Employers most at risk of penalties are those that have already received multiple blue reminder letters. The first fines were received by French employers in October and TMF France expects foreign employers without establishment will be next.
Withholding tax at-source was introduced in France on 1 January 2019 and it was a significant change for employers because they had never before been involved in collecting employee personal income tax.
Under the new system, employers must:
- apply their employees’ tax rates (provided by the DGFiP – Direction Générale des Finances Publiques)
- collect the necessary monthly withholding tax from net salaries and declare the amounts on payslips
- pay the withholding tax monthly to the DGFiP via DSN (Déclaration Sociale Nominative) several days after making salary payments.
The switch to PAYE was a long time coming for France and considering its notoriously complex tax system the first year has gone quite smoothly. TMF France submits monthly e-filings to the tax office on behalf of its HR and payroll clients, and the automatic updates of personnel files to reflect any changes in individual tax situations month-to-month have worked well.
We have seen ‘hiccups’ in the new system where personalised tax rates have not come through from the DGFiP due to employee identification issues. In these cases, default tax rates apply based on salary bands. Sometimes the default rate is much higher than the employees’ actual personal tax rate and this can cause upset until the problem is resolved.
A more significant problem – now resulting in fines for non-compliant employers – relates to the monthly direct debits to the DGFiP. For French entities with French bank accounts, the direct debits have worked in 80% of cases. For the other 20% the SEPA mandate (Single Euro Payments Area debit authorisation) has failed for any number of reasons, resulting in employers receiving blue ‘reminder’ letters requesting manual payment.
Foreign companies in France face extra hurdles
Foreign employers without establishment in France have found it more difficult to integrate with the new system in part because they report to a separate, non-resident tax administration department that still relies on very manual processes.
- Foreign employers with an EU – but not French – bank account had to confirm that their bank would accept the SEPA mandate so the DGFiP could debit their EU account. But many clients found themselves non-compliant because their EU bank blocked the debit attempts. Monthly manual payments were made instead, with employers receiving blue letters from the DGFiP.
If your company has an EU bank account, the direct debits are supposed to work.
- Foreign employers without establishment or an EU bank account must have a French tax representative with a local bank account in order to be compliant.
Grace period ending
Despite sending many blue letters, the DGFiP has been sympathetic to employers as they adjust to the PAYE system. Until recently no fines had been issued and manual transfers of monthly withholding tax were accepted. However this tolerance is not expected to last and foreign employers will be asked for proof of local tax representation and a valid EU bank account.
Fine amounts can vary from 10% + late interest for late payments to 100% + specific interest where a tax representative has not been designated.
Talk to TMF Group
Our expert team on the ground can take care of all aspects of your French HR and payroll obligations to ensure you’re compliant. We can:
- act as your French tax representative
- provide a local bank account
- process your monthly payroll, calculating and collecting the necessary withholding tax for transfer to the authorities.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.