Do you have assignees in France? If so, then double-check that you have done everything you can to benefit from a new taxation law for employees and executives coming into France on assignment as of 1 January 2004.

The amended Finance Act for 2003 introduced a new taxation regime for employees and executives coming into France on assignment as of 1 January 2004 (article 81B of the French tax code). The purpose of this regime is to increase the attractiveness of France for foreign companies by encouraging them to send employees and senior executives on temporary assignment in France.

This new regime is applicable for a maximum period of six years, provided the individual has not been considered a French tax resident for the ten years prior to commencing their French assignment. It provides for an income tax exemption of allowances, expense reimbursements and benefits in kind directly linked to the assignment and paid by a foreign company to an assignee in France.

Prior to this new regime, most of the expense reimbursements, such as school fees, home leave, and moving expenses, were already exempt from French income tax under certain conditions. The new regime goes much further and allows exemption of allowances that are not paid to compensate an incremental cost due to the assignment.

Expatriation premiums, and any cash allowances that are paid to the employee as a financial incentive for the assignment, can now be tax exempt. In addition to the cash incentive allowances, the regime allows tax exemption of the premium paid by the employer in order to compensate for the additional tax and social security costs of the assignment compared to the tax and social security costs the assignee would have borne in his home country; such as the tax equalisation settlement.

These specific provisions make the new French tax regime the most innovative and the most competitive of the European Union. Indeed, although the Belgian special regime for foreign executives allows tax exemption of the tax equalization settlement, the exemption is capped at a maximum of EUR 29750 and this ceiling applies to other allowances paid to the assignee.

In France, there is no ceiling, but a threshold of taxable compensation to respect. This threshold corresponds to the remuneration that would be received by a French person exercising equivalent functions in the same or similar companies. 

The tax exemption of the tax equalisation settlement basically means the end of the need for tax gross ups in France.
It is therefore now possible to consider a French exception in your International Assignment Policy. This French exception would allow companies to think in terms of gross remuneration when assigning an employee or a senior executive in France, rather than looking at net guaranteed remuneration. 

If you keep looking at net guaranteed remuneration, then you still withhold from your assignee’s remuneration the hypothetical charges (income tax and social security contributions) the assignee would have paid should he have remained in his home country.

Working with gross remuneration means that you build up the package of gross remuneration (base salary and any allowances and benefits in kind linked to the assignment) by determining what net in-pocket remuneration your assignee will benefit from applying the new regime.

This net remuneration would in most cases be more than the home net in-pocket, and you would therefore share with the assignee the gain resulting from the application of the new tax regime.

The advantage of this method is that you will no longer need to calculate and withhold hypothetical tax, and you could therefore consider implementing the French exception, which basically means a tax protection for your assignee (rather than tax equalisation according to which the assignee bears the same cost of tax and social security charges as in the home country). Instead, the employee would bear the lesser of the hypothetical charges or the actual charges.

The French tax administration has still not published its comments on this new regime. However, we have been in regular contact with the Tax Legislation Direction and been informed that this new regime should not apply to non-residents of France and most importantly, that the French tax administration will not issue a scale of salaries to determine the threshold. This regime can therefore be considered as relatively flexible.

To ensure you do benefit from this new regime for 2004, we recommend you take the following necessary steps prior to 31 December 2004:

• Determine your population that would fulfil the conditions to benefit from this new regime (meaning assignees who arrived in France after 31 December 2003 and who were not resident of France in the last 10 years);
• Review their assignment letters and ensure that all payments related to the assignment are clearly identified;
• Verify whether the payment can be considered as linked to the assignment in view of the French tax law.  Ask yourself whether a local employee would receive such an allowance or benefit if he were occupying the same position;
• Compare the gross remuneration then identified to the one a local employee would receive in the same position and make the necessary adjustments;
• Modify your French payslips (if any) accordingly.

December 2004

Patrick Tyrrell is the lead partner of the International Assignment Services of Taj in Paris. Taj is an independent French tax and law firm, serving clients in coordination with Deloitte tax professionals outside of France , formerly known as Deloitte & Touche Juridique et Fiscal. He can be reached at + 33 (0)1 40 88 22 14 or by email at ptyrrell@taj.fr

Sabine Binisti is a tax lawyer and a senior manager of the International Assignment Services of Taj in Paris. She can be reached at +33 (0)1 40 88 70 40 or by email at sbinisti@taj.fr