France: Changes to the Tax Collection System and Other Current Tax Developments

Michael Jaffe, Christophe Flaicher, and Bertrand Hermant
Published Date:
May 1, 2017

A long-awaited change to the French tax system is scheduled to go into effect throughout the next two years: the implementation of a current year “pay-as-you-earn” (PAYE) system. France has aspired to change the system since World War II, and it would be the last member of the Organisation for Economic Cooperation and Development (OECD) to implement the change. Legislation for the reform has been passed, and the information campaign is in full swing—with administration websites educating both individuals and employers of what to expect.

Many of the French presidential candidates, however, have expressed doubts as to its implementation in 2017. The current political environment is highly charged. French elections take place this month, the United Kingdom has just invoked Article 50, and the German elections are scheduled for September 2017. The changes to France’s tax system are portrayed as a technological modernization of the tax collection process, but it is clear that no action will be taken until May 2017 at the earliest—after the outcome of the French elections is known.

It is still too early to be absolutely certain that the change will occur this year. Any newly elected president can get cold feet when confronted with this major change to the tax collection process. If the transition process does not run smoothly, political disaster could follow. If, however, the transition is successful, it will demonstrate that France is a modern country capable of transformation through the enhanced use of technology.  

The Political Environment and Brexit

The transition to current year withholding is designed as a step toward gaining technological efficiency in the management of the tax administration, as well as streamlining an already complicated process. The French administration has been on a public information campaign to emphasize that the underlying tax system is not fundamentally changed—the only change is the manner in which tax is collected. Thus, the administration has attempted to separate the implementation of a modernized process from larger tax issues that attract the attention of not only the French, but the global press—for example, the OECD work stream on Base Erosion and Profit Shifting (BEPS), state aid, and the morality of taxes. 

Following the Brexit referendum, each European country is doing its best to focus on the ability of its taxation system to entice and retain businesses and individuals. Indeed, we will comment on the legislative changes to the favorable “inpatriate” tax system designed to attract seconded employees to France. 

France has a bilateral tax treaty with the United Kingdom, which is independent of its membership in the European Union. The treaty will remain in force and effect regardless of Brexit; however, depending on Brexit discussions, one could imagine renegotiation of the tax treaties, as well as other treaties with the United Kingdom. Unlike a bilateral tax treaty, E.U. regimes impacting the United Kingdom, such as the VAT regime, will have to be renegotiated. 

Following the Foreign Account Tax Compliance Act (FATCA), E.U. directives, governmental negotiations, and public opinion, there has been a tremendous shift with respect to the exchange of information between countries. France has experienced highly visible cases of tax evasion, including that of its Finance Minister, Jérôme Cahuzac, who was sentenced to prison with respect to undisclosed offshore accounts. France’s voluntary disclosure program produced a higher number of participants than expected: The traditional lenient attitude toward not paying taxes is, if not fully changed, at least beginning to.

But implementation of a PAYE system is not outwardly designed to be tax reform. It is more about tax efficiency and the use of technology by the government, employers, and individuals in the management of tax obligations.  

The Existing Tax Payment System

Understanding the complexity of the change requires a basic understanding of the current system. In a nutshell, French residents pay taxes one year in arrears—tax is both calculated and paid the year following that in which it was earned.   

Under the French system, the taxpayer does not calculate his own taxes. He or she “declares” income on a “déclaration de revenus.” Then, the administration processes the tax return, issues a tax bill (“avis d’impôt”) informing the taxpayer of the amount of taxes due, and then turns the collection efforts over to another part of the administration. Individuals then pay the prior year’s liability in three installments: Feb. 15, May 15 (based on the tax bill of the preceding year), and—after the final bill is issued for payment—around Sept.15). Alternatively, the taxpayer can elect to pay on a quasi-monthly basis, based on the prior year’s liability, with an adjustment toward year end upon issuance of a final bill. At least with respect to the final payment, the taxpayer is accustomed to the fact that he or she cannot pay his or her final taxes without a tax bill being issued by the administration. The employer is completely absent from the tax collection process.

To illustrate: In 2017, a French resident would pay 2016 taxes. The 2016 income is reported via a tax declaration filed in the spring of 2017. The administration will then calculate the 2016 tax and issue a final bill, payment for which is due in the fall of 2017.

