Consequences of lockdown measures due to COVID on taxable income for French tax residents

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The year 2020 is over but will continue to have many consequences in 2021. As far as French tax residents are concerned, the lockdown measures and movement restrictions imposed over the year by the various governments which prevented many employees from travelling for business purposes will definitely impact the level of their 2020 taxable income and the corresponding amount of final tax.

Situations not covered by the Amicable agreements

In March 2020, France entered into amicable agreements with Belgium, Germany, Italy, Luxembourg and Switzerland to neutralise the tax impacts of COVID-19 restrictions for cross-border employees. Provided certain conditions are met, taxpayers who are normally taxable in France and in another country pursuant to the provisions of the applicable Tax Treaty between such two countries will have the option to choose the country in which their 2020 professional income corresponding to home working days due to COVID-19 restrictions will be taxable. These agreements, which have been applicable to the days of home working since March 14, 2020, are (for now) applicable until March 31,2021.

However, these provisions apply to “ordinary commuters” who partly or fully work in a State other than their residence state and are effectively taxable in such State according to the terms of the applicable Tax Treaty. This would for example be the case of a French tax resident working in Belgium for a Belgian employer, or working in Belgium for more than 183 days per year on a usual basis. Should the taxpayer remain taxable in France pursuant to the Tax Treaty, these provisions will not apply.

Situation of business travellers and inbound expatriates

French tax law provides for two specific tax regimes allowing French tax residents to benefit from tax exemption on part of their salaries, provided certain conditions are met:
-    Section 81A I of the French tax code provides that French tax residents who spend more than 120 days abroad in the interest of their employer (which may reside in France or in another EU Member State) to carry out commercial prospection services may be exempt on the portion of their salaries corresponding to the days worked abroad;
-    The same exemption applies for employees working on assembly, construction or resource extraction sites and spending more than 183 days outside France during the year;
-    Finally, inbound expatriates benefiting from the provisions of section 150 B of the French tax code are fully exempt on the salaries corresponding to days worked outside of France.

Employees who were not allowed to travel during 2020 will most likely loose the full exemption they are usually granted based on section 81A I (if the 120/183 days threshold is not met, no exemption is allowed), and no specific measure was taken to mitigate the consequences of such loss.

An impact not only in 2021, but also in 2022

Employees who usually benefit from a partial exemption of their yearly salaries based on the above specific regimes are subject to the French PAYE system at a lower tax rate, which was most probably applied as usual by their employer during the year 2020. Once they file their 2020 tax return in May 2021, they will therefore have to pay an additional amount of tax corresponding to the salaries usually exempt.

In addition, their new PAYE tax rate will be computed on the basis of such higher taxable income, and applied to their 2021 salaries starting September. Should the exemption be again available in 2021 (which is far from sure), it means that unless the taxpayer asks the French tax authorities to adjust his foreseeable taxable income for 2021, an excess amount of tax will be withheld on a monthly basis between September 2021 and August 2022 (with a refund in September 2022 only).

Should employers be concerned?

Employers should definitely be aware of the impact on the cash position of the employees who usually benefit from such exemptions, more particularly for employees working on assembly and construction sites, for whom the exemption sometimes relates to more than half the employees’ yearly compensation.

It may also have an effect of employers’ cost for tax equalized inbound expatriates.

For further information or to discuss any of the issues raised, please contact Stéphanie Le Men-Tenailleau, Galahad: lementenailleau@galahad-legal.com

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