France: New income tax collection system

France has been one of the last OECD member countries adopting a pay-as-you-earn (PAYE) system. With effect from 1 January 2019, France stopped collecting the individual income tax (IIT) with a lag of one year and introduced an income tax levied at the source by the employer or, depending on the form of income, by the taxpayer him- or herself.

The income types affected by the PAYE system are mostly salaries, directors’ fees, income of self-employed individuals, various types of allowances (health, insurance, etc.) and rental income.

French tax resident employment income is taxed under the PAYE system, but only the portion related to workdays in France. The part of salaries relating to workdays outside France is subject to instalments that are directly paid by the employee.

The new system does not apply to employees who are non-resident in France. These employees are liable to income tax in France in accordance with the provisions of the French tax code and the provisions of the applicable DTT.

This new system also applies to foreign employers, even if the employee is not under a French payroll. This is the case if they employ French tax resident employee having workdays in France. 

The French tax authorities (FTA) calculate and communicate to the employer the rate of the levy that has to be withheld based on all incomes reported in the tax return.

The PAYE system does not exempt the taxpayers from filing IIT returns on a yearly basis in May. The tax already withheld on a monthly basis will be deductible from the amount of the total income tax due, which includes other income not subject to withholding such as capital gains.

Employers not located in the EU, Iceland or Norway need to appoint a tax representative to accomplish all the formalities described below.

Employers located in the EU, Iceland or Norway have several formalities to accomplish in order to comply with the new French system.

First of all, they have to ensure that they have a SIRET identification number. If not, they need to fill out an EE0 form and submit it to “le Service des entreprises étrangères”.

The second step is that they need to ensure that they have created a dedicated account on the website www.net-enterprises.fr. Such an account is required in order to submit the list of their French tax resident employees. This list has to be sent to the FTA via the DSN form for the employees subject to French mandatory social security and retirement contributions or via the PASRAU form for the employers who are not subject to those contributions.

Then, based on these filed forms, the FTA transmits to the employer the tax rate for each employee, which has to be applied on the taxable basis of the wage.

After being withheld on net pay, this withholding is paid by the foreign employer via an online transfer made from the company’s dedicated portal on the website of the FTA (impots.gouv.fr). If the employer has no dedicated portal on that website, it must be created.

The deadline for the payment of the withholding tax is the same as the one to file the DSN or PASRAU form: it is the 5th, 10th or the 15th of the month of payment of the salary income subject to the withholding tax.

Finally, each month, a DSN or a PASRAU form has to be filed in order to declare the withholding tax calculated and to pay the income tax for the previous month. This declaration is also used to update the list of employees and to enable the FTA to provide the employers with any update of the tax rate.