While the current system creates a steady flow of revenue for the administration once the taxpayer is in the system, it does create a “tax holiday” in the year the individual becomes a resident—and then again in the following year, until the tax bill is issued. Under the reform, in 2018, the taxpayer will pay 2018 taxes in 2018 through various withholdings—an approach similar to that in the United States, as well as most developed countries.

So Why Has it Taken so Long to Move to Current Year Withholding?

Conceptually, the idea of withholding the current year’s taxes from current year income is simple; however, part of the problem lies in the transition from the existing system (payment of taxes one year in arrears) to payment of taxes during the year in which the income is earned. 

There are two fundamental preoccupations in addition to general concerns inherent in any major change to a long-standing process. The first revolves around new employer obligations, while the second is linked to potential tax abuse during the transition year.

New Employer Obligations

It is somewhat ironic that employers have complained about the implementation of the new PAYE on the grounds that they will become liable for failure to properly withhold taxes because employers have historically been integrally involved in the collection of “social” and “para-fiscal” withholdings—including sickness, hospitalization, old-age pension, complementary pension, disability, unemployment, continuing education, transportation taxes, general social contributions (CSG), and contributions for the reimbursement of the social debt (CRDS), among many others  There are typically between 25 and 30 lines of withholding, often at three separate tranches, on the average monthly wage statement. Employers are required to furnish copies to both the employee and the various administrations as the basis for remittance of the various charges. This information is then captured on an annual wage reporting statement submitted to the administration along with a copy (or the information therefrom) that is remitted to the employee. There is no doubt that this process is complex and inefficient—it has been the subject of continual, albeit slow, improvement over the years, including the gradual requirement of digital data submissions. Many employers are thinking: We already manage layer upon layer of bureaucracy with various social withholdings—how can we add yet another for income tax withholding?

While one can understand their frustration, one can also understand the government’s push for greater efficiency and better use of technology in the tax collection process through PAYE.  As the first withholdings are scheduled to begin in January 2018, many employers are already busy modifying their payroll software or working with third-party payroll service providers to ensure a smooth transition. 

Stated simply, the employer will only have to indicate on the wage statement a tax rate, which will be communicated to the employer by the tax administration and not by the employee, then apply that rate to a taxable income amount, show what it will withhold, and remit to the authorities. As with other employee data, this must be done securely and confidentially.

2017: The “Lost Year” (“L’année blanche”)

The second major obstacle to implementation is the concern over tax abuse balanced against the principle of fairness vis-à-vis the taxpayer. It would be unreasonable to impact taxpayers’ cash flows by asking them to pay two years’ worth of taxes in the same calendar year. So why not just “forget” a tax year—say 2017—so that the individual pays 2016 taxes in 2017 and 2018 taxes in 2018?

From the government’s revenue viewpoint, as long as it continues to raise a given amount in tax revenue—regardless of whether one calls that 2016, 2017, or 2018 tax—omitting a tax year will not impact the tax revenue stream if reported income and rates were constant. Income, however, does vary year to year for both the “right” and “wrong” reasons. 

The “right” reasons include higher income resulting from normal pay increases, higher bonuses, and higher profits—in general, a better economic performance. The “wrong” reasons include manipulating the payment of income—for example, through discretionary bonuses distributed during a certain year simply because doing so will avoid taxation. The government struggled to find a way to avoid actions such as this while also avoiding the imposition of an unfair cash flow burden on the taxpayer.

For example, let’s assume that the taxpayer pays 100 in taxes per year. From a cash flow viewpoint, he pays 100 in 2017 for 2016 taxes and 100 in 2018 for 2018 taxes. It would be an undue burden on the taxpayer to have to also pay 100 for 2017 taxes during period. And the shift should be revenue neutral from the government’s perspective: It will still collect 200 in two calendar years; however, after the change, the two years of taxes it collects will relate to the current year instead of the prior year. Thus, once the transition takes place, the government will collect the taxes related to each current year in 2018 and every year thereafter.

The CIMR: the Tax Credit for the Modernization of Collection

To avoid both relinquishing the collection of 2017 taxes and an undue cash flow burden, the government created the Crédit d’Impôt Modernisation du Recouvrement (CIMR), the tax credit for the modernization of the collection of taxes. The government will require taxpayers to report their 2017 income in 2018, and, as always, it will calculate the tax related to 2017 income and grant a CIMR tax credit for non-exceptional income.  

