In order to discuss tax residency from a French tax perspective, you must refer yourself to article 4B of the French general tax code (CGI).
In application of article 4B, the following people are considered as French tax residency :
- Those who have in France their place of abode or their principal place of stayl.
- Those who exercise in France most of their activity.
- Those who have in France their main economic interests.
If one of these criteria is met by the employee, he will be considered as a French tax resident.
However, for employees on assignment abroad, the simple fact of being considered as a French tax resident by French standards is not enough. Indeed, each country's internal code has its own rules and an employee can be considered as a tax resident in more than one country. In case of such a situation, it is necessary to look at the international tax treaties signed between the home country and the host country to determine residency. If there are no tax treaty between the two countries, the employee will be considered as a tax resident of the home country, as well as France (i.e. France has signed a tax treaty with most countries around the world).
Therefore, not doing this meeting can generate additional costs (i.e. double taxation of certain elements of compensation, late filing interests and penalties, non-application of tax and social security optimizations, payment of social security contributions in the wrong country, etc).
Not doing this meeting can also result in conflicts with the employee. Indeed, the employee can have made investments only applicable to certain tax individuals (resident or non-resident), have contracted certain loans that reduced his tax liability in the home country, made gift or donations that only allow tax reduction in the home country, etc. If all this investment of time and resources by the employee does not provide the results expected because of a bad tax residency analysis, the employee will see this assignment abroad from a negative perspective.
Finally, this analysis will be necessary in order to properly explain to the employee how the international policy of the firm applies to his specific situation.
French tax residents
If, further to a tax residency analysis, the employee is considered as a tax resident of France , he must report his worldwide income in France.
Each foreign income must be subject to a tax analysis to determine the taxation rules applicable. You must determine where the income is taxable and how to avoid double taxation using tax treaties applicable between France and the country of source of the income. Without a tax treaty, the income is taxable in France in full.
Depending on your international mobility policy, if the employee is equalized, the employer will have to pay either the portion of the income tax relating to the assignee's expatriation package or all of the income tax.
We draw your attention to the fact that a special impatriate regime exist since January 1st, 2004 (article 81b of the CGI) for seconded assignee, and since January 1 st , 2008, for local employees recruited from abroad (article 155B of the CGI). Under this regime and if the conditions of this regime are respected by the employee, it is possible for certain elements of compensation in kind or in cash to be exempt from French income tax (foreign capital gains are also exempt in the limit of 50%). You will find an article on this special impatriate regime in our blog.
Finally, for assignees to France who can not benefit from this special regime, there exist in France numerous ways to reduce your net taxable compensation (i.e. exemption of the annual home leave trip, school fees, moving fees, etc).
The employee will have to file his return with the French tax center of his neighborhood. In the last couple of years, the filing date has been at the end of the month of May of the following year.
French tax non-residents
If your assignee is considered as a French tax non-resident, he must only report income earned for an activity in France . Indeed, each day worked in France is taxable in France (article 164 B I d of the CGI).
Under certain tax treaties, an article (generally article 15.2. concerning compensation income) allows for exemption in France if certain conditions are met :
- The employee is in France for a period exceeding 183 days over the calendar year or 12 consecutive months (depending on tax treaties) ; and
- Compensation is paid by an employer or on behalf of an employer that is not resident of France ; and
- Cost of the assignment is not born by a permanent establishment in France .
If one of these three conditions is not respected, the assignee will be taxable in France as a tax non-resident.
We draw your attention to the fact that these three conditions are the standard conditions. However, exceptions exist. For this reason, do a tax analysis per employee and per country.
Compensation earned by a French tax non-resident is subject to a monthly (or weekly or daily) withholding income tax return, as well as an annual income tax return.
The French monthly withholding income tax return must be filed by the employer using monthly brackets (same applicable for weekly or daily taxation). Rates of taxation on salary income are 0%, 12% and 20%, after an initial rebate of 10%.
Filing these monthly returns is an obligation of the employer and any penalty or interest for late filing or late payment will be at the employer's expense. The monthly returns must be filed on the 15 th of the month following that during which it was earned (i.e. an employer, with an employee earning income in February for work performed in France, will have to file a French monthly withholding return for his employee by March 15 th , unless the 15 th is a Saturday, a Sunday or a bank holiday. In that case, filing deadline will be the next working day).
