The French Finance Act for 2017 was adopted on December 29, 2016. The Act introduced a new withholding tax system beginning January 1, 2018. However, on September 23, 2017, French decree N° 2017-1390 postponed the implementation of the French withholding tax system on salaried income until January 1, 2019.
Under the prior system, French tax residents filed an annual income tax return and paid their income tax a year after the income was received. For example, income received in 2017 was reported on a return filed in 2018; the income tax was paid in 2018 with the return. Beginning January 1, 2019, the “pay as you earn” system requires that taxes be withheld as income is earned, similar to the U.S. withholding system. Under this system, French tax residents will be subject to a monthly withholding tax on their 2019 income beginning on January 1, 2019, rather than paying the 2019 income tax when they file their 2019 tax return in 2020.
To facilitate this change-over to the new system, the French Government declared a tax holiday for 2018. A special French tax credit will eliminate income tax on regular income (e.g. wages and salaries) in 2018. After the credit is applied, French income tax may still be due on certain exceptional income. French tax residents will still file their 2018 income tax returns in 2019 to determine their income tax on all income.
Section 901 of the U.S. Internal Revenue Code provides a tax credit to alleviate double taxation on foreign sourced income. The special French tax credit eliminates any French tax on the 2018 French wages and salaries, and, thus, also eliminates double taxation on this income since it is only subject to U.S. tax. As a result, U.S. taxpayers accustomed to claiming a foreign tax credit (FTC) to offset their U.S. tax liability on wages and salaries may not have a 2018 FTC.
U.S. taxpayers working and living in France who did not set aside income to pay any outstanding U.S. tax liability may experience a cash flow shortage when they file their 2018 U.S. income tax return in 2019. This will largely affect taxpayers who elected the “accrued” method on Form 1116 to claim the FTC. For those who elected the “paid” method, they will still be able to claim the FTC in the amount of any French income taxes paid in 2018 attributable to the 2017 tax year.
Frequently Asked Questions for U.S. taxpayers working and living in France:
- Will the U.S. also declare a tax holiday for 2018 for those U.S. taxpayers caught up in the French change-over?
- Answer: The Internal Revenue Code does not include a provision that would allow a U.S. tax holiday. Taxpayers may consult with a tax advisor.
- How will the U.S. assist those taxpayers facing the cash flow shortage in 2019 when they file their U.S. tax return?
- Answer: The new French withholding system was announced on December 29, 2016 and delayed until January 1, 2019. During 2018, U.S. taxpayers should consult with their tax advisor. Depending on the taxpayers’ facts and circumstances, certain changes to the U.S. Internal Revenue Code, such as the increased standard deduction and tax rate reduction, may ease the transition to the French withholding system. Taxpayers should also consider:
a. Claiming a FTC carryover, if available. Taxpayers who have a FTC carryover from a prior year may be able to use the carryover credit to offset the 2018 U.S. income tax on the regular income exempted from French tax for 2018. Although regular income (wages and salaries) earned in France is exempt from French income tax in 2018, it is reportable for U.S. income tax purposes and therefore considered foreign source income.
b. Claiming a foreign earned income exclusion. Taxpayers who meet the requirements for claiming the foreign earned income exclusion may be able to reduce their U.S. income tax liability. Eligible taxpayers may exclude up to $104,100 of foreign earned income from U.S. taxation for the 2018 tax year. For more information and limitations on claiming the foreign earned income exclusion, see IRS Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad, and the Instructions to Form 2555.
c. Making a U.S. payment arrangement. Taxpayers who have difficulty making the full U.S. tax payment may want to consider the options available for paying U.S. income taxes by visiting https://www.irs.gov/payments. Available options include paying by debit or credit card or establishing a payment plan, which can be requested on line or by submitting a Form 9465. Additional information is available at irs.gov.
d. Consult with a tax advisor.
- What if my 2018 U.S. tax liability is subject to underpayment and late payment penalties?
- Answer: Taxpayers that have under payment or late payment penalties may request penalty relief. Information on penalty relief may be found at:
