Who is eligible for the regime ?
The expatriate tax regime applies to individuals who were not residents of France for tax purposes during the five calendar years prior to their taking up their duties in a company based in France which recruits them:
- either the employee is “recruited by a company” that has links with the original company based abroad [intra-group] transfer. These links may relate to share capital, or be legal or commercial in origin… This applies, inter alia, to employees who are posted or made available as part of an intra-group transfer, for instance, from a foreign parent company to a subsidiary based in France ;
- or the employee is directly recruited abroad for a position in a company in France [external hire].
Note: entitlement to the regime is not contingent on the employment contract or its rider stipulating the period of employment in France, nor on the contract having been executed for a fixed term.
It is also understood that the host company may not exist legally in France on the date of the expatriate employee taking up his or her duties, if the purpose of his or her arrival in France is related to the creation of that company.
When there are proven links between the company based in France and the original company, recruitment shall always be considered as an intra-group transfer.
Persons coming to work in France at their own initiative or who have already established their residence in France at the time of recruitment are not eligible for the expatriate regime.
What are the income tax benefits of the expatriate regime?
The expatriate regime provides entitlement to income tax exemptions on:
- Additional compensation directly linked to the exercise of a professional activity in France (expatriate bonus) ;
- The share of compensation relating to the foreign activity carried out in the interests of the employer ;
- 50% of income from investments from foreign sources (payment of which is made by a person based outside France in a State or territory which has concluded a tax treaty with France that contains an administrative assistance clause to combat tax evasion and avoidance) ;
- 50 % of certain intellectual and industrial property rights from foreign sources (payment of which is made by a person based outside France in a State or territory which has concluded a tax treaty with France that contains an administrative assistance clause to combat tax evasion and avoidance) ;
- 50 % of capital gains on the sale of securities and ownership interests from foreign sources.
The expatriate scheme also allows beneficiaries to deduct contributions to supplementary retirement and supplementary pension schemes with which they were affiliated before arriving in France from their taxable income.
Condition for exemption of the expatriate bonus
The employee shall be taxed in France on an amount at least equivalent to the compensation earned in the same company by a non-expatriate employee.
In practice, the expatriate’s taxable income must, after exemption of the expatriate bonus, remain at least equal to the reference compensation, which corresponds to the amount paid for similar functions within the company or, where applicable, within similar companies based in France.
Defining the reference compensation is a matter of fact specific to each company with the latter being required to have supporting evidence justifying the method used.
It may also be equal to the lowest salary earned by an employee with similar experience to that of the expatriate employee and performing similar functions within the company or within a similar company based in France, either during the year in question or in the three previous years.
The situation may be assessed solely with respect to the year in which the employee takes up his or her duties if the amount of the expatriate bonus is determined and fixed, and if the employee’s duties do not change during the period of expatriation (this is not applicable in cases where the expatriate bonus is calculated as a percentage of the base compensation or in cases where the employee chooses flat-rate assessment of the bonus).
To be eligible for exemption, the expatriate bonus must appear clearly in the employment contract or corporate officer status or, where applicable, in a rider to it drawn up prior to taking up the position in France. When the position is taken before 15 November 2018 and when the employer does not specifically set the amount, in order for the bonus to be exempt, it must be determined according to objective and specific criteria set forth in the employment contract.
The expatriate bonus may therefore be determined as a percentage of the base compensation which itself includes a variable portion, or as a percentage of the variable portion of the compensation alone. For instance, the bonus may be set at 30% of the fixed compensation, at 30% of the base compensation, that itself includes a variable portion, or at 30% of the variable portion of the compensation alone.
For external hire, the bonus may be assessed at a flat rate, in particular if the contract does not provide for an expatriate bonus. In this case, is deemed to be equal to 30% (at most) of total compensation.
When the position is taken after 15 November 2018, expatriates transferred by a company based outside France to a company in France who take up their duties on or after 16 November 2018 may opt for the flat-rate assessment of their expatriate bonus under the same conditions described above. This applies to compensation due after 1 January 2019.
Cap on the exemption of the expatriate bonus and the compensation corresponding to the assignment carried out abroad.
At the taxpayer’s choice, this cap may be:
- either an overall cap : in this case, the expatriate bonus exemption (possibly limited with respect to the reference compensation) and the portion of compensation corresponding to the assignment carried out abroad may not exceed 50% of the total compensation ;
- or a cap solely on the exemption on compensation corresponding to the assignment carried out abroad: in this case, the exemption for this portion may not exceed 20% of the taxable compensation of the individual in question, net of the expatriate bonus (possibly limited with respect to the reference compensation).
From when and for how long does the regime apply ?
Entitlement to the scheme applies only in respect of the years for which expatriate employees have, on one hand, their household or principal place of residence in France and, on the other, carry out a primary occupation in France. Failure to comply with one of these cumulative conditions with respect to a single year does not exclude entitlement to the scheme in respect of previous or subsequent years in which the conditions are met.
In addition, taking into account the constraints which may exist, particularly professional constraints (e.g. a probationary period for the individual in question, the spouse’s professional situation) or family-related (such as schooling for children), it is agreed that the regime may apply for the year in which employees take up their duties in France, even if the household is set up in France at the latest before the end of the calendar year following that in which they take up their duties.
For example, an employee taking up duties in France in January 2020 may benefit from the regime as from the taxation of income for the year 2019 if he or she sets up house in France by 31 December 2021 at the latest. If he/she sets up house in France after that date, he/she will not be permanently rendered ineligible for the regime. He/she will be able to benefit from the regime with respect to income earned as from the year in which the household is
established. For example, if he/she takes up his or her duties in January 2020, but establishes a household in France as from March 2022, he/she would be able to benefit from the regime for income earned as from 1 January 2021 until 31 December 2028 at the latest.
The maximum period of application for all new employees as from 6 July 2016 has been set at 31 December of the eighth calendar year following the taking up of duties in the host company. This period of application allows, for example, a person taking up a position in France on 1 January 2020 to benefit from the scheme until 31 December 2028, i.e. for a total of nine years.
Eligibility for the scheme ends if the employee leaves the host company before this period ends, even if he or she remains resident in France for tax purposes. Entitlement to the scheme shall, however, be maintained in the event of a change of functions within the host company or in the event of a change of employer within the same group, regardless of whether the duties performed are similar to the original ones.
However, continuation of the regime in the case of a change of function does not extend its total duration, which is calculated based on the date the employee first took up his or her duties.
What are the other benefits of the regime?
Individuals who were not residents of France for tax purposes during the five calendar years prior to the year in which they establish their tax domiciliation in France are liable to property wealth tax (IFI) only on property and property rights located in France with no conditions regarding employment.
The regime applies for each year when the taxpayer is resident in France for tax purposes up to 31 December of the fifth year following the year when he/she set up his/her tax domiciliation in France.
Where applicable, this partial property wealth tax exemption applies without prejudice to the special income tax regime which is specific to expatriates.
The expatriate bonus paid to expatriate employees who took up their positions in France after 6 July 2016 is exempt from payroll tax in the commensurate amount of the income-tax exempt expatriate bonus.
For expatriate employees who are recruited directly abroad by a company based in France and who are entitled to opt for flat-rate assessment of the expatriate bonus, this exemption applies to 30% of their compensation.
The payroll tax exemption applies under the same conditions regarding tax domiciliation and period as those laid down for entitlement to the income tax exemption.
All of the tax authorities’ guidelines are available online or on the bofip.impots.gouv.fr website.
UPDATED DINR PART on 15 MARCH 2021