On September 4th, 2018 French Prime Minister Edouard Philippe dispelled any doubts about the implementation of the withholding tax reform. As from January 1st, 2019 a withholding tax will in fact apply to a great majority of income, with very few amendments to the original reform which was voted in December of 2016 (we invite you to consult our previous alerts for the major outlines of this reform).
Further to the publication of a series of tax guidelines, namely in July of 2017 regarding the treatment of property income during the transitional year, the French administrative doctrine has expanded over the course of the Summer to include comments on the transitional measures that will apply with regards to employment income.
The highly awaited comments published on August 1st, 2018 (BOI–IR-PAS-50-10-20-10-20180801) clarify the definition of “exceptional income” as well as the scope of application of the “CIMR” exceptional tax credit on salaries, pensions and life annuities.
As a reminder, in the context of the withholding tax reform, 2018 will be set as a transitional year during which “regular income” will benefit from the CIMR exceptional tax credit, which will have the effect of cancelling taxes on such income. The CIMR will however not apply to “exceptional income” (as well as to income which does not fall within the scope of the withholding tax reform), which will remain subjected to 2018 income tax.
The definition and criteria for determining what constitutes “exceptional” income, as opposed to “regular” income, is therefore crucial for purposes of anticipating the tax liability to be borne on one’s 2018 income.
The tax administration’s comments firstly state that wages, pensions and life annuities that are not deemed to be “exceptional” in the sense of Article 60 C II of the 2017 French Finance Bill, are therefore eligible for the CIMR tax credit in their entirety, even if they represent a higher amount in 2018 than in previous or following years. In fact, increases in income due to the performance of overtime hours, a job change or a change in position are listed as having no impact on the applicability of the CIMR.
The following comments explain the notion of « exceptional income », following the definition laid out in Article 60 C II of the 2017 French Finance Bill, and covering especially: severance payments upon termination of an employment contract, indemnities for beginning or termination of corporate officers’ mandates or functions, indemnities paid in the event of a change in residence or of workplace, sums received in the context of the French “participation” or “intéressement” profit-sharing schemes, etc., but also - and the category which had raised the most questions: supplementary remuneration.
This had already been defined as supplementary remuneration with no specific link to the employment contract or corporate mandate, or as amounts over and above what these legal documents provide for. Questions remained however around the identification of the “supplementary” nature of this kind of remuneration.
As a result, the administrative doctrine has made the following distinctions – in a nutshell:
Assessing whether a payment is « supplementary » or not must be done on a case by case basis, keeping in mind that the administrative doctrine does not yet address, in either its comments or examples, all the possible issues that could be raised. While making such an assessment, one must also take into account that “exceptional income” also includes elements of income which – due to their payment schedule – relate to one or several previous or future years, as well those which, by nature, cannot be received on an annual basis.
It must also be noted that taxpayers are to self-assess - at the time of filing their annual income tax return - the “exceptional” or “regular” nature of their various elements of income. This is a factual matter, and all means can be used to prove the “exceptional” or “non-exceptional” nature of an income. Employers are therefore not required to distinguish between their employees’ “exceptional” or “regular” income. A specific ruling procedure (BOI-IR-PAS-50-20-40-20180704) is however available for employers who wish to provide additional clarifications – and legal certainty – to their employees regarding the elements of remuneration they receive.
It must finally be noted that only spontaneously declared income will be taken into account for the determination of the CIMR, and that the French administration has extended the statute of limitations for 2018 income tax for one extra year.
PwC Société d'Avocats
Tel : +33 1 56 57 56 57