Income Tax Relief in France in 2017
Tuesday 06 December 2016
As a result of the proposed introduction of PAYE in France in 2018, most 2017 income will escape income tax and social charges.
Although a system of 'Pay-As-You-Earn' has been in existence in the UK since the end of WW2, and is used in most other countries around the world, 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 to it due to the additional burden they would incur in the preparation of wage and salary slips, a task which is already onerous and costly.
In reality, 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 the following year, based on the tax they paid in the previous year.
In addition, if you paid at least €347 of income tax in the year, then in February and in May of the following year you are required to make two payments on account, being two-thirds of the tax paid in the previous year. 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.
The detailed plans seek to allay some of the historical fears, but the risk of a double imposition of the tax in 2018 has meant that the government have been obliged to forgo tax revenues due on 2017 income.
Broadly speaking, the proposed calendar of events is that in May 2017 everyone will as normal be required to declare their 2016 income, for which they receive a tax notice in September, 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, which will be used to deduct income tax at source on the pay packet, commencing January 2018. 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 2018.
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. It is likely to mean that many will defer building works expenditure next year due to the lack of full tax relief on such works. (We will be considering the implications for landlords in greater detail in a future Newsletter).
The position will remain the same for micro-entrepreneurs who have elected to pay an income tax rate each month/quarter with their social security contributions. In effect, they are already on PAYE for their business income.
In May 2018, everyone will be obliged make a tax return on their 2017 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 - 2014, 2015 and 2016.
The provisional payments that would normally be required to be paid in 2018 on income earned in 2017 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 2017 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 2017 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 2017 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 2017 will simply be carried forward to 2018 and credited in that year.
There are three exceptions to the exemption from taxes on 2017 income.
i. Exceptional Income - Such income received in 2017 will be taxable. Just what is regarded as 'exceptional' has yet to be fully defined, but if it exceeds the income earned in any of the previous three years then it may well be taxed and payable in September 2018. Pension capital sums and similar exceptional payments will also be taxed.
The taxation of exceptional income will be used to ensure that individuals do not artificially inflate their income earned in 2017, either by bringing forward income that might normally be taxable in 2018, or delaying income that might ordinarily be received in 2016!
ii. Capital Gains - Remaining outside of the tax credit relief in 2017 will be capital gains. Those on the sale of real estate will be taxed in the normal manner at source, at the time of sale, by the notaire.
iii. Investment Income - In addition, dividends, interest and stock gains will also continue to be taxed at source, as currently occurs, with no tax credit.
Implications for Expatriates
For 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 2017 income, like everyone else.
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 the following year, 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 any 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, although 2017 income will be exempt.
The one fly in the ointment of all of this is the forthcoming presidential election in May 2017.It remains to be seen if the plan is maintained by the winning candidate.
Postscript: Following the election of President Macron the introduction of this change has been postponed until 2019. Accordingly, relief will now apply to 2018 income.