been submitted, via the TOPAze service. It is accessible via the net-entreprises.fr website.
The access to this service is available to any new declarant already registered on the net-entreprises.fr website without prior registration on the new service.
Special case of 2018
In the case of arrivals to France in 2018, the first tax return will be filed in spring 2019. The employer will levy tax at the neutral rate from January 2019 onwards. If a request for a personalised rate has been made (process here above), the tax authorities will forward the new rate to the employer who has two months following such request to implement it.
In addition, given the introduction of the withholding tax, and to prevent people from paying in 2019 tax on both 2019 income and 2018 income, a tax credit, the CIMR, has been introduced to cancel the tax on 2018 income on habitual income6.
What happens in the event of departure from France?
In the event of departure from France, the employee or executive ceases to be a tax resident of France and is therefore no longer subject to withholding tax.
As the year of departure is a partial year, it is possible to request the adjustment of the applicable rate.
In the event of departure from France at the beginning of 2019, the rate can be adjusted via internet as of January 2, 2019. Overpayment of tax (if any) will be refunded in August 2020.
It is important to maintain a bank account in France until the end of the year following the departure to be able to obtain the refund, or to pay any additional tax if required.
What are the obligations for foreign employers ?
Foreign employers who do not have a permanent place of business in France must:
- Have a SIRET company registration number in order to be identified with the tax authorities. Failing this, they must obtain a SIRET number8
- Be registered on the net-entreprises.fr website in order to be able to complete the nominative social declarations (DSN) of foreign employees transferred to France whose remuneration is subject to the payment of French social contributions; monthly “withholding tax for other income” (PASRAU) declarations must be made for employees that remain subject to the social contributions of the country of origin. These must be submitted via the net-entreprises portal by the 10th of each month at the latest.
- Create a professional account on the impot.gouv.fr website to track declarations submitted and payments.
- Appoint a tax representative in France (except companies based in the European Union and the European Economic Area) who must be accredited as responsible for declarations and withholding tax with the tax authorities9.
- Provide bank details for the withholding tax (the bank account must be within the SEPA area).
How are taxes collected for the self-employed?
Tax on the current year's income of self-employed workers is paid in the form of down payments calculated by the tax authorities on the basis of the most recent French tax return and paid monthly or quarterly10.
In the case of a business creation starting in 2019, the self-employed will be able either to opt for the contemporaneous down payment from the start of the activity by estimating their profit, or wait until September of the following year.
It should be noted that the down payment system concerns not only the self-employed who are residents but also non-residents.
Alisa Sakic-Second, Head of the Welcome Office, Business France
Sandra Thiry;Partner, Vaughan Avocats
1 Article 182 A of the General Tax Code
As a reminder, non-residents submit a French tax return to the non-resident personal income tax department and, if applicable, the difference between the deduction and the normal amount of tax payable will be due.
2 Article 155 B of the General Tax Code
3 Applicable rate: http://bofip.impots.gouv.fr/bofip/11255-PGP.html
4 A penalty of 10% applies if the downwardly modulated deduction is less than the amount that would have been withheld if no modulation request had been made, by more than 10% or more than €200 per year. This rate may reach 50% if the amount deducted is €0.
6 Definition of habitual income giving entitlement to a tax credit, and exceptional income that does not give entitlement to it: https://www.economie.gouv.fr/prelevement-a-la-source/2018-annee-de-transition
7 Chart of mandatory procedures: https://www.impots.gouv.fr/portail/files/media/1_metier/5_international/EV_pro/PAS/schema_mesdemarchesv2.pdf
8 Declaration of a foreign company with no place of business in France: form EE0
9 Details of the appointment procedure and the responsibility of the tax representative: https://www.impots.gouv.fr/portail/les-modalites-du-prelevement-la-source#ancre7
10 Withholding tax applicable to the self-employed: https://www.economie.gouv.fr/files/files/PDF/pas-livret3.pdf