Using the prior example, if tax on the 2017 income of 100 were 30 (assuming the 100 was composed of non-exceptional income), it will grant a CIMR tax credit of 30, effectively nullifying 2017 taxes. If, however, one were to have “exceptional” items of income in 2017, the tax on those items will be payable in 2018 in addition to the tax on 2018 income. The credit is determined through the application of an effective rate method: tax on total household income multiplied by the fraction of non-exceptional income divided by total net income, before the application of tax credits. Thus, if income were 120 (including 20 of exceptional income), the tax credit would be based on the tax on 120—say, 35. The CIMR would be limited to 100/120 x 35 = 29 (rounded), and it would be due in 2018.

While the administration has not yet defined all non-exceptional income, it has expressly excluded from its definition certain income related to the termination of a work contract (with certain exceptions), indemnities paid upon the termination of certain officers and members of the board, certain sign-on payments for company officers, indemnities linked to the transfer of professional athletes, certain lump-sum pension payments, and amounts paid from mandatory or voluntary profit-sharing plans not invested in company savings plans. Also excluded are “supererogatory” payments—that is, amounts paid that are not linked to the work contract or the remuneration for a company officer that go beyond the foreseen amount.  And if all of this is not clear, employers can request the government to opine as to the correct tax treatment. Failure by the government to respond within three months constitutes acceptance of the employer’s actions, although the government has noted that it will be particularly attentive to potential abuse of the new tax system.

Rules apply for carryovers of the CIMR and tax credits and reductions. There is genuine concern over whether these transition rules will have a chilling effect on tax-advantaged payments, including investments in real estate as well as charitable contributions. While the calculation of two years of capped credits and deductions goes beyond the scope of this article, there is a risk that the public will simply reduce or abandon certain tax-advantaged payments during the transition year. 

Privacy Concerns

While France has struggled to modernize by including the use of technology in the tax collection process, it has also had an overarching concern about data privacy since World War II.

The first sensitivity is on the employee side in an employer/employee relationship. The employer has historically not been involved in the employees’ tax affairs, and employees do not want this to change. As the employer must apply a withholding tax rate, there will necessarily be some involvement in its employees’ tax affairs in the new regime. To combat this, the administration communicates the tax rate to the employer. The individual may adjust the amount of the withholding rate, but this is done through the tax administration.  Nonetheless, the employer will have knowledge of the employee’s tax rate. If it is disproportionate to the salary level, the employer might make inferences regarding the employee’s private tax affairs.

A second concern is whether the employer has the necessary safeguards to secure employee tax information, thereby avoiding penalties. While this is a legitimate concern, the implementation of PAYE would not require additional safeguards, which already exist for other confidential employee data.

Nonetheless, employers are perhaps particularly jittery in view of the E.U. Data Protection Regulation that recently entered into force in May 2016. And both employers and employees are concerned about hacking, which may compromise confidential tax information. Third-party providers often deal with these payroll processes, so it may be the appropriate time to review the providers’ safeguards and their contractual obligations to ensure confidentiality. 

Potential Transition Pitfalls—U.S. Taxpayers on the Accrued Foreign Tax Credit Method

The delay in the payment of French taxes inevitably creates issues for U.S. taxpayers residing in France. 

Take a U.S. expatriate and French resident who arrived on a three-year assignment on Feb. 1, 2017. While working in France for 11 months in 2017, he would not pay any 2017 income tax until the fall of 2018, once the bill for his 2017 taxes has been issued and assessed for payment—a delay of over 1.5 years! This deferral creates a positive cash flow for the taxpayer, but it is simply a timing issue. For U.S. tax purposes, the U.S. expatriate in France is typically placed on the accrual method of accounting for foreign taxes in order to claim the foreign tax credit for 2017 French taxes not yet paid on his 2017 U.S. tax return.

If 2017 is a lost year in which no French tax will accrue as a result of the CIMR tax credit, there may not be enough foreign tax credits to offset U.S. taxes. One should carefully review the foreign tax credit situation—including any carryovers—and ensure that the appropriate amount of U.S. tax is paid during the course of the year to avoid penalties.

