France: Adjustment of the rules applicable to foreign employers with regard to with-holding tax

published on 28 March 2024 | reading time approx. 4 minutes

The rules applicable to withholding tax have been amended since 1 January 2023. Under certain conditions, employers established abroad no longer have to deduct withholding tax from wages paid to employees domiciled in France who carry out part of their activity in France. They are, however, subject to a new annual reporting obligation, the practical details of which have just been clarified.

In what context?

Income derived from an activity carried out in France on behalf of a foreign employer by an employee domiciled in France is, in principle, French-source income that is taxable in France, even if the activity is carried out on an ad hoc basis and from home.

Before 1 January 2023, foreign employers were required to register in France, deduct the withholding tax from taxable wages in France every month and declare the corresponding amounts via the Déclaration Sociale Nominative (DSN) if the employee was affiliated to the French social security system, or via the Déclaration Passage des Revenus Autres (Pasrau) if the employee was affiliated to the social security system of another country.

These taxation requirements hindered the development of teleworking by cross-border and non cross-border workers because of the extensive reporting obligations incumbent on the employer established abroad.

Extension of the scope of the contemporary advance payment to French-source wages paid by a foreign employer under certain conditions.

As a reminder, the withholding tax (in French “Prélévement à la source” and below “PAS”) can take two forms:

by means of a monthly withholding tax (in French “Retenue à la source” and below “RAS”) paid at the time of payment by the person paying the income, i.e. in the case of salaried activity by the employer; or
by means of a contemporary advance payment (in French “acompte contemporain” and below “AC”) paid by the taxpayer directly to the tax authorities.

In order to simplify the teleworking of cross-border and non cross-border employees, the Finance Act for 2023 extended the scope of the PAS in the form of AC to French-source remuneration paid by foreign employers to employees domiciled in France for tax purposes but not affiliated to the French social security system. This means that the foreign employers concerned are no longer subject to the RAS, which is a much more cumbersome withholding tax procedure.

This reform, which applies to income received from 1 January 2023, nevertheless introduces an annual reporting obligation for foreign employers (“annual Pasrau”).

Who is concerned?

This scheme applies to French-source salaries (i.e. salaries paid in respect of an activity carried out in France) taxable in France, when they are paid:

By companies established outside France:

in a Member State of the European Union
or in another State or territory that has signed an administrative assistance agreement with France to combat tax fraud and avoidance, as well as a mutual assistance agreement for tax recovery.

To employees who are French tax residents:

who, pursuant to Article 13 of Regulation (EC) No 883/2004 of 29 April 2004, are not covered by a compulsory French social security scheme (in practice, these are employees domiciled in France who work less than 25 percent of their working time in France)
or who are covered by a compulsory French social security scheme pursuant to I of article L. 380-3-1 of the CSS.

What are the practical details of the new annual reporting obligation for foreign employers?

An obligation to register

If the foreign employer is not registered in France, he must register for withholding tax purposes in France through the “guichet unique”.

If the foreign employer is already registered in France, for example to establish monthly withholding tax declarations, he should contact the tax center to change his registration if he has not already done so, so that he is only required to make an annual withholding tax declaration.

An annual Pasrau obligation

Each year, the employer must declare to the tax authorities, for each employee concerned, information relating to the net taxable amount of income paid, before deduction of professional expenses (French tax code, art. 87-0 A bis). The remuneration to be reported on theannual Pasrau corresponds to the net remuneration for tax purposes equal to the amount of income paid in respect of taxable days in France for each employee concerned. This remuneration must be determined on the basis of French tax rules.

After the first year of this reform, initial feedback from the tax administration shows that the new annual Pasrau must be filed electronically (rather than on paper).

In principle, this annual declaration must be filed by 10 February of year N+1. For employers affected by this reform in 2023, the first annual Pasrau must therefore be filed electronically by 10 February 2024 at the latest.

In the event of failure to comply with the reporting obligation, a corresponding penalty system has been introduced. Employers will be liable to a tax fine of not less than 500 euros and not more than 50,000 euros per declaration:

5 percent of sums that should have been declared for omissions or inaccuracies
10 percent of the sums that should have been declared, for failure to file within the prescribed time limit.

The fine is not applicable if there has been no breach of the reporting obligation in the three years preceding the year in which the report should be filed and if the interested party has corrected the error spontaneously before the end of the same year. Employers who have not yet fulfilled their annual declaration obligation for 2023 will therefore be able to regularise their situation spontaneously without risking the application of the aforementioned fines.