After an initial delay, the new French withholding tax system will be coming into effect for all French salaries starting on January 1st 2019.
Under the new tax regulation, French tax resident employees will now be subjected to a monthly withholding tax on their income.
This represents a significant difference in how the French tax system operated in the past. Prior to this change, French tax resident employees paid their income tax liability when filing their annual tax return in the year following the tax year. i.e. Pay their 2019 income tax liabilities when filing their 2019 tax return in 2020.
What are the changes?
Until now social taxes only have been deducted at source from employees’ gross salary.
The employee would make their annual tax declaration themselves and make the corresponding payment of the taxes to the relevant tax authorities.
As of January 1st 2019, the new regulation on withholding tax on salaries will be implemented meaning the deductions will have to be calculated and integrated into the monthly payroll process by employers. With the new regulation, the French government removes the delay of one year between the receipt of salaries and the payment of the income tax.
Since 2017, all private companies subject to social charges payments in France must carry out their social security declarations via the DSN (Déclaration Sociale Nominative) channel. Through this channel the social security contributions are declared monthly or quarterly* using a secured and electronic file exchange, containing detailed information on the revenues of the employees and their social contributions.
As part of the new regime from the 1st January, this will now also be the case for tax deductions.
*For companies with a headcount of less than 11 employees (optional)
What does this mean?
With these changes, each employer will now be responsible for withholding taxes for each of their employees.
The employer will now deduct tax each month based upon the tax rate notified by the Tax Authority to the employee and employer. The tax rates are individual and vary from person to person. For example, the marital status and salary of each employee will determine the tax rate applied during the monthly payroll calculations.
Each month, the employer or their payroll services provider will receive the information from the Tax Authority on the individual tax rates to be applied for their current payroll. The employer must carry out the corresponding deductions, declare these via the DSN declaration and pay the collected tax amounts to the Tax Authority.
How will this affect my employees / payroll?
The tax rate will not be determined by the employer, but by the Tax Authorities. Each employee will be able to apply to the tax authorities to choose the rate they want applied. They may choose:
- A personalised rate defined upon their tax household;
- An individual personalised rate; or
- A neutral rate.
The employee will also have to declare any changes in their marital status on the Tax Authority portal. You can login to the tax authority portal to declare changes.
What should I do to prepare?
Each employer must be prepared to make the tax payments to the Tax Authorities on time.
- For companies with less than 11 employees, optional payment dates – possibility of quarterly payments
- For companies with less than 50 employees with a deadline date of returning the DSN declaration by the 15th of the following month: payment is due by the 18th of the following month;
- For companies with over 50 employees with a deadline date of returning the DSN on 5th of the following month: payment is due by the 8th of the following month.
The payment of the tax deductions will be done through a direct debit order by the French Tax Authorities. This differs from how social security contributions are paid. Social security payments are paid at the initiative of the employer and as a result, employers pay a monthly / quarterly payment to the social security authorities.
Now, instead of waiting for the payments to be done by employers – the tax authorities will collect the money directly.
- If the company pays VAT in France and the company’s SEPA bank account is already registered on Tax Authorities portal (impots.gouv.fr), this SEPA mandate is currently valid.
- If the company does not pay VAT in France or if it does not have a bank account in France, it must register on impots.gouv.fr a bank account with SEPA European standards and fill in a direct debit mandate.
Companies which do not comply with the legal provisions may be subject to various penalties depending on the violation that has occurred.
- Are not less than 250 EUR per declaration
- Can vary between 5% – 80% of the total tax deduction amount.
Who can I ask for more help?
This blog was written by Immedis and our French partner, Securex. It covers a brief explanation of the new tax regulation in France. It does not include specific circumstances which might occur such as short term fixed contract handling or foreign income taxation.