The employee will report on his annual French income tax return, not only income declared by the employer but also any additional French source income), He will have to file this report to the French tax center for non-residents at Noisy-Le-Grand at dates that vary depending on the country of residency (June 30 th up until July 15 th ).
There are two types of annual French income tax return: the French income tax return for residents and the French income tax return for non-residents.
Employees coming from abroad have the same obligations as any other French local employee. They must use the same forms but may have additional forms such as form number 2047 allowing to declare income paid abroad or form number 3916 to declare foreign bank accounts. They may also have to provide additional documents to justify the reasons why they benefit from special tax treatment (i.e. exemption of US capital gains earned by a US citizen, application of the French special impatriate regime) in order to reduce questions from the French tax administration.
The French income tax return for non-residents
The French income tax return for non-residents must report all income earned in France (i.e. salaries, rental income, etc), as well as all income declared by the employer throughout the year.
You will below a summary of the main forms to complete when preparing your French income tax return for non-residents :
- Form number 2042 NR summarizes of all income earned during the year;
- Form number 2044 NR summarizes of all French rental income earned during the year;
- Form number 2041 E summarizes all elements of compensation declared during the year by the employer through the French monthly withholding income tax returns.
However, a certain number of elements of income such as interests or dividends do not, if withholding has already been performed by the bank, have to be declared through the French income tax return for non-residents.
Par ailleurs, un grand nombre de plus-values de source française sont exonérés d'impôt sur les revenus à condition que ceux-ci ne sont pas liées à des plus-values immobilières (ou liées à la vente d'actions de sociétés exerçant principalement une activité générant des revenus immobiliers).
In addition, most French source gains will be exempt from French income tax if they are not relating to real estate gain. However, capital gains from the sale of shares of a company who's main activity is real estate will, in most cases, be taxable.
A French income tax return for non-residents must also be filed if you have French source rental income. The net taxable rental income will be taxed at a minimum rate of 20% (if the minimum tax amount generated is reached). If the rental income generates a deficit, this deficit will be reported on future years' gain.
Finally, note that for the employee who only earns French source professional income, he may be exempt from filing of French income tax return for non-residents if the income declared by his employer through the French monthly income tax returns did not reach the highest tax bracket of 20%.
The French income tax return for residents
As mentioned previously, an employee considered as a French tax resident must declare his worldwide income.
You will find below a summary of the main forms to complete when preparing your French income tax return for residents :
- Form number 2042 summarizes all worldwide income earned during the year. You must report salaries, rental income, capital gains, deductions, reductions, financial investment (interests, dividends, etc);
- Form number 2042 C summarizes stock-option gains, self-employed income, etc- Form number 2044 summarizes all rental income earned during the year;
- Form number 2047 summarizes all income earned abroad (rental income, salaries, financial investment (interests, dividends, etc);
- Form number 2074 summarizes all details concerning capital gains.
We will not go in detail in the tax treatment of each income but will only draw your attention to the fact that France , like numerous other countries in Europe, has passed numerous laws allowing for the exemption of certain revenues for foreign employees in France for short-period of times.
France has also signed numerous tax treaties in the last 50 years. These allow to set straight rules concerning taxation of certain elements of compensation when on assignment abroad or to France . French tax obligations are set by these rules and all income declared in France must respect these rules.
Be aware! The impatriate to France will most likely have additional French taxes to pay of which :
French dwelling tax and French tax for the media (they come together)
The French dwelling tax is due by anyone who occupies a living space on French soil on January 1 st .French tax for the media is due by individuals who have a television or a computer on which they can receive French public channels.
CSG/CRDS and social tax on personal income
This tax on interests, dividends, rental income, capital gains, etc is determined by income declared in the French income tax return.
French wealth tax (ISF)
This tax is due by all those who's worldwide assets is superior to 790 000 euros (of French assets for French tax non-residents).
For more information on these taxes, we recommend our article in the blog that discusses these different taxes.
You can also obtain information on the French ministry of finance's website at http://www.impots.gouv.fr