Implementation of a withholding system in France: what foreign employers should know?

The withholding tax procedure on personal income will enter into force on January 1st, 2019. This reform brings the tax collection for a given year in line with the employee’s actual situation for the same year (income, status change), and without changing the calculation rules in order to eliminate the one-year gap between the earning of the income and the tax paid on it.

Starting from January 1st, 2019, employers must collect the withholding tax along with social security contributions.

Employer: Are you concerned by the withholding tax procedure and what practical steps do you need to set up?

All companies which pay salaries in France must collect and pay over the withholding tax.

The withholding tax procedure works as follows:

• The Tax Administration calculates the rate applicable to each employee.
• The employer applies this rate on the salary to be paid to the employee and declares the withholding tax collected each month using the Single Staff Reporting Statement (the so-called DSN), which must be filed by the 5th or 15th of the month following the payment of the employees’ salaries.

Before collecting the withholding tax, you need to ensure that you are ready to do so. To this end, the French Government prepared the following scheme (which can also be found on the following link: https://www.impots.gouv.fr/portail/les-modalites-du-prelevement-la-source).

Obligations of the employer

As an employer, your sole obligation in relation to the employee is to apply and then return the collection rate to the Tax Administration.

It is not the company’s role to provide employees with any other information relating to the withholding tax. If an employee has a question concerning the calculation methods of the collection rate, the Tax Administration will be the right contact person.

However, as a collector of this rate, the employer cannot disclose the employee’s withholding rate.

Responsibility of the employer

The Tax Administration will be responsible for the determination of the employee’s withholding rate. Consequently, there should not be, in principle, any risk for the employer to make a mistake on the calculation.

However, should it happen, the employer would be held responsible as it is today in case of mistake for the employees’ social contributions.

• If an error occurs concerning the amount of the collected rate, the employer may borne the payment of a 5% penalty calculated on the basis of the concerned amounts,

• If the employer is late in the collection of the withholding rate, he may have to pay a 10% penalty calculated on the concerned withholding amounts.

How does it work for the employees?

The Tax Administration calculates the rate applicable to each employee. The amount of this rate was sent to each employee on his tax notice during the summer 2018.

However, the employee can choose a “non-personalized” withholding rate. This could occur in the following situations:

• If the employee does not want to communicate his withholding rate to his employer. In this case, he will pay an additional tax directly to the Tax Authorities,
• If the employee starts his professional life in 2019, he does not have a personalized withholding rate as he never paid any tax,
• If he is back in France after a long period of expatriation,
• If the administration did not recognize the employee.

This new system does not change the fact that the employees will continue to fill an annual tax declaration to declare all their revenues and in order to take into account any reductions or grant of a tax credit.

2019: special year for the employees who will benefit from a tax credit (so-called “CIMR”)

The implementation of this new system requires transition measures for the 2019 year.

Indeed, in order to align the tax collection with the actual situation of employees and to avoid them paying taxes for both 2018 and 2019, they will benefit from a special tax credit in 2019. This is the so-called “credit d’impôt de modernisation du recouvrement” (CIMR).

Practically, with this credit tax, employees will not pay any tax on their current incomes for 2018 if they did not receive an “exceptional” income during this year.

The fiscal Administration gave some indications on this so-called exceptional income which includes:

• retirement indemnities,
• the taxable portion of the severance pay or amicable termination indemnity (“rupture conventionnelle”),
• profit-sharing and incentive bonuses.

This new procedure will apply to all employers as from January 1st, 2019, whatever the type of company (French of foreign affiliate, branch…). It is thus key to prepare in advance to be ready on time!