Withholding tax and its hidden defects

The first month of the Prélèvement à la Source (withholding tax) seems to have gone well for companies, at least in terms of its impact on pay slips.

Much of the credit for this must go to the companies, which were able to seize the opportunity offered by this far-reaching reform in good time, by taking a proactive approach and putting in place policies to communicate with employees, train HR teams, raise awareness among decision-making bodies, and even involve employee representatives. We can only applaud this essential work on the part of collectors.

However, withholding tax is much more than just applying a tax rate to an employee’s pay. As HR management is never a smooth ride, it’s also a question of ensuring that the various situations are properly managed.

The absence of a cash payment seems to be given special treatment by the French tax authorities. On the one hand, when the employee’s remuneration consists solely of benefits in kind, the withholding tax must be neutralized. A specific declaration must be made by the employer. However, no tax will be deducted(DSN-Info sheet 1940). In itself, this method seems