The expatriate tax regime
Table of contents
Who can benefit from the expatriate tax regime?
What are the advantages of the expatriate tax regime?
Non-fiscal benefit: exemption of certain social security contributions
How to benefit from the expatriate tax regime?
Conditions for exemption of the expatriation bonus
Determining the reference compensation
From when and for how long can expatriates benefit from the expatriation scheme?
Legal certainty: advance tax ruling and guarantees in the event of a tax audit
How to obtain more information about the expatriate scheme?
Who can benefit from the expatriate tax regime?
The expatriate tax regime applies to individuals who have been tax resident outside France for at least five calendar years before they start working for the company based in France that recruits them. They must have been recruited in one of two ways:
- The employee is "recruited by a company" established in France, which has links with the company of origin established abroad [intra-group mobility]. These links may be of a capital, legal or commercial nature, etc. This includes employees who have been seconded or posted abroad as part of an intra-company mobility scheme, e.g. someone from a foreign parent company who comes to work for a subsidiary based in France. It is accepted 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.
- 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 being for a fixed term.
The expatriate tax regime also applies to certain company executives who are considered as employees for tax purposes under the provisions of paras. 1°, 2° and 3° of article 80ter (b) of the tax code (Code General des Impots or “CGI”). An employee or executive who directly or indirectly holds all or part of the shares of the company that recruits him or her may also benefit from the scheme, as long as he or she meets all the conditions set out in the text, receives remuneration that is taxable as salary and wages and remains taxable for income tax purposes on an amount equivalent to the reference compensation (see below).
Employees asked by their employer to take up new duties within a company in France (reactivation of a previous employment contract or creation of a new employment contract) after more than five years spent in a company located abroad belonging to the same group [return from expatriation] may benefit from the expatriate scheme as long as they meet all the conditions set out in the text.
On the other hand, individuals who have already established their residence in France at the time of recruitment are not eligible for the expatriate tax scheme.
What are the advantages of the expatriate tax regime?
Income tax benefits
Under the expatriate tax regime the following are exempt from income tax, under certain conditions:
- 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 (in cases where the depositary of the securities or, failing that, the company whose securities are to be sold is 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).
In addition to these exemptions, the expatriate regime allows beneficiaries to deduct from their taxable income certain contributions paid to supplementary retirement and life insurance schemes to which they were affiliated before arriving in France.
Property wealth tax benefits
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 residence in France benefit from a partial exemption of property wealth tax (impot sur la fortune immobiliere or “IFI”): they are only taxable on their property and property rights located in France. As a result, in practice they remain under the same taxation regime as when they were non-residents of France.
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.
Unlike the special income tax regime which is specific to expatriates, no conditions regarding employment are attached to the property wealth tax partial exemption. Where applicable, this partial exemption applies without prejudice to the special income tax regime which is specific to expatriates.
Payroll tax benefits
Employers are liable for payroll tax (taxe sur les salaires or “TS”) when they are based or domiciled in France, they pay salaried compensation, and they are exempt from VAT for at least 90% of their turnover during the calendar year prior to the pay¬ment of salaried compensation.
The expatriation bonus paid to expatriate employees who took up their positions in France after 6 July 2016 is exempt from payroll tax up to the amount of the expatriation bonus exempt from income tax. For expatriate employees who opt for a flat-rate assessment of the expatriate bonus, this exemption applies to a fraction of 30% of their compensation.
The payroll tax exemption applies under the same conditions regarding tax domiciliation and duration as those laid down for entitlement to the income tax exemption.
Non-fiscal benefit: exemption of certain social security contributions
In accordance with Article L767-2 of the Social Security Code, expatriate employees who took up their positions in France after 10 July 2018 may also elect not to be affiliated to the compulsory French Social Security schemes for basic and supplementary old-age insurance and to benefit from an exemption from the contributions relating to these schemes. Full details of this exemption can be found on the Urssaf website.
