In France, income tax is collected the year following the income’s receipt pursuant to the filing of tax return. Starting January 1st , 2019, the payment of French income tax will change to a withholding system.
This withholding tax is not a new tax but, just a new way for the French Tax Authorities (FTA) to collect income tax.
Filing obligations remain unchanged and the taxpayer will still have to report his income from the previous year on his tax return in May-June of each year.
The final amount of income tax due will still be calculated in September, after the FTA has received each taxpayer’s tax return.
In 2019, the first year of the withholding tax implementation, due to the current tax collection system, the taxpayer will end-up paying both his income taxes for 2018, and the amounts withheld for 2019.
In order to avoid such a burden, the law provides for a tax credit, which will cancel the tax calculated and owed for unexceptional income received in 2018.
Scope of the new withholding system
This withholding system applies to any income, which comes within the definition of income for the purpose of the withholding system, regardless of whether the taxpayer is a French resident or not (e.g. French rental
income received by a foreign tax resident).
However, not all income will be subject to withholdings. Two types of income are excluded from this system:
- income that is already subject to a withholding tax as dividends, interests or a salary paid to foreign tax residents;
- income, which, by its nature, is exceptional such as a capital gain on securities or real estate properties.
In practice, income taxes will be withheld using either of these two methods:
- directly withheld and paid by the debtor of the taxpayer’s income (e.g. employer for the salary, Social Security or retirement funds for pensions);
- automatically withheld by the FTA on the taxpayer’s account for income such as rental income, income of independent workers or income from foreign sources.
Specifically, employees paid abroad by a foreign employer, but who are French tax residents, will be subject to the FTA’s automatic withdrawal on their foreign income.
The withholding tax is only based on income that comes within the scope of the definition of income for the purpose of the withholding system. For example, the amount of tax due on capital gains will still be paid in
Furthermore, salaries will be taken into account without any deductions for professional expenses.
Finally, losses will be taken into account for a nil amount
If the tax basis is contemporary, the tax rate‘s calculation is based on the taxpayer’s last income known by the French Tax Authorities.
The tax rate, specific to each household, for year N is calculated as follows:
Between January and August of year Y, before the taxpayer has filed his tax return reporting his Y-1 income:
Between September and December of year Y, after the taxpayer has filed his tax return reporting his Y-1 income:
Payment of the final income tax
The final amount of income tax due will still be calculated by the FTA upon receipt of the taxpayer’s tax return.
The tax notice, received around September Y+1, will indicate the amount of withholding tax collected during year Y and the potential difference between the two amounts.
Such difference can be the consequence of, for example:
- payments made by the taxpayer which result in a tax credit;
- the evolution of the income received during the year;
- the realization of a capital gain or receipt of other income coming outside of the withholding tax scope.
If the amount of withholding tax is higher than the amount of tax due, the difference will be reimbursed to the taxpayer in September Y+1.
If the amount of withholding tax is lower than the amount of tax due, the difference will have to be paid:
- in September, if such difference is of less than €300;
- In equal payments throughout September to December included if the amount due is superior to €300
Adjustments to the amount withheld
The tax rate can be automatically modified if the taxpayer, reports, within two months after the event has occurred, a marriage, a divorce, a birth, a death, the conclusion or end of a “PACS” (civil partnership).
The tax rate can also be automatically adjusted by the FTA at the taxpayer’s request, in the case of spouses who want to have individual tax rates. This individual tax rate can be useful when spouses have an important
discrepancy between their income.
Adjustment by the taxpayer:
In the event that the taxpayer’s income evolves between year Y-2, Y-1, Y , he can choose to adjust the amount of tax withheld.
The taxpayer can freely increase the amount of monthly withholdings.
However, if he reduces the amount and at the end of the year the amount of withholding tax paid is lower than 90 % of the amount due, he will be liable for penalties.
Tax credit applicable on 2018 income
In order to prevent the taxpayer from paying in 2019, the 2018 income tax, collected in September 2019, and the 2019 income tax, collected each month of 2019, the legislator has provided for a tax credit mechanism on
“unexceptional” income. This tax credit will be deducted from the 2018 income tax. This tax credit is called the “Modernization Recovery Tax Credit” (CIMR in French).
Tax credit calculation:
The tax credit corresponds to the amount of income tax due on the taxpayer’s unexceptional income.
Unexceptional income is defined by opposition to exceptional income.
The CIMR is not included in the general cap on tax reductions and credits. The CIMR tax credit is deducted before any other deductions of credits and tax reductions. These tax credit and reduction will thus be fully effective for the year 2018.
The CIMR will only be granted for income declared spontaneously. This tax credit will not be applicable to tax withheld after formal notice from the FTA, even though the tax is related to eligible income.
The CIMR will be reduced by tax credits granted pursuant to double taxation treaties relating to foreign income coming within the scope of the withholding tax system.
Unexceptional income is defined by opposition to exceptional income, which is defined differently depending on the income category.
Exceptional income is defined differently depending on the income’s category.
To determine the “exceptional” or “unexceptional” qualification is quite complex especially regarding salaries and the anti-abuse clauses applicable to rental income.
Besides, the tax reform turns employers and retirement funds to tax collector with new filing obligations and responsibility.
It will be important to prevent particular tax cases regarding this complex tax reform with a lot of details and exceptions or anti-abuse disposal.