France & Switzerland: Agreement on the taxation of home office income

On 22 December 2022, France and Switzerland reached an agreement on the taxation of home office income. Thus, the declaration of 29 June 2022 on the introduction of a provisional agreement on telework applicable to cross-border workers was revised and has resulted in amendments on sustainable tax arrangements for home office in existing agreements, which entered into force on 1 January 2023.

The main changes concern two agreements:

1.) The agreement concluded in 1983 between the Swiss Federal Council, acting on behalf of the cantons of Bern, Solothurn, Basel-City, Basel-Country, Vaud, Valais, Neuchâtel and Jura, and the government of the French Republic is extended to include the following:

Telework limited to 40% of the annual working time has no effect on:

• the cross-border worker status
• the associated income taxation regulations from employment in the employee's country of residence

2.) The agreement signed in 1966 between Switzerland and France for the avoidance of double taxation for taxes on income and assets contains the addendum that (in practise the employees who are not covered by the cross-border status):

• Taxation takes place in the employer's state of establishment if the telework performed in the state of residence does not account for more than 40% of the working time.
• A compensation in the favour of the employee's state of residence is provided for.

The entry into force of the addendum is subject to signature and subsequent ratifica­tion. In the meantime, France and Switzerland have agreed to apply the terms and conditions in connection with telework by mutual agreement. This agreement can be applied until 31 December 2024 at the latest if the amendment is signed by 30 June 2023, and whilst taking into account the progress of the ratification process.

Article 3 of the 2023 Finance Bill provides for an adjustment of withholding tax for foreign employers with employees resident in France for tax purposes. It will particular­ly help cross-border workers to use teleworking. The regulation will apply to income received from 1 January 2023.

General rule from 1 January 2019

• Income tax received by French taxpayers is subject to a pay-as-you-earn system (PAYE or PAS in French)
• Tax due by a taxpayer resident in France can be withheld by the debtor or paid in 'instalments' which the French tax authorities can directly withhold from the taxpay­er's account, depending on the source of the wages and the location of the employer

Main changes

Adjustment to the PAYE system

• Foreign employers will no longer be subject to withholding tax procedures (PAYE)
• Instead, a system of advance tax payments will be applied where the French tax administration can directly deduct a certain amount of income tax from the taxpay­er's bank account on the basis of the employee's last income

Applicable if

• The employer is established in an EU member state or in a state that has concluded an administrative assistance agreement with France to combat fraud and tax eva­sion, as well as an administrative assistance agreement for the collection of tax and;
• The employer is not established in a non-cooperative state or territory as defined by Article 238-0 A of the French tax Code (Code général des impôts)
• The employees carry out their activities occasionally in France and:

-are not subject to the compulsory French social security system (EU social security regulations or bilateral agreement). In practise, this concerns employees residing in France and receiving remuneration from a foreign employer for an activity carried out in France for less than 25% of their total working time, or

-are dependent on a compulsory French social security scheme in accordance with the provisions of article I L. 380-3-1 of the social security code. Therefore, this simplification also applies to cross-border commuters living in France and working in Switzerland who have opted to join the compulsory social security system in France.

Obligation of the foreign employer

• Annual report to the French authorities declaring the amount of net remuneration taxable in France determined according to French tax law and within a timeline that is yet to be specified

Failure to comply with the obligation to report will be punishable with fines ranging from EUR 500 to EUR 50,000 per declaration, corresponding to the following amounts:

• 5% of the amounts that should have been declared in the case of omissions or inaccuracies
• 10% of the amounts that should have been declared if the declaration is not submit­ted within the prescribed time limit

The fine does not apply if there has been no breach of the duty to declare during the three years preceding the year in which the declaration should have been made and the person concerned has spontaneously corrected their errors by the end of the same year.

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