Could France become a one-year tax haven for impatriate employees?

France likes being an exception, to do things “à la française”. This could be applicable for years to personal income tax: contrary to many of its European neighbours or major countries in the word, no income tax is withheld at source on salary for tax residents. French income tax on employment income is paid by taxpayer directly to the Treasury, the year after the income is received (i.e. income tax of a year N is paid during year N+1).

 

This “French exception” causes serious stress to foreign employees who come to France for the first time. Either they do not anticipate the necessity to save a portion of their salary to settle their French income tax – which will be claimed with no doubt the next year – or they simply do not know what amount shall be saved until they received their first tax bill (which – cherry on the cake – will be all drafted in French).

 

But things are changing in the country of indomitable Gauls. Unfortunately, not the use of French as sole valuable language on French administrative papers – but France demonstrates a serious desire to join the rank of « pay-as-you-earn » countries: Since 2015, the French government is conscientiously implementing step by step withholding of income tax at source on employment income in France, which is deemed to be in force for tax year 2018 (starting January 2018).

 

For the transition from “taxation in year N+1” to “taxation in year N”, the French government is considering not to tax employment income received during year 2017 to avoid double tax burden for taxpayer who will have to pay 2017 French income tax in 2018 and support withholding at source of income tax on their 2018 income. This proposition has been nicknamed “l’année blanche” which could be translated into “the blank year”.

 

The idea is that, in 2017, French taxpayers will be paying French income tax on their 2016 income and in 2018, they will pay taxation on their 2018 salary. Consequently, there will be – for most French taxpayers – no actual breach in the payment of income tax: they will have to pay tax each year, without disruption.

 

Government is already considering rules and exceptions to discourage taxpayers trying to take advantage of this year of transition by voluntarily increasing their income during year 2017 for instance.

 

Nevertheless, in such a scheme, if an individual settles in France during year 2017 (or even in late 2016), it seems that he/she may have an actual French “blank tax year” since he/she will have no income tax to pay in 2017 (in absence of taxable French source income received in 2016) and will only start to pay tax on 2018’s income… in 2018.

 

This anticipated scheme – to be confirmed with the provisions of the final French Financial Act for 2017 – could turn to be extremely attractive for employees who are considering working in France: during year 2017, they would receive their salary free of tax in France. And in 2018, they would simply start to pay taxes on their 2018 employment income.

 

This “one year tax heaven” could turn into a political illusion if it never enters into force, due for instance to the possible change in the government with the coming election of new French President. Its implementation could also been postponed to year 2018 or 2019, considering the practical process to be implemented by the French tax administration and the employers; also requiring a specific training of the supporting teams and the adjustment of payroll software.

 

Nevertheless, if the changes in the French income tax system finally do not enable such extreme tax savings, the employees that settled in France during 2017 may at least benefit from the very favourable French impatriate tax regime (provided, among other conditions, they were not tax resident of France during the 5 years preceding 2017).

 

When applicable, this tax regime could notably lead to important tax exemption on employment compensation (sometimes more than 50%!) but also on foreign capital gains (50% exemption of income tax).

Parliament just voted the 2017 Financial its extension from 5 years to 8 years regarding assignment that started after July 6th, 2016 – to be confirmed with the provisions of the final French Financial Act for 2017.

If definitely voted, the new impatriate tax regime would also be directly interesting for employers who would benefit from an exemption of payroll tax regarding compensation linked to mobility paid to the beneficiaries.

 

Finally, keep in mind that this idyllic tax perspective could only be applicable for employees who become tax resident of France, i.e. who settle and work in France. For non-resident taxpayers, the withholding tax at source is already in place in France for ages. Consequently, they are not covered by the transition scheme. Besides, they cannot benefit from French favourable tax regime for impatriates (unless they become tax resident in France within the two first year upon the beginning of their French duties).

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