Patrick Tyrrell of Deloitte reports on a change in the tax system for companies with headquarters in France. He also introduces the amended budget law for 2003 — applicable from 1 January 2004 — that includes a tax to encourage foreign executives to work in France and brings the French tax provisions for expatriates in line with those of neighbouring countries.

Tax system for headquarters in France

Corporate taxation

The business press recently commented on a change in the headquarters régime - the tax system for companies with their headquarters based in France – set out in an administrative instruction of 21 January 1997.

So far, companies with headquarters in France have benefited from a favourable tax system when determining their income subject to corporation tax. Tax was not calculated on the basis of their actual profits, but as a fixed percentage of expenditure.

The European Commission considered that certain details of this preferential system constituted state aid and were therefore in contravention of European rules. The French administration first made it obligatory in 2002 for companies to which the system was applicable to renegotiate their status every five years, and has just introduced a new change via an administrative instruction dated 14 August 2003.

Going forward, subcontracting expenses will be included in expenditure and will be included in taxable income. However the cost-plus basis applicable could be lowered. Headquarters will also be subject to the minimum corporate income tax, under the conditions of common law.

These modifications to the corporate tax side towards the headquarters tax system ensure that it is in keeping with the commission's decision. Nevertheless, the tax system remains attractive as companies continue to have the right to negotiate with the administration the cost-plus basis used.

Expatriate taxation

With regard to individual taxation, expatriates working in headquarters profit from numerous income tax exemptions on a certain number of benefits-in-kind and cash benefits (see list below). The Commission has not questioned these exemptions, and the French tax authorities have made no changes in this respect.

The following allowances and reimbursements, received by employees posted to France for less than six years and who were not tax residents of France in the year prior to their arrival, are exempted from income tax:

• Pre-assignment visit by the employee and his/ her spouse.
• Rental agency fees in France.
• Furniture storage expenses in the home country.
• Relocation and travel expenses on both arrival and departure.
• Car hire on arrival (and departure) for a maximum period of two months in both cases.
• Cost of education for children still included in the expatriate’s tax household. The exemption applies to fees paid for children at primary or secondary school, in establishments where the schooling is in a foreign language.
• French language courses for the employee and family.
• Annual return trip to the home country for the employee and family.
• Annual return trip for children at school abroad and included in the expatriate’s tax household to visit their parents.
• Emergency trips to the home country for the employee and family.
• Living expenses (such as hotel costs) during the relocation period, for the employee and his/ her family.
• Double household expenses on arrival and departure - not exceeding, except in particular circumstances, a period of three months.
• Care taking expenses for the residence in the home country.
• Customs clearance charges and customs duties.
• Expenses for obtaining a French driving licence.
• French automobile registration and the costs of compliance with French automobile standards.
• Consultant fees for administrative, immigration and tax assistance.

For the application of these provisions, the employee’s family includes the expatriate’s spouse and any dependent children included in the expatriate’s tax household.

Extension of income tax advantages to all expatriates

It should be noted that these income tax exemptions, involving substantial tax savings, apply not only to employees in a company headquarters, but have been extended to company employees who do not constitute headquarters staff, but who meet the conditions for tax residence and assignment length specified above.

2003 amended budget law

Expatriate bonus exempt from income tax

Employees sent by a foreign resident enterprise to work in France, can expect an income tax exemption for bonuses paid that are directly connected to their assignment in France. This exemption will apply to employees who have not been domiciled in France during the ten years preceding their arrival in France. The exemption will apply until 31 December in the fifth year after their arrival in France.

The remuneration that remains subject to tax in France should not be less than that received by a French person exercising equivalent functions in the same or a similar enterprise.

2003 amended budget law - social security payments deductible

A deduction will be permitted where executives who are carrying out professional duties in France continue to pay social security contributions in their own country. At present this is only possible under certain social security conventions, but will now be available to all expatriate professionals.

2003 amended budget law - pension contributions

Similarly - where pension or health care contributions were already being made by an expatriate professional to a foreign pension provider before arrival in France - contributions made after arrival in France will be deductible for purposes of French income tax. Please note that the deduction of such contributions is limited and be aligned with the regime applicable to employees subject to French pension contributions.

2003 amended budget law - effective date

The budget law provisions, derived from the Huyghe report published in November 2003, must now be considered by parliament. If passed into law, all the above measures will be applicable in the case of expatriate professional employees coming to work in France from 1 January 2004 onwards. The budget law is expected to pass in December 2003.

Patrick Tyrrell is a partner with the Deloitte International Assignment Services in Paris. He can be reached at +33 (0) 1.40.88.2214 or by email at ptyrrell@deloitte.fr