In December 2016, the French government passed the French Finance Act for 2017 - which included significant changes to the country's tax system: specifically, the introduction of withholding requirements for employers. Although originally scheduled for 2018, the new withholding rules will come into effect across France on 1 January 2019 - with that deadline imminent, both employees and employers (and their payroll departments), should be getting to grips with their compliance obligations.
The New System
Under France’s current system, income tax is paid directly to the state, by employees, in the tax year following the current. From 1 January 2019, this regime will be replaced by “prélèvement à la source” (PAS) which will require employers to withhold income tax from their employees’ salaries on a monthly, ‘pay-as-you-earn’ basis and remit that tax to the French Tax Authorities (FTA).
That adjusted role essentially repositions French employers as both collectors and third-party payers of personal income tax.
The new regime will cover almost all income types, including salaries and wages, replacement income, self-employment income, and property income. As a consequence, the employer will become a collector and third-party payer of personal income taxes.
The rates at which employees' income tax will be withheld are determined by declarations on their completed 2017 tax returns - and were communicated to them in September 2018.
There are three withholding rates:
- A non-personalised ‘neutral’ rate (applied in the absence of a known rate)
- A personalised rate
- An individualised rate chosen by the taxpayer (applicable under certain conditions - and only available for selection until 15 September)
In order to implement the appropriate rate, the FTA sent employers details of their employees’ categories in a specific “declaration sociale nominative” (DSN) in September 2018. Going forward, employers will calculate and deduct the taxable amounts from their employees’ payslip in 2019 (and subsequent payslips), and then pay that tax to the FTA.
Monthly Withholding Implementation
The implementation of the withholding system should be made simpler for employers thanks to the monthly DSN which will contain the integrated data necessary to calculate each of their employees’ taxable income.
That data will also be transmitted to the “Direction Générale des Finances Publiques” (DGFIP) in order to pre-fill tax returns. Once the new regime is in effect (from January 2019) withholding data will also be sent to the DGFIP.
The date on which tax must be paid to the FTA depends on certain factors, including number of employees, and the date of the monthly DSN filing. In more detail:
FTA Payment Date
Over 50 employees
DSN filing deadline of the 5th of the month
8th of the month
Less than 50 employees
DSN filing deadline of the 15th of the month
18th of the month
Less than 11 employees
Optional payment dates - possibility of quarterly repayments
Under the PAS tax system, additional information will be required on employee payslips:
- The rate of the compulsory levy
- The base taxable salary, the withholding rate, and the amount of tax withheld
- The accumulated amount of tax withheld in the tax year so far
Helping Employees Adjust: FAQ
Income tax withholding isn’t just a significant shift for employers but for employees - who may be confused about their own responsibilities in the new system. As an employer, it’s worth helping your workforce get to grips with PAS to smooth out any potential future disruption - with that in mind, we’ve put together some of the questions employees might ask…
Q: How does PAS impact me?
A: From January 2019, the income tax you owe will be deducted from your wages directly, by your employer, over the tax year.
Q: What do I need to do?
A: In short, nothing. Your withholding rate is sent to employers in the social DSN report - that tax will be automatically levied, and sent on to the FTA by your employer.
Q: Will I see a change on my payslip?
A: Your payslip will show your gross wages, your net wages after social contributions, and net after tax contributions. Keep an eye out for ‘tests’ in November and December 2018: these tests won’t involve an actual wage deduction but your payslip will show a withholding tax line.
Q: Do I need to get in touch with the tax office?
A: Only if you think your withholding rate is incorrect - or if you want to change your rate. The FTA communicates your tax rate to your employer via the DSN.
Q: What about my 2018 income tax payment and tax return?
A: To avoid double-taxation, tax due on non-exceptional income received in 2018 will be cancelled by the FTA with a specific tax credit mechanism. This will be calculated on the basis of the 2018 income tax return which is filed in spring 2019.
Q: What about declarations on my 2019 return?
A: Your 2019 return will be filed, as usual, for income earned in 2018 (but no tax will be levied). From 2019, the PAS system will mean tax is levied at source from income earned in 2019.
The introduction of Income tax withholding in France could be especially problematic for businesses with a global footprint - many of which will need to adjust their global pay solutions to remain compliant. Prepare your payroll department for the consequences of PAS - and anticipate the potential knock-on effects it might have on your various locations in France and across the world. If you outsource your pay solution, talk to your payroll service provider now to clarify any issues or challenges that might be on the horizon.
For more information on French tax and payroll compliance, visit activpayroll’s dedicated France Global Insight Guide.