Installment Payments for Other Income Other than Earned Income

While the foregoing discussion has focused on the implementation of current year withholding for employees, it is important to note that another intent is to align other types of income with current year taxation. Certain passive income and non-resident earned income is already subject to payments due contemporaneously with the receipt of income.   

In an effort to continue this approach, the reform also includes self-employment income and rental income. Instead of paying installment payments on the prior year’s income, the installments will be made against the current year’s income. The payment schedule is also adjusted.

Other Tax Measures Concerning Individuals

“Inpatriate” Tax Regime

For over thirty years, France has encouraged international companies to send their expatriate employees to France by granting certain tax concessions. Under this “inpatriate” regime, certain allowances—including housing assistance, education assistance, tax reimbursements by the employer, and allowances accorded for work outside of France—are exempt from tax.  The government recently extended the duration to which this favorable regime applies from five to eight years. The administration is seeking to attract international companies to France—particularly after Brexit.

As noted above, Brexit in and of itself will not terminate the France-U.S. tax treaty; however, the European social security regulation that allows seconded individuals to remain on their home country’s social security systems while on assignment will be impacted for U.K. assignees to France and French assignees to the United Kingdom. Today, it is not yet known exactly how the United Kingdom will work with France and other E.U. member states with respect to its expatriates. 

Free Share Awards—Yet Another Modification

A full description of the French qualified free share system is beyond the scope of this article. Very briefly, the proposal to end the favorable “Macron Act” free share system was defeated and replaced by a compromise. For gains of up to €300,000 (approximately $320,749), the 50% to 65% rebate on gains, depending on the hold period, will continue. This leads to the highest rate of taxation—at 35.7%, with the potential of the 3%-4% surtax on high income. The employer contribution was also increased from 20% to 30% upon acquisition of the shares.


It is very clear that the administration and members of parliament have deeply reflected on the various transition hurdles. The administration is making an express effort to reassure the public that these hurdles will be appropriately managed. Nonetheless, it would not be surprising if this major reform is once again postponed. It is not at all evident that the newly elected president will wish to embark on this reform almost immediately after taking office. At the same time, France continues to attract foreign companies, as evidenced by the extension of its inpatriate regime from five to eight years—and by at least preserving some of the favorable tax and social security treatment of free shares on gains up to €300,000.


jaffeMichael Jaffe is a partner in the tax law department of Taylor Wessing Paris. He has over 30 years experience advising companies in their international tax and compensation and benefits issues.  Michael is also an expert in the legal issues related to remuneration packages and international mobility. He is in charge of dealing internationally with the “Private Clients” industry of the firm. A member of the international US group, Michael is principally based in New York where he supports French and other Taylor Wessing clients in the US market. Michael started his career in Los Angeles in 1981 before moving to PwC in New York in 1984 and then joining the French law firm structure in Paris in 1986, where he remained until June 2016. Since 2013, he was the Managing Partner France and Francophone Africa of PWC Société d’Avocats (ex-Landwell). Michael joined Taylor Wessing in October 2016. He is also a member of the Paris, New York and California bars. He can be reached at

FlaicherChristophe Flaicher, PhD, specializes in all aspects of taxation. His extensive experience includes international tax planning and restructuring (including  transfer pricing and streamlining studies), merger and acquisition, and assistance to tax audit and local taxes optimization. He is also involved in all incentive employee schemes. Christophe acts primarily for major Technology Press and Market information French based and international groups as well as for Japanese clients. In 1995, he joined  the Media Entertainment and Technology department of one of the "Big 4" firms before creating Taylor Wessing in France as founder since 2003. He can be reached at

HermantBertrand Hermant, PhD, LLM, concentrates on national and international tax advice, deal negotiations, structuring, tax optimization and tax litigation. His experience includes tax, corporate and financial aspects of French and international structures and deals. His practice also includes working with French and foreign companies to implement employee incentives plans in France (stock options, restricted stock units). He acts for both, national and international clients ranging from individuals and/or medium to large companies. Bertrand also advises entrepreneurs, business owners, fund managers and high net worth families on developing and implementing innovative income, capital gains and inheritance tax planning schemes. Bertrand worked for various firms in New York and Paris before joining Taylor Wessing in December 2008.  Bertrand is a member of the Paris and New York bar and can be reached at

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