French Tax “White Year” – Impacts on 2018 US Tax Filings

February 2018

In the January 2018 issue of the BDO Expatriate Newsletter (Issue 36, page 4) we outlined the details of the French withholding tax at source that will be implemented effective January 1, 2019.  While income taxes will be paid in France on a Pay As You Earn (PAYE) basis from January 1, 2019 with respect to ordinary income, there are US tax implications for calendar year 2018 that need to be considered as soon as possible regarding US citizens and green card holders living and working in France.  This applies to local hires in France or participants in a company sponsored global mobility program who are tax equalized, or French nationals working in the US as local hires.  In addition program managers of company sponsored global mobility programs who have French nationals living and working in the United States who are tax equalized to France as their home country will also have tax implications to consider during 2018, the so called “White Year”.
 
French authorities have set up the exceptional tax credit (“Credit d’Impot de Modernisation du Recouvrement” (CIMR)) that will be granted for income taxes due on 2018 “non-exceptional” income received in 2018 (i.e., ordinary income) that falls within the scope of the withholding tax system.  The purpose of the exceptional tax credit is to avoid a double payment of income tax and social charges in 2019 when the 2018 French income tax liability would normally be due since individuals will also be subject to PAYE withholding on ordinary income (i.e., wages) they receive in calendar year 2019.  If an individual only has 2018 ordinary income (i.e., wages) the 2018 French income tax will be calculated and the CIMR will be granted so that effectively there will be no 2018 French income tax due with respect to 2018 ordinary income.  French income tax will be due on “exceptional income” such as equity and portfolio income.     
 
Since there will essentially be no 2018 French income tax liability with respect to 2018 ordinary income and because US persons continue to be taxed on worldwide income regardless of physical residence, it is critical that US citizens and green card holders living and working in France review their 2017 Form 1116 (Foreign Tax Credit (FTC)) to determine if they have excess FTCs that will be carried forward to 2018.  If there are not sufficient FTC carryforwards to 2018 then the individuals will need to increase their 2018 US Federal income tax withholding if they are paid on a US payroll or make 2018 US Federal estimated tax payments to cover their expected 2018 US Federal income tax liability.  For individuals who are participants in a company sponsored global mobility program the program manager in conjunction with the tax service provider will need to review this issue to ensure the appropriate amount of US Federal income tax withholding is remitted during calendar year 2018 in order to satisfy the US Federal income tax liability and ensure that no underpayment of estimated tax penalty is incurred.  For individuals who participate in a company sponsored program these additional US Federal income tax payments will need to be considered with respect to the overall assignment cost as well as budgetary estimates. 
 
Global mobility program managers of company sponsored programs who have French nationals living and working in the US who are tax equalized to their home country (i.e., France) and have French hypothetical tax withheld on 2018 stay at home wage income (i.e., ordinary income in France) will need to consider if they should suspend the 2018 hypothetical withholding since the assignee would have been entitled to the CIMR which would effectively eliminate any 2018 French income tax liability due with respect to 2018 ordinary income.  If the company suspends the French hypothetical tax withholding during 2018 then the actual US income tax liabilities (i.e., Federal, State, Local, Social Security, and Medicare taxes (if applicable)) will increase since the hypothetical tax withholdings reduce taxable wages.  These additional costs will need to be factored into the overall cost of the assignment from both a budgetary and actual perspective.
 
The granting of the CIMR does not change the fact that US citizens and green card holders who have a tax home in a foreign country or countries and meet either the Bona Fide Residence (BFR) test or Physical Presence Test (PPT) can still claim the Foreign Earned Income Exclusion (FEIE) for 2018 since, as noted above, taxpayers are still liable for 2018 French income tax, it’s just that the French authorities have set up the CIMR that will effectively eliminate the 2018 French income tax on ordinary income.  French income tax on exceptional income (i.e., income not covered under the PAYE withholding system) will still be due.
 
While French PAYE withholding is implemented effective January 1, 2019 there are many things, as outlined in this article, that US citizens, green card holders, French nationals working as local hires in the US, and program managers with US assignees in France and/or French nationals on an equalized assignment in the US should be thinking about and addressing during 2018.
 


Contacts:


Donna Chamberlain
Managing Principal, Expatriate Tax Services

Thomas McGlynn
Managing Director, Expatriate Tax Services