29nov 2018

Businesswoman examining cube at desk in office

So far, tax payers in France had the obligation of fulfilling an income tax return regarding their incomes over the past year. There was a year of delay between the perception of the income and the payment of tax.

This was problematic for two reasons. On one side, tax payer’s situation might have changed from the moment they perceived the income and the moment of collection (loss of work, divorce, etc.). On the other side, there was a higher risk of misdeclaration or absence of it.

Article 60 of the law n° 2016-1917 of December 29, 2016 of the finance act for 2017, provided for a deduction at source of the income tax from January 1st, 2018 in order to erase the delay of one year in the perception of the tax and in order to avoid tax evasion.

After a long debate about the pertinence and the feasibility of this modification, the precedent law was amended by ordinance n° 2017-1390 of September 22, 2017 in order to delay the application of the withholding tax to January 1st, 2019 with a transitory period from September 1st, 2018.

This withholding tax will take the form of a deduction at source (on payslip) or a payment on account (debited from bank account), depending on the nature of the income, its origin and the tax domicile of the taxpayer who receives it.

Tax payer’s 2017 declared income will lead to the calculation of a specific rate for each tax payer.

Regarding wages, the specific rate of each employee will be communicated to the employer who, at the end, has the obligation of withholding the tax for the tax administration.

A “neutral” tax rate will be applied in the case that the tax payer does not desire that his specific tax rate to be communicated to his employer and the total amount of owned tax will be corrected at the end of the year through the income tax return.

In this regard, the fulfilling of an income tax return will be still necessary at the end of each year.

The specific rate may be updated at any moment, from January 2nd, 2019 in order to take account of family status or income changes.

The withholding tax takes the form of a deduction at source for most income related to wages, pensions and free life annuities through the application of the specific tax rate.

It takes the form of a payment on account for incomes in the categories of industrial and commercial profits, agricultural profits, non-commercial profits and property income, life annuities in return for payment, alimonies, and, when paid by a debtor established outside France, foreign source income taxable in France according to the rules applicable to wages, pensions or life annuities.

For this last type of incomes, the withholding tax may also concern social security contributions.

Moreover, this payment on account is calculated on the basis of 2018 tax return regarding 2017 declared incomes by defining a total amount of tax owned then establishing a monthly amount to be paid. Tax payers will have the choice of making this payment monthly or quarterly.

Some types of income as capital or real state gains, profit-sharing or income paid to non-resident taxpayers already subjected to a different withholding tax obligation are excluded from this new tax system.

Furthermore, in order to avoid “a double imposition” on 2019, regarding both 2018 and 2019 income tax, the administration has defined a so-called « exceptional income » theory in which normal revenues (i.e. non exceptional ones compared to the average income of the past year) from 2018 will be excluded of tax on 2019 through a mechanism of tax credit.

To conclude, the tax administration has specified that in order to withhold the tax, it would be necessary to be registered in France, to have a bank account in the SEPA area and have sent to the bank a signed mandate, to have a professional account at www.impots.gouv.fr (French tax administration website) and at last, to appoint a tax representative when legally obligated to do so, and expand his or her proxy to the withholding tax.

For more information you can visit: https://www.impots.gouv.fr/portail/how-withholding-tax-works.