The Draft Finance Bill for 2023 plans to reduce withholding tax obligations for foreign employers of French tax residents

A new wage tax withholding system has been applicable in France since 1 January 2019, burdening employers with the responsibility of withholding personal income tax from their employees’ taxable salaries and paying it monthly to the French tax authorities. This new system applies to all French tax residents receiving French source employment income, regardless of whether their employer is located in France or abroad, and involves a rather complicated identification procedure for foreign companies with no establishment in France and complex monthly reporting obligations (the so-called “PASRAU declaration”).

It seems that the many complaints made to the French tax authorities about this complex process were heard since the Draft Finance Bill for 2023 proposes to abolish the obligation to withhold tax at source for employers:

• established outside of France in a Member State of the European Union or in another State or territory which has concluded with France an administrative assistance agreement to combat tax fraud and tax evasion, as well as an agreement on mutual assistance in matters of recovery with a scope similar to that of Directive 2010/24/EU, for instance 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;
• with respect to employees who are not affiliated to the French social security system on a compulsory basis for the periods that such income is paid.

Such employers would, however, remain subject to an annual reporting obligation of the French source salaries paid to their French resident employees. The date and process for filing such declaration remain to be defined by the government.

In case of breach of such reporting obligation, the Draft Bill provides for a fine which, without being less than EUR 500 or more than EUR 50,000 per declaration, would be 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 prescribed time limit.

Wage tax on such employees’ French source salaries would be taxed through advance payments debited directly by the tax authorities to the employees’ bank account.

Key points to remember:

• The obligation to withhold tax at source and report on a monthly basis remains applicable for foreign employers located in countries not meeting the above mentioned conditions, and for employees registered with the French social security system on a compulsory basis.
• There would still be a reporting obligation for foreign employers falling within the scope of the exemption, the breach of which would be sanctioned by rather high fines.

More details should be available over the next few weeks.

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This article was produced by Stéphanie Le Men-Tenailleau, Partner specialized in tax law at Galahad, France, a CELIA Alliance member firm.

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