French Income Tax Relief for Expatriate Executives
3rd Sept 2022
Partial relief from income tax is available to individuals who relocate to France to take up employment in a company based in France.
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The relief is available under a scheme called the ‘régime des impatriés’.
Although designed primarily with executive positions in mind, it can be used by any employee.
Eligibility
Eligible individuals are those recruited by a France based company, which may be either an intra-group transfer (if the French company is linked to a foreign company in which they were already working) or as an external hire (in cases where a company based in France directly recruits them abroad). Similarly eligible are individuals sent to France to set up a French branch of an existing foreign company.
Those who move to France of their own accord and then find a job in the country are not eligible.
Individuals cannot have been fiscally resident in France for the 5 years preceding commencement of their work contract and they must become France resident.
The duration of the employment contract may be for either a fixed or indeterminate period, but the tax exemption is a maximum of 8 years.
The condition of residence requires that individuals set up their fiscal residence in France before the end of calendar year in which they take on the role and their primary occupation must in based in France. However, the regime applies for the year in which the employee takes up their duties in France, even though the family may not relocate until the following calendar year.
What are the Advantages?
The scheme provides that a supplement payable related to the relocation to France (prime d’impatriation) is exempt from income tax. The amount of this supplement should either be explicitly stated in the work contract, or can be calculated on a pro rata basis as a maximum 30% of the total net income.
Also exempt from income tax is that part of the income earned for work outside of France for the employer, called a prime d’expatriation.
There are conditions surrounding the bonus to ensure that employers do not use it as a way of paying lower salaries. Thus, the net taxable income must remain equal to the salaries of other employees carrying out similar roles in the company (or in similar companies) in the year that the employee takes up the post. If the net taxable income is less than the reference salary the difference will be taken out of the bonus and will become taxable.
In addition, individuals will also be exempt from income tax for up to 50% of earnings from real estate or from passive income, such as the sale of real estate or shares, certain intellectual and industrial property rights from foreign sources, and capital gains on the sale of securities and ownership interests from foreign sources.
There are also exemptions for moving and relocation allowances and expenses and earnings paid into a foreign social security scheme.
In addition, during their first five years in France, individuals will only be subject to wealth tax (Impôt sur la Fortune Immobilière) for real estate within France (meaning that property outside France will be exempt during this 5-year period). In practice, very few individuals are liable for this tax, and it is not a concession that is specific to this scheme.
Social Security Contributions
As generous as the scheme may appear, income tax continues to be payable on the basic remuneration.
In addition, and perhaps of greater importance, employer and employee social security contributions are payable on the total remuneration. The level of the contributions is around 40% of salary for the employer and around 25% for the employee.
Social charges of 17.2% are also payable on passive income before deduction of the 50% exemption threshold.
It is possible to alternatively opt to continue for a maximum of 3 years with the pension regime of your home country, opting out of pension contributions in France, but to be eligible a substantial minimum pension contribution each year is required, and other social insurance contributions (health, accident at work etc) remain payable.
Whilst company directors who hold a minority or equal shareholding in a company are also eligible for the scheme, substantial employer and employee social security contributions would be payable on their salary.
Supplement Ceiling
A ceiling threshold applies to the total proportion of the earnings that can be exempt from income tax. There are two different options for calculating this cap. The most advantageous can be chosen on a year-by-year basis.
The options are as follows:
The total of the supplement cannot equal more than 50% of the total remuneration from both in and outside of France - prime d’impatriation plus prime d’expatriation or:
The exemption applies to your foreign earned income, limited to a maximum of 20% of your total income, excluding the prime d’impatriation.
Process
There is no requirement to make application for prior approval of the scheme to the French authorities.
Instead, employees simply declare the amount exempted in the relevant section of their income tax declarations and employers are required to declare the exemption on their annual employment declaration.
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