New French withholding tax: impact on the Luxembourg companies employing French tax residents

New French withholding tax

France will be moving to a current year tax at source system starting January 2019.

This major change regarding the timing of the tax payments is paired with the transfer of the responsibility of calculating, collecting and paying the income tax due on the compensation and benefits from the individuals and the French tax authorities to their employers, French or foreign, provided that the employees receive compensation and benefits taxable in France.

The employer has to comply with the new withholding tax obligations on compensation and benefits when the employee is a French tax resident and perform his/her professional activity partly or fully in France and he/she has an employer located in France or outside of France.

In the case where the non-French employer has employees who are French tax residents, its French withholding obligations (responsibility of calculating, collecting and paying the French income tax due) are applicable to the portion of compensation and benefits related to workdays in France.

For the portion of compensation and benefits related to workdays outside France, the French withholding tax is directly paid by the French tax resident employees via monthly or quarterly withholdings made directly by the French tax authorities on the bank account of the employees, i.e. no French tax obligations borne by the non-French employers.

The portion of compensation for which a tax credit (equal to the French tax) or a tax exemption is granted in France in application of a tax treaty signed by France is not subject to the new French withholding tax.

Impact of the new French withholding tax on the Luxembourg companies employing French tax residents

The new French withholding tax obligations to be borne by the Luxembourg employers while being existent under the current double tax treaty between France and Luxembourg may be increased under the future double tax treaty between the 2 countries whose application is expected for 2020 onwards for income tax on individuals.

Under the current double tax treaty between France & Luxembourg (treaty signed on April 1st, 1958)

Under the current tax treaty between France and Luxembourg, a French tax resident employee who is working in France for a temporary assignment for less than 183 days remains taxable in Luxembourg and not in France for the compensation related to the professional activity performed in France, provided that the cost of this compensation is borne and paid by the Luxembourg employer.

Based on this rule, it is our understanding that some Luxembourg employers consider that French tax residents who are home-working from France for a period lower than 183 days can be viewed as qualifying for the temporary assignment clause.

In such case, the compensation related to the French workdays is not subject to the new French withholding tax, i.e. no French tax obligations on the Luxembourg employers.

However, employees who have workdays in other countries than France and Luxembourg are taxable in France on that portion of remuneration, and the employee will be subject to a direct debit from their bank account as an advance payment towards this tax. This amount is shown on their last income tax bill as “acompte contemporain”.

Under the future double tax treaty between France & Luxembourg

Under the future double tax treaty between France and Luxembourg, in case of professional activity performed partly in France by French tax resident employees of Luxembourg companies, it is anticipated that the taxation will be due in France in more cases since the maximum number of French workdays switches from 182 days to 29 days.

In application of the protocol of the future tax treaty, if a French tax resident employee of a Luxembourg employer works in France for more than 29 days should be considered as taxable in France for the portion of compensation related to the French workdays.

In such case, the tax due in France on this portion of compensation is subject to the new French withholding tax and the Luxembourg employer is required to meet with the collection, declaration and payment obligations borne by the employer (registration of the Luxembourg employers with the French tax authorities, “PASRAU” monthly returns to be filed by the employer, calculation, collection and payment of the monthly French withholding tax).

The rules regarding the new French withholding tax remains unchanged under both tax treaties for:

  • the compensation related to the Luxembourg workdays is still not subject to the new French withholding tax (due to the tax exemption, current tax treaty, and the tax credit equal to the French tax, future tax treaty) 
  • the compensation related to the workdays in third-countries (outside France and Luxembourg) is taxable in France since France is the tax residency country of the employee

The French withholding tax as of January 2019 will be directly withheld by the French tax authorities on the bank account of the employee , i.e. no French withholding tax obligation on the Luxembourg employer.

It should also be noted that under the future tax treaty, if the total number of workdays in third-countries and in France does not exceed 29 days, the compensation related to these workdays will not be subject to taxation in France (the tax will be only due in Luxembourg).

Photo de Nadia Hamya
Nadia Hamya

Nadia Hamya, Associée, a acquis une solide expérience en matière de fiscalité individuelle et de mobilité internationale. Elle intervient régulièrement sur la mise en place et la gestion des politiques […]

Thomas Wane
Thomas Wane

Thomas Wane, Manager au sein de la ligne de services GES disposant d’une expérience de 8 ans, intervient auprès des groupes internationaux (notamment des sociétés du top CAC40) en matière […]