How to benefit from the expatriate tax regime?
Procedures to be carried out
No formal application is required to benefit from the scheme. All the company and the employee have to do is fulfill their reporting obligations as described below.
For the company:
1. The company is required to report on the unified annual declaration of social data (“DADS-U”) or on the nominative social declaration (“DSN”) the remuneration paid to expatriates, mentioning separately, on the one hand, the amount of the salary subject to income tax and, on the other hand, the amount of the salary exempt from income tax.
In this respect, it must indicate in the box "amounts exempted under the expatriate tax regime" (“sommes exonerees au titre du regime des impatries”), the total amount corresponding to the sum of the expatriation bonus and the fraction of the remuneration received in return for the activity carried out abroad, which benefits from the exemption pursuant to I of article 155 B of the CGI.
2. The company shall determine the amount of the reference compensation subject to income tax on behalf of the employee or executive, on the basis of information that the company must be able to justify to the tax authorities.
For the employee:
1. If the employee chooses to have the expatriation bonus assessed on a flat-rate basis, they must indicate this in the "other information" (“autres renseignements”) section of the overall income tax return form no. 2042/2042C. If the expatriation bonus exemption is combined with the exemption for the part of the remuneration relating to an activity carried out abroad, the choice of capping method must be indicated in the same way.
2. The employee must check the amount of salary subject to income tax which is pre-filled by the tax authorities on the overall income tax return. If the employee believes that this amount is incorrect, they shall modify it.
The net taxable salary after deduction of the exempt portion must be entered in section 1AJ or 1BJ of the main form no. 2042.
Exempt salaries and bonuses must be entered in section 1DY or 1EY of the supplementary form no. 2042 C.
The amount of the salaries, including the exempt part, is used to calculate the reference tax income.
Conditions for exemption of the expatriation bonus
The employee must be taxed in France on an amount at least equivalent to the compensation received in the same company by a non-expatriate employee performing similar duties.
After exemption of the expatriate bonus, the expatriate’s taxable income must remain at least equal to the reference compensation, which corresponds to that paid for similar functions in the company or, where applicable, in similar companies established in France.
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).
In principle, to be eligible for exemption, the expatriate bonus must appear in the employee’s – or corporate officer’s – contract or, where applicable, in a rider to such contract drawn up prior to taking up the position in France. Nevertheless, the employer is not obliged to determine the amount beforehand. When the employer does not precisely set the amount of the expatriation bonus, it must be determined on the basis of objective and precise criteria mentioned in the employment contract in order to be exempt.
The expatriation bonus may 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.
This method of determining the bonus makes it possible to take into account the situation of employees whose compensation, both contractually and objectively, provides for a variable portion that is performance-based.
In line with business practices, it is also possible to provide for this bonus to evolve over time (either decreasing or increasing), according to criteria that must be specified.
Alterntively, the bonus may be assessed on a flat-rate basis. Expatriate employees may opt for a flat-rate assessment of their expatriation bonus if:
- their contract does not stipulate an expatriate bonus; or
- the contract does stipulate an expatriate bonus: the employee can then choose between using a flat-rate assessment or the real amount of the bonus.
If the employee opts for the flat-rate assessment, the expatriation bonus that is tax-exempt is deemed to be equal to (a maximum of) 30% of total compensation.
The choice of a flat-rate assessment is available:
- for individuals recruited directly abroad by a company established in France, regardless of the date of their recruitment;
- for people called in by a company established in another country to work for a company established in France, only if they were hired after 15 November 2018. The option applies to compensation due from 1 January 2019.
The expatriate bonus exemption may be combined with the exemption of the share of compensation arising from an assignment carried out abroad.
Nevertheless, this combination is capped and can take one of two forms, which the taxpayer can freely choose:
- 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;
- 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 ex¬patriate bonus (possibly limited with respect to the reference compensation).
Determining the reference compensation
It is the responsibility of the company employing the expatriate employee or manager to determine the reference compensation and to inform the employee or manager accordingly.
Defining the reference remuneration is a matter of fact specific to each company with the latter being required to have supporting evidence justifying the method used.
However, to take account of any practical difficulties in identifying relevant terms of comparison, particularly in the case of highly individualised compensation, the tax administration accepts several methods:
- The situation may be assessed by reference to compensation paid to an employee with comparable professional experi¬ence in similar functions to those of the expatriate employee in similar companies based in France even though similar functions to those of the expatriate employee may be undertaken in the company;
- The “reference compensation” may be also equal 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.
As a result, to provide the option of broadening the benchmark, even if there are in-house comparables in the company, the reference compensation may be the same as that paid for similar functions in comparable companies based in France.
Lastly, although it requires that the expatriate’s professional experience be taken into account, the term “similar functions” allows for internal or external comparables to be used as regards functions that are not exactly the same.
From when and for how long can expatriates benefit from the expatriation scheme?
The scheme applies only in respect of the years for which expatriate employees, on the one hand, have their household or principal place of residence in France and, on the other hand, 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 admitted 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 subsequently, at the latest before the end of the calendar year following that in which the employee takes up their duties.
For example, an employee taking up duties in France in January 2021 may benefit from the regime as from the taxation of income for the year 2021 if their household is set up in France by 31 December 2022 at the latest.
If the employee’s household is set up house in France after that date, the employee will not be permanently rendered ineligible to 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 establi¬shed. For example, if he/she takes up his or her duties in January 2021, but establishes a household in France from March 2023, he/she would be able to benefit from the regime for income earned as from 1 January 2023 until 31 December 2029 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 2021 to benefit from the scheme until 31 December 2029, i.e. for a total of nine years.
Eligibility for the scheme ends if the employee leaves the host company before this term 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 calcu¬lated based on the date the employee first took up his or her duties.
Legal certainty: advance tax ruling and guarantees in the event of a tax audit
Expatriate taxpayers and their employers can make use of existing procedures that provide significant legal certainty.
Taxpayers are able to ask the Public Finances Directorate General (Direction generale des finances publiques or “DGFiP”), either at local or central level, to make a decision concerning a point of tax law (Book of Tax Procedures - LPF, Art. L.80 A, 1st para.) or actual circumstances (LPF, Art. L.80 B).
In this respect, responses to individual taxpayer requests may be relied on by the interested parties under Article L.80A, 1st para. of the LPF provided they include an interpretation of tax legislation, i.e. when their purpose is to specify in law the meaning and scope of the legislation and regulations applying to the preferential regime for expatriates.
In turn, the guarantee set out in Article L.80 B-1° of the LPF allows the taxpayer to rely on the authorities’ formal decisions concerning the assessment of actual circumstances based on tax legislation. Such decisions must have been taken prior to the end of the time limit for submitting returns. They must relate to the taxpayer him/herself and have been made following a specific, full and genuine request made by a person acting in good faith.
Examples with respect to the expatriate regime
The above-mentioned formal decisions, taken either to interpret tax legislation, or by assessing specific circumstances, may be relied on by the relevant taxpayers vis-à-vis the tax authorities pursuant to an audit procedure.
For example, when an expatriate taxpayer has received confirmation that the additional compensation related to the expatriation, which is exempt in this respect, is not excessive in relation to the reference compensation for similar duties, the exempted amount of the bonus may not be called into question by criticizing the chosen amount of reference compensation.
All the information on the tax ruling procedure can be consulted on this page.
How to obtain more information about the expatriate scheme?
All of the tax authorities' doctrine can be consulted online on the bofip.impots.gouv.fr website.
Expatriate employees who have already been recruited by a company established in France and who have set up home in France should contact their local tax office (https://www.impots.gouv.fr/contacts).
Individuals who have not yet been recruited by a company established in France and who are domiciled abroad can address their questions to the tax4business office: tax4business@dgfip.finances.gouv.fr