France: Special expatriate tax regime – a breath of fiscal oxygen under control
Nicolas Duboille and Alexia Dal Ponte of Sumerson examine the French special expatriate tax regime enshrined in Article 155B of the French Tax Code, in the light of recent case law.
A favourable regime
Designed to attract foreign executives, the expatriate tax regime applies to employees and managers who were not residents of France for tax purposes during the five calendar years prior to their taking up of their duties in a company based in France. Their recruitment can result from an intra-group transfer, or from an external hire, i.e. directly recruited abroad for a position in a company in France. To be eligible for this regime, the employee must have their household or principal place of residence in France, in addition to a primary occupation in France.
The special expatriate tax regime provides income tax exemptions for eight years on expatriate bonus and the share of compensation relating to the foreign activity carried out in the interests of the employer. Moreover, the bonus may be assessed at a 30% flat-rate of total remuneration in case the contract does not fix it.
However, these tax advantages are capped at the taxpayer’s discretion: it can be an overall cap, which means that these two elements may not exceed 50% of the total remuneration, or a cap solely on the exemption corresponding to the assignment carried out abroad, which may not exceed 20% of the taxable remuneration net of the expatriate bonus.
This exemption for active income is correlatively accompanied by a tax exemption for passive income. Indeed, taxpayers falling within the personal and temporal scope of the special expatriate tax regime can benefit from a 50% tax exemption for passive income from foreign sources, such as income from investments, intellectual property rights or capital gains on securities.
These conditions have recently been reiterated by the French Administrative Supreme Court (Conseil d’État, 21-10-2020, n°442799). The French Tax Authorities subordinated, in their guidelines, the benefit of the tax exemption of passive income to the effective and actual receipt of activity income, thus creating an additional condition not provided for by law, which was annulled by the French Administrative Supreme Court.
In addition to this favourable income tax regime, there is also a favourable wealth tax regime for new French tax residents. Indeed, the Article 964 of the French Tax Code (FTC) provides, that for five years, these French tax residents are liable to property wealth tax (Impôt sur la Fortune Immobilière) only on property and property rights located in France, thus avoiding the global territorial scope of this taxation.
Risks to consider
French tax residents should be aware that the applicable expatriate regime is the one in force upon the beginning of expatriation. Subsequent favourable legislative amendments on that regime are not available for the individuals already residing in France, even if there are still benefiting from such a regime. Consequently, attention should be paid, during all length of this regime, to the rules applicable upon the arrival in France.
Similarly, the concepts inherent in this regime are strictly construed, as shown by a recent ruling (Conseil d’État, 22-12-2020, n°427536). In this case, a taxpayer has been employed for more than 20 years in a company in the UK, before breaking all legal ties with this entity, then being hired by the French entity of the same group, while benefiting from an exemption from the probationary period and the full reinstatement of his seniority in the group.
The French Administrative Supreme Court has approved the reasoning of the French Tax Authorities to deny the benefit of the 30% flat-rate expatriate bonus method to this taxpayer. The judges considered that he was recruited in 2010 from an intra-group mobility and not as an external hire (as this optional regime, initially provided for taxpayers recruited from an external hire, only became available for intra-group hires since Finance Law dated December 31 2018).
Furthermore, the new French tax residents should not omit to complete annually certain declarations, e.g. concerning the holding of bank accounts abroad, which they could have kept from their former residence abroad, or trust returns (to be filed notably when a settlor or a beneficiary of a trust arrangement is a French tax resident).
Arousing discussion on the ground of the principle of equality, Article 155B of the FTC provides a safeguard clause, according to which the employees shall be taxed in France on an amount at least equivalent to the remuneration earned in the same company by a non-expatriate employee. Therefore, the expatriate bonus can be limited with respect to this reference remuneration.
In practice, the main issue is based on the notion of analogous functions and the identification of suitable benchmarks. Furthermore, since the expatriate bonus is exempt, the idea is to make sure that the employment contract does not provide for an artificially low remuneration, with a high bonus.
Another point not to be overlooked is the potential situation of vulnerability of this regime in the light of the rules on state aids, enshrined in Articles 107 and 108 of the Treaty on the Functioning of the European Union (TFEU). This expatriate tax regime could be considered as an aid which distorts competition between the member states, characterising harmful tax competition. Indeed, this regime may have an impact on the location of companies in one state rather than another.
However, to consider this tax incentive regime as a prohibited state aid, the European Commission will have to prove that the location of companies depends on this regime and this indirect selectivity will be quite difficult to demonstrate, as the tax advantage is given here personally to the employees, not to the employer.
Even if the COVID-19 pandemic slows down global employee mobility, the French special expatriate tax regime constitutes a breath of fiscal oxygen, on which the threat of an examination by the European Commission on illegal state aids hangs over.
Alexia Dal Ponte