With French income tax soon to be deducted at source, how might this affect you if you earn an income in France? Tax expert Debbie Bradbury reports
Income tax is soon to be deducted at source. How will this affect you?
Following the 2018 French Finance Law, France is going to implement a system of income tax deducted ‘at source’ from January 2019, known as Prélèvement à la Source or PAS. We take a look at how this could affect you if you run your own business in France.
Which income will be taxed at source?
So, what type of income will be taxed at source, and how will payment be made? Effectively, only certain types of French income can really be subject to income tax deducted at source and this is when the taxpayer is paid by a French organisation or employer, such as with salaries, pensions and unemployment benefits.
For self-employed professional income, company directors’ remuneration and income from rental activities, there is no third party to pay the tax so it is paid by the business owner or rental landlord directly by means of stage payments on account.
All other types of income will be excluded from this system of deduction of income tax at source or payment on account, such as capital investment income (bank interests, dividends etc), capital gains on property or sales of stocks and shares, as well as exceptional income (unanticipated income). These will be taxed separately.
So if you are self-employed or run a rental activity of any kind, your monthly stage payments will effectively be debited directly from your personal bank account by the tax authorities according to a common tax rate based on previous income tax.
If you are a majority shareholder company director in an SARL and receive a remuneration, the same will apply to you. If your company has staff, their personal income tax will be deducted at source from their salaries and you, as a company, will be responsible for paying the tax to the French tax authorities, according to the common tax rate supplied by the French authorities to the employer.
How will the tax rate be determined?
As France works on a household tax return for married or ‘PACS’ couples, the French tax authorities will calculate each household’s tax rate – called the common tax rate ( taux commun) based on the taxation of revenue from two years previously for January to August and on the previous year’s tax for September to December. This is similar to how the stage payments are currently calculated (eg common tax rate based on 2017 income for January-august 2019 tax payments and based on 2018 income for September-december 2019 tax payments).
The calculation of this common tax rate is as follows: Household income tax related only to income that will be taxed at source Amount of household revenue (related only to income that will be taxed at source)
It should be noted that this rate is calculated on salaried and pension income prior to the deduction of the 10% tax-free allowance but for self-employed businesses and rental income, the net taxable figure is used. All income that is excluded from the system of taxation at source will be taxed at an average tax rate rather than the marginal tax rate.
For example, self-employed commercial profit of €50,000 only, taxed at €5,000 (for the purposes of the example only!): €5,000 household income tax/€50,000 household revenue = 10% 10% of €5,000 = €500 payable monthly by means of stage payments by direct debit
Note that, if this same person had also received dividends, these would not be included in the household revenue figure used to calculate the common tax rate as they are not included in this taxation at source.
By choice (and an obligation for new taxpayers or newly employed staff), there is a neutral tax rate and a special grid has been drawn up showing fixed rates according to monthly revenue (ranging from 0% for net monthly income of less than €1,367 rising to 43% for net monthly income in excess of €46,501).
Double the trouble?
So will you be paying income tax twice in 2019?! The general response to this is no. The French authorities understand that it will not be possible to pay both the 2018 income tax in September 2019 and the taxation at source from January 2019 so they are effectively going to cancel out the taxation of your regular 2018 income with a special tax credit called Crédit d’impôt Modernisation du Recouvrement or CIMR.
However, they will look upon certain income as ‘exceptional income’ and so this part of your income will still be taxed, in order to avoid any abuse of this free tax year!
This is fairly easy to distinguish for salaried employees (high bonuses, severance pay, etc) but for the self-employed, they are going to review the previous three years’ income alongside the 2018 declaration to work out whether part of that income should be considered as ‘exceptional’, as per the following example.
In this example, taxpayer A will receive a full tax credit in 2019 as his 2018 income was no higher than the highest of the previous three years; whereas taxpayer B is seen to have earned an ‘exceptional income’ in 2018 and will be taxed on the difference between 2018 income and the highest of the previous three years.
Any exceptional income will be taxed in 2019 but reviewed again in 2020 and if it is then proven to have been a natural progression in revenue going forward, there will be a partial or full reimbursement of the 2019 tax paid, as follows.
Should taxpayer B earn more in 2019 than in 2018, he will receive a full reimbursement of the additional tax paid in 2019; whereas should he earn less than in 2018 but more than the highest of the previous three years, he will receive a part refund.
There are particular rules surrounding unfurnished rental declarations and deductible expenses in 2018 and 2019 and if this is your case, it will be worth taking advice as to when you should carry out refurbishment works to make the most of these rules.
Other useful points
It will still be an obligation to file an annual income tax return each May, in order to calculate the new rate to be applied to SeptemberDecember payments.
Also, where the French tax authorities can usually go back a maximum of three years on personal income tax inspections, as 2018 is a year where the special tax credit will cancel out taxation on regular income, they will have a one-off four-year period to deal with taxation related to 2018 and possible abuse of the system!
If you are running a business in France, it is important you obtain advice from your accountant as soon as possible on how to make the most of this new taxation at source, and how to avoid finding yourself with taxation in this ‘free tax year’.
If you have staff, it is imperative that your payroll software system is up to date and that the taxation at source can be implemented, and you may need advice on your new responsibility as an employer recovering income tax on behalf of the French tax authorities.
It will still be necessary to file an income tax return each May