Treaty Residence Paramount
Another measure relevant to expatriates that passed from the draft bill into the Finance Act concerns the meaning of “tax residence” in France. The General Tax Code has until now stated that the French domestic law interpretation of residence was paramount; however, this was at odds with both general understanding and recent case law that gave precedence to residence in treaties.
The Finance Act provides for the primacy of treaties when determining the residence of an individual in France. It updates Article 4B of the General Tax Code, which defines the conditions for an individual to be considered a resident of France for tax purposes. It now clarifies that even if a person meets one or more of the criteria in domestic law, he or she will not be considered a French tax resident if, under the provisions of international double taxation treaties, that person is regarded as a resident of another country.
Other Key Measures
- Extension to 10 years of the statute of limitations for the tax authorities to challenge individual taxpayers’ declarations of foreign tax residence where the authorities believe the taxpayer has falsely declared the position.
- Introduction of new audit procedures for tax credits and withholding taxes.
- The surcharges of corporate income tax (CIT) proposed in the original budget also made it into the final legislation, but are restricted to one year only. They apply to companies with French annual turnover in excess of €1 billion in 2024 or 2025. The rate of the surcharge will be 20.6 percent for companies with an annual French turnover of less than €3 billion in 2024 or 2025, or 41.2 percent for companies with an annual French turnover of €3 billion or more in 2024 or 2025.
There was concern that the 20-percent minimum tax would apply to 2024 revenues, as was originally proposed in October 2024. Announcing a minimum tax rate to income already received during 2024 caused much consternation. Whilst they may find some relief in the fact that 2024 revenues are not affected, those planning for 2025 must now consider the impact on their finances.
The exclusion of income exempted under the 155B inpatriate tax regime preserves the intended benefit of the regime and perhaps will preclude requests that might have come had such income been included (rather than excluded) from the CDHR. Further, employers with equalised assignees to France should not face higher costs as a result of the measures.
The need to make advance payment of the CDHR introduces an additional compliance step to check if payment is due. This is out of sync with the normal compliance calendar, introducing a risk that relevant cases are not identified until after the payment window has closed, as well as the risk of non-compliance.
Some measures that had been proposed in October 2024, such as changes to tax rates on investment income and capital gains, and a wealth tax on unproductive wealth (impôt sur la fortune improductive), were not included in the final Finance Act.
It is essential to get in front of the changes described in this newsletter and to communicate quickly and clearly with key stakeholders, so that they can properly plan, budget, and make any necessary payroll and other adjustments, ideally in advance of their coming into force.
Taxpayers with questions about how the above-noted measures may impact them, and/or what steps they may need to take to be in compliance, should consult with their usual qualified tax professional or a member of the GMS tax team with KPMG in France (see the Contacts section).
