France: Impatriate regime – Paris Administrative Court of Appeal’s decision of 16 March 2021

France has an attractive regime to incentivize foreign talents to take up residence in France: the impatriate regime.

The regime offers a whole series of tax and social security advantages, provided notably that the person concerned has not been a French tax resident at any time during the five years preceding the year of the move to France.

Eligible persons can thus be exempted (temporarily, subject to conditions and limits) from:

• Real estate wealth tax (IFI) on their real estate assets located abroad,
• French compulsory social pension contributions (basic and supplementary),
• Personal income tax on 50% of their foreign-source investment income (interest, dividends, capital gains on securities) and, especially, on the elements of their compensation directly linked to the impatriation to France (i.e., the so-called “impatriate premium” which may, on election, be notionally valued at 30% of taxable net compensation) as well as on the fraction of their compensation related to professional duties performed outside of France.
   

It was on this last facet of the impatriate regime (and more precisely on the exemption of the impatriate premium) that, on 16 March 2021, the Paris Administrative Court of Appeal issued a decision in a case involving an international football player playing for the Paris Saint-Germain club (PSG).

To understand the significance of the decision, let us first look at the wording of the law (Article 155 B of the French Tax Code) applicable to the facts of the case:

“I. – 1. Employees (…) recruited from abroad to take up a position in an undertaking established in France for a limited period are not subject to tax on the elements of their compensation directly linked to this situation or, on election, and for employees and persons other than those recruited by an undertaking established in another State, on 30% of their compensation. (…) If the portion of compensation subject to personal income tax under this subparagraph 1 is less than the compensation paid for analogous functions in the undertaking or, in the absence thereof, in similar undertakings established in France, the difference shall be reinstated into the taxable bases of the person concerned.” (Unofficial translation from the French)

In first instance, the tax court (Paris Administrative Court, judgment of 6 November 2018) had awarded the player (Mr. X) full relief from the additional tax assessments resulting from the French tax authorities’ position that he was ineligible for an exemption of his impatriation allowances under   Article 155 B of the FTC: the Minister of Public Action and Accounts then appealed against this judgment before the Paris Administrative Court of Appeal, which upheld the merits of the lower court’s position…

To contest the Paris Administrative Court’s decision, the authorities challenged the relevance of an employer affidavit produced by Mr. X, which set out the average taxable compensation of seven PSG players who played as midfielders or defenders, bearing in mind that Mr. X held the position of midfielder. The affidavit showed an average taxable compensation that was lower than Mr. X’s reported taxable compensation for the fiscal years at issue (2009 to 2011) after deduction of his impatriation allowances.

The authorities argued, firstly, that the players chosen as reference points in the affidavit could not be regarded as performing analogous functions because they did not have a level of fame and experience comparable to that of Mr. X: it should be noted here that the Paris Administrative Court of Appeal flatly dismissed this argument by considering that “those criteria, which go beyond simply defining the analogous functions in the undertaking within the meaning of Article 155 B of the French Tax Code, but add on to the legislative text by demanding that characteristics specific to the individuals performing those functions be taken into account, thus cannot be used to exclude the seven players’ compensations from the applicable comparison.”

Secondly, the authorities also argued that three of the players included in PSG’s affidavit could not be taken into account because they were defenders and not midfielders: in light of the inherent differences between the types of functions performed by field players, and of their influence on compensation, the players holding defender or forward positions could not, according to the public minister, be regarded as performing functions analogous to midfield players within the meaning of Article 155 B of the FTC. Here again, the Court of Appeal rejected the authorities’ argument, pointing out that the midfielders included in PSG’s affidavit must be regarded in the present case as positions analogous to that of Mr. X: insofar as Mr. X’s reported taxable compensation was higher than the taxable compensation of the players taken into account due to their analogous functions within PSG, the appellate court held that Mr. X was therefore eligible for the exemption from personal income tax on his impatriation allowances (the other conditions of eligibility having also been satisfied).

In our view, this decision goes in the right direction notably by rejecting the authorities’ attempt to introduce a “fame” factor, which would have gone beyond the legislative text and could have added a layer of subjectivity to the application of an already very technical and complex regime. We are also of the opinion that the authorities’ argument did not fit well with the official administrative comments which, incidentally, had been raised as an alternative defense argument by Mr. X (guidance of 30 July 2009, ref. 5 F-13-09, no. 46). Indeed, pursuant to that guidance, the authorities allow the possibility of using, as a reference compensation, “the lowest of compensations received by an employee with a level of experience comparable to that of the impatriate and performing analogous functions in the undertaking or a similar undertaking established in France, during the considered year or the three previous years.” While these comments are consistent with the authorities’ position in our case (in that they too refer to the concept of comparable “experience”), the attempt to introduce an additional “fame” concept is, in our view, incompatible with the tax guidance which allows the lowest of compensations to be used as a reference point (and therefore quite irrespective of fame, so long as the experience is comparable…).