HOW WILL THE NEW FRENCH WITHHOLDING TAX SYSTEM ON PERSONAL INCOME (“PRÉLÈVEMENT À LA SOURCE”) AFFECT FOREIGN BUSINESSES?
French Government has confirmed that the new withholding tax system on personal income (the so called “Prélèvement à la source”) will enter into force on January 1st, 2019.
This new system will impact all kinds of revenue, and notably wages. As in most OECD countries, employers will now take not only Insurance contributions but also Income tax before they pay wages to their employees. The relevant withholding tax amounts will then be transferred by employers to the Tax authorities.
Within two months, companies which fall under the scope of this new scheme will need to complete all the required adjustments in their accounting systems and payroll procedures in order to be ready to withhold wage tax starting from January 1st, 2019.
Rules governing the new withholding tax system are technically complex, notably for foreign businesses for which information provided by the authorities are mostly drafted in French.
In this context, what are the impacts of the new French withholding tax system for foreign companies?
To answer this question, the key aspect is to determine whether your company falls under the scope of this new tax scheme, as explained below.
1/ If you are a foreign business operating via a French subsidiary or a permanent establishment in France (such as a branch), you will be subject to the same rules as any French company.
In other words, you will fall under the scope of the new French withholding tax system. As far as wages are concerned, the main features of the referred system are as follows:
- Based on Fiscal Year 2017 personal income, French Tax authorities will provide employers with the withholding rates to be used.
- Employers will be responsible for withholding the right amount of wage tax and transferring such amounts to the French Tax Authorities via SEPA direct debit.
2/ If you are a foreign company not established in France, specific rules apply (BOI-IR-PAS-30-10-10-20180131)
You will fall under the scope of the reform if you pay salaries to French Tax residents working on the French Territory. In this case, you will be subject to the same rules as French businesses. Depending on whether you are a Non-EU or an EU business, you may have additional obligations.
- Non-EU businesses
If you are a non-EU business, you will have to appoint a fiscal representative (article 1671 of the French Tax Code). Your fiscal representative will be liable for your tax obligations (withholding tax related aspects). From a practical standpoint, such representative will be responsible for both reporting and paying the withheld amounts to the tax authorities via SEPA direct debit.
- EU businesses
If your business is established in the EU or in an EEA State which has signed the relevant Treaties with France, you are not required to appoint a fiscal representative. Such appointment can however be made on a voluntary basis and is advisable for both technical and practical reasons. In practice, EU businesses will pay the withholding tax via SEPA direct debit.
NB: Please note that Non-French tax residents working on the French Territory do not fall under the scope of the described withholding tax system. Those employees remain subject to the specific withholding taxes set out in art. 182 A of the French Tax Code and the relevant Tax Treaties (BOI-IR-PAS-10-10-10-20180515).
Whether you are under situation 1 or 2, GMBA Walter Allinial can assist your company for all French withholding tax system related aspects and act, if necessary, as your fiscal representative.