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Tax e-Lert - Personal Income Tax Regime For French

Personal income tax regime for French "inbound" expatriates : A Tax Instruction clarifies the application of Article 155 B of the French tax code (Instruction 5 F-13-09 / B.O.I. n°79 dated August 7, 2009). The main clarifications provided by this Instruction are described below:

In Brief

This new favourable regime replaces that provided by Article 81 B of the FTC for individuals taking up a position in France as from January 1, 2008. It provides for the tax exemption of compensation items directly linked to the assignment to France and of the portion of remuneration that is linked to non-French workdays.

In addition, this regime provides for a partial tax exemption of certain "passive income" and capital gains realized outside of France.

It should be noted that this regime also applies to certain self-employed individuals. The Tax Instruction 5 K-2-09 published the same day comments on the provisions applicable to these individuals and will be dealt with in a separate alert.

Scope of the regime

The Instruction provides that Article 155 B applies to employees and company officers who are requested from abroad to work, for a limited or unlimited duration, in a company established in France.

The Instruction goes into details on tax residence issues and excludes, notably, from the regime:

  • individuals who are considered non-French tax residents by virtue of an international tax treaty even though the domestic provisions of paragraph a and b of article 4B- 1 of the FTC relating to residency are met;
  • individuals who are considered French tax residents only by virtue of an international tax treaty.

Application of the regime

While one must be a French tax resident to benefit from the new regime, the Instruction creates a tolerance for the first year in France: assuming the other conditions are fulfilled, an individual may benefit from the tax regime from the start date of his French activity even though the transfer of the rest of his family is delayed.

The Instruction also provides that the tax residency conditions have to be reviewed each year and that if these conditions are not met for a given year,it does not affect the application of the regime for prior and subsequent years.

Application of the exemptions

The Instruction provides that "international direct hires" can elect, if more favourable, for a flat exemption of 30% of their total net taxable compensation (excluding gains derived from employee profit-sharing and share schemes) instead of the exemption of the actual remuneration supplement paid to them in direct connection with their transfer to France.

Exemption of the portion of remuneration relating to foreign workdays

The Instruction does not provide for a rule to determine the exempt portion of remuneration. It only excludes situations where the exempt amount would be out of proportion compared to the remuneration taxable in France. The exempt amount can therefore be determined:

  • by the employment contract or the social mandate,
  • at the time of each trip outside of France, or
  • in relation to the number, duration and destination of the trips.

As a practical solution, in the absence of any specific stipulation regarding this portion of remuneration, remuneration relating to foreign travels can be determined based on the ratio of foreign workdays (excluding transportation time) over the total number of workdays during the year.

Filing obligations

The pre-completed income tax forms sent annually to taxpayers should show the tax exempt amounts resulting from this tax regime based on the year-end wage statement (DADS) completed by the employer.

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