Tax

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

French Property News - - Contents - Debbie Brad­bury is the co-or­di­na­tor for English-speak­ing clients at SAREG ac­coun­tants Tel: 0033 (0)4 50 25 23 97 sareg.com

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

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