Exemption of withholding tax obligations for foreign employers of French tax residents

Additional guidelines on the scope and consequences of the measure.

Further to our article dated 23^rd October 2022, the Finance Bill for 2023 in its adopted version abolished the obligation to withhold wage tax at source some foreign employers of French tax resident employees, however the scope of the amendment is a bit more limited than expected. Clarifications on such scope and on the remaining reporting obligations of such employers were recently issued by the French tax authorities.

As from January 1, 2023, salaries taxable in France and paid by :

• Employers established outside France and in a Member State of the European Union or in another State or territory which has concluded with France an administrative assistance to combat tax fraud and evasion. This is in addition to an agreement on mutual assistance in matters of tax recovery, with a scope similar to Directive 2010/24/EU (for instances, that the agreement is limited to the recovery of income tax due on salaries and wages) and which is not an uncooperative State or territory under French law,
• With respect to employees who are not affiliated to the French social security system, pursuant Article 13 of the Regulation (EC) n°883/2204 on the coordination of social security systems,

are no longer subject to any withholding of French wage tax by the employers, which no longer have to file a monthly declaration (the so-called PASRAU) in this respect.

The PASRAU mechanism is replaced by advance payments debited directly by the French tax authorities from the employee’s bank account.

Employees within the scope of the exemption

The amendment does not apply to employees seconded to France by their foreign employer pursuant to Article 12 of the above-mentioned Regulation who remain covered by the social security system of their home country. The former wage tax withholding obligation and reporting process continues to apply to salaries paid to such employees. 

It therefore only applies to multiple states workers as defined by the EU Regulations.

Countries included in the scope of the exemption

Employers located in the EU Member States fall within the scope of the new regime, as well as those located in Iceland, Norway and the United Kingdom (but only for French tax residents who have been affiliated to the UK social security system before 1st January 2021 and have remained affiliated since that date without interruption).

Swiss employers are therefore excluded from the scope of the exemption, except for frontier workers residing in France and working in Switzerland who elected to be affiliated to the French social security system based on section L 380-3-1 I of the French social security code.

Any remaining obligation for foreign employers to which the exemption applies?

Foreign employers exempt from the monthly declaration and withholding obligation remain subject to an annual reporting obligation of the French source salaries paid to their French tax resident employees.

Based on the recent guidelines published by the French authorities, such declaration will have to be filed on the same platform normally used for the monthly filing of the PASRAU declarations (i.e. the ones that used to be compulsory), and will have to be filed before the end of January of the year following the one of payment of salaries.

Practically speaking, it means that:

• Foreign employers already registered will still need assistance in France to determine the taxable amount of the salaries paid to their French tax resident employees and to declare it through the platform; and
• Foreign employers employing French tax residents for the first time will have to carry out the rather burdensome and complicated process of requesting an identification number (SIRET number) with the French tax authorities, and find assistance to meet their annual reporting obligation.

Any breach of this reporting obligation is sanctioned by a fine equal to:

• 5% of the sums which should have been declared in the event of omissions or inaccuracies or
• 10 % of the sums which should have been declared, in the event of failure to file the declaration within the deadline.

CELIA Alliance member firm Galahad contributed to this article. For further information or to discuss any of the issues raised, please contact Stéphanie Le Men-Tenailleau (lementenailleau@galahad-legal.com) or Nicolas Pregliasco (pregliasco@galahad-legal.com).