Taxation of Income in France 2019
Tuesday 08 May 2018
Delay in the introduction of PAYE in France means that most 2018 income will escape income tax and social charges in 2019. The system of 'Pay-As-You-Earn' may well have been in existence in the UK since the end of WW2 and is used in most other countries around the world, but France is a rare example of where it has not been adopted.
The deduction of income tax at source by the employer (prélèvement à la source) has been resisted, mainly because it has been viewed as an unacceptable intrusion of privacy.
Employers have also objected due to the additional burden they would incur in the preparation of wage and salary slips, a task which is already onerous and costly.
Although painted as something of a tax revolution, for many households there will be very little practical difference.
This is because several million households already elect to pay 'on account' (over 10 months) provisional payments of income tax to which they may be liable in the year, based on the tax they paid in the previous year.
In addition, if you paid at least €347 of income tax in the previous year, then in February and in May of the following year you are required to make two payments on account equal to two-thirds of the tax paid. The final payment is made after your income tax notice is received, assuming there has been no major reduction in your earnings.
So the French are already used to paying at least part of their income tax bill in advance; what is new about PAYE is that employers and pension administrators will deduct it at source.
However, the risk of a double imposition of income tax in 2019 has meant that
the government have been obliged to forgo tax revenues due on 2018
income - in most cases!
Here is what will happen over the next couple of years.
2018Broadly speaking, the proposed calendar of events is that this month everyone will, as normal, be required to declare their 2017 income, for which they receive a tax notice in September or earlier, when they will be required to settle their tax bill for the previous year.
Based on the income declared on this tax return all employees and employers will subsequently be sent a tax rate for 2019, which will be used to deduct income tax at source on the pay packet, commencing January 2019. If individuals wish to preserve their privacy they can opt for a 'neutral' tax rate, and their final tax liability will be subsequently adjusted with their tax declaration.
Retired households and their French pension administrators will similarly be advised of the amount that will be deducted from their bank account each month from January 2019.
Business owners who are taxed on a personal basis will be granted the option of quarterly payments, due to the variability of their income. There is no change to the arrangements for company taxation. New businesses will not be given an amount to pay each period in their first year but will settle their tax bill the following year in September.
Landlords will also be advised of a fixed sum they will pay each month, based on their rental income history.
Particular provisions have been put in place for those who let unfurnished accommodation taxed on the basis of the régime réel. They may find it advantageous to undertake major building works in 2018, as these are deductible from rental income at 150% - 100% in 2018 and 50% in 2019. The aim is not to discourage landlords from undertaking works in 2018. By contrast, works undertaken in 2019 will only be 50% deductible, except for those of an urgent nature, which remain 100% deductible. Things only return to normal in 2020.
As far as furnished accommodation is concerned, the accounting rules are different, so there is no need for the above measure.
From January 2019 the tax office will deduct a sum each month (15th day) as a withholding tax on 2019 income. The sum payable will be as advised on your income tax notice for 2018 (on 2017 income).
In May 2019, everyone will be obliged make a tax return on their 2018 income, and although a full tax assessment will be carried out, no tax will be levied, provided the earnings are in line with the income declared in the previous three years - 2015, 2016 and 2017.
The provisional payments that would normally be required to be paid in 2019 on income earned in 2018 will simply not be levied.
To cancel out the tax imposition each household will be granted a tax credit, called crédit d’impôt modernisation du recouvrement (CIMR). Any other specific tax credits to which they may be due in 2018 will also be processed, so that there is no loss of any tax breaks in the year.
According to the government: "L’impôt normalement dû au titre des revenus non exceptionnels perçus en 2018 sera annulé."
Perhaps of greater significance for many expatriates is that the tax credit arrangement will also apply to the social charges, which will also be cancelled for 2018 for income affected by the reform. "Il en sera de même des prélèvements sociaux afférents aux revenus concernés par la réforme", says the government website.
Tax credits that might normally be granted in 2018 will simply be carried forward to 2019 and credited in that year, but with an advance payment of 60% payable in January 2019.
There are four exceptions to the exemption from taxes on 2018 income.
i. Exceptional Income - Such income received in 2018 will be taxable. Broadly speaking, if your income exceeds the income earned in any of the previous three years then it may well be taxed and payable in September 2019. Pension capital sums and similar exceptional payments will also be taxed. Income arising from a new business created in 2018 will not be regarded as exceptional.
The taxation of exceptional income will be used to ensure that individuals do not artificially inflate their income earned in 2018, either by bringing forward income that might normally be taxable in 2019 or delaying income that might ordinarily be received in 2017!
ii. Capital Gains - Remaining outside of the tax credit relief in 2018 will be capital gains. Those on the sale of real estate will be taxed in the normal manner at source by the notaire at the time of sale.
iii. Investment Income - Dividends, interest and stock gains will also continue to be taxed at source, as currently occurs, with no tax credit.
iv. Micro-Entrepreneurs - The position for micro-entrepreneurs will
depend on the basis on which you have elected to pay your income tax.
Those who elected to pay income tax each month/quarter with their
social security contributions in 2018 (called the prélèvement libératoire) will see no major change. In effect, they are already on PAYE for their business income. Accordingly, in such cases the tax-free year will not apply,
an injustice that has been noted by some commentators and politicians,
although the government appears to have rejected any change to the
arrangements. Only if you have not opted for the prélèvement libératoire will you obtain a tax credit.
Implications for ExpatriatesFor retired expatriates in France, or for those who run a business, there will similarly be very little change once PAYE is in force, although they will benefit from the tax relief on 2018 income like everyone else, other than in the case of those exceptions listed above.
Clearly, in future, where pension or salaried income is generated from outside of France there can be no deduction at source.
Only if you have not previously elected to pay on account each month, and pay in three instalments each year, will it change to a monthly (or quarterly) deduction from your bank account.
As with employees the amount of the deduction will be based on your previous tax returns. In the absence of a previous tax record you will be taxed the following year, or you can choose to pay a sum in advance 'on account'.
The final assessment of your liability will be carried out following submission of your tax return, when you will either receive a tax refund or be required to pay any additional tax due over a four-month period.
If you do not actually pay any income tax you will not be required to pay provisional monthly payments.
Similarly, in the event of any significant change of earnings during the course of the year you can ask the tax authority to change your tax code. However, if you do so, and your income is 10% greater than advised, you will face a tax penalty of at least 10%.
As far as non-residents are concerned, in future rental income will be subject to 'on account' deduction, as occurs for residents.
This article was featured in our Newsletter dated 08/05/2018