New withholding tax on employment income announced

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The French government has revealed the first details of the new withholding (or income) tax rules that will be implemented from 1 January 2018.  The new arrangements are set to impact significantly on the French employers and those companies with employees seconded into and out of France.

Impact of this change

At present France is one of the few countries that runs a limited withholding tax system (whereby tax is deducted at source).  French residents pay their taxes annually in arrears based on their tax return submissions, and income tax is typically only deducted at source for non-French residents. 

Under the new rules, withholding tax will apply to all employers resident in France for tax purposes as they will be responsible for the levy of the income tax.  Although the withholding tax will encompass employment income, pensions and rental income, the employer will only be liable to withhold income tax on the employment income paid to their employees.  

It is worth noting that the government has yet to announce whether employers who are not resident of France for tax purposes will also be required to levy French income tax at source or not.

Anyone who is considered a resident of France for tax purposes will also be affected.  

Calculation of tax rates

The new income tax rates will be determined by the tax authorities on the basis of the information provided by each taxpayer.  This rate will take into account the total income of each tax household, the family status of each taxpayer, as well as the number of dependents in the tax household.  It will be possible to ask the tax authorities to calculate different tax rates for each member of the same tax household (provided that these individuals do not earn incomes of the same amount).

A tax coding system will be introduced to enable employers to calculate the amount to be deducted, and this will need to be displayed on pay slips.  

Uncertainty over 2017 tax year remains

Uncertainty remains as to how tax will be calculated for 2017 related income during 2018.  Although French residents will pay income tax on their 2016 income in 2017, from 1 January 2018 their income tax liabilities (those related to their 2018 incomes) will be levied at source.  There is speculation that 2017 incomes will never be subject to income tax as the French confirmed that taxpayers would not be subject in 2018 to both 2017 and 2018 personal income tax.  Nevertheless it also remains possible that this may be tackled by an adjustment to the withholding tax rate in September 2018 which takes account of "the 2017 situation" for each taxpayer.  

The government has confirmed that "exceptional incomes” received in 2017 should be subject to income tax in 2018, and that the 2017 tax reductions and tax credits that taxpayers could benefit from "will be preserved".  Income that is obtained under special conditions and is not linked to the tax payer’s usual activity or employment income can be classed as “exceptional income”.  This could be an additional bonus for outstanding service or a termination package (excluding the normal wages paid with termination). 

More detail is expected in June 2016 after which we will provide a further update. 

Further information

For further information or to discuss any of the issues raised, please contact Nicolas Pregliasco on +33 (0)6 37 77 03 42, Galahad.

Further reading

Press release (French)

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