France has been suffering for many years from a bad reputation when it comes to the level of taxation of French residents, unlike Belgium or Luxemburg. Looking a bit further, one may realize that the French personal income tax system results in a lower taxation on professional income than the ones of most of European countries, including countries of the Benelux, due more particularly to our family ratio mechanism and to the special regimes implemented to attract taxpayers to France. Extensive business relationships between France and the countries of the Benelux allow many employees or managing directors transferring their tax residence to France to benefit from the inbound expatriate regime, which is, with regards to its conditions and the benefits it offers, one of the most favourable regimes in the Benelux area.
Employees and corporate officers benefiting from the tax regime
The exemptions provided by the tax regime can apply to ‘inpatriates’ – employees or corporate officers who:
• Have a fixed-term or permanent employment contract in a company based in France either through a company based abroad, or recruited directly by the company based in France
• Have not been tax domiciled in France within the meaning of French law, or been resident in France within the meaning of the international tax agreements during the five calendar years prior to the year of start of their activity in France
• Transfer their tax domicile and tax residence to France from the time of their appointment in France.
It is important to note that individuals fulfilling these conditions are eligible for this tax system regardless of their nationality.
Tax exemptions on income provided for by the regime
Employees and corporate officers who meet the conditions above qualify for the following exemptions:
• Exemption for supplementary compensation items directly linked to inpatriation (so-called ‘inpatriation bonus’), provided for in their employment contract or corporate appointment (or in an addendum to such contracts) and determined prior to the start of their activity in France. However, employees/corporate officers may also opt for a lump sum valuation of the exempt ‘inpatriation bonus’ of up to 30% of their annual compensation
• Exemption of the portion of their salary, exclusive of the inpatriation bonus, corresponding to days worked abroad during the tax year
• A 50% exemption for ‘passive’ earnings paid by an entity based in a State that has a tax agreement with France containing an administrative assistance clause with a view to measures against fraud or tax evasion. This partial exemption is aimed at certain intellectual or industrial property products, earnings from capital assets, particularly dividends and interest, and capital gains from sales of securities and ownership interests abroad.
These exemptions only relate to personal income tax and have no effect on social security contributions or social charges on investment income from assets or investment products to which they are subject.
Caps on the exemptions
Exemptions are capped in two ways:
• Firstly, the ‘inpatriation bonus’ exemption is limited by reference to employees who have equivalent pay but do not benefit from this status: the inpatriate’s pay, after deducting the inpatriation bonus (actual amount or flat valuation of 30%), should thus be at least equal to that received in respect of equivalent positions in the same company, or failing that in similar companies based in France, by employees who are not inpatriates
• After applying this first cap, beneficiaries must opt for one of the following two limiting mechanisms:
– an overall ceiling of 50% of their taxable compensation (including inpatriation bonuses) or
– a ceiling calculated according to the portion of their pay that relates to days worked outside France: this ceiling is equal to 20% of their taxable pay minus the amount of the inpatriation bonus.
Maximum period of application of the tax regime
This tax system can be applied up to 31 December of the eighth year following the year of the start of the employee’s activity in France (except for employees who started to work in France before 6 July 2016).
This tax regime will cease to apply if any of its conditions are not met. However, the French tax code expressly provides that a change of post within the same company or within the same group of companies during the eight-year period does not call into question the application of the regime.
Options for regularisation within the regime
Finally, it is important to remember that individuals who qualify for this tax regime but who have not opted for it (or who have only partially benefited, for example, by omitting to request exemption for passive income) may, within a limitation period, require their previous declarations of income to be corrected to obtain reimbursement of tax on income that was incorrectly paid. The tax authority generally looks kindly upon such requests, as long as the taxpayer can prove they have met all the necessary conditions.
Partner, GALAHAD cabinet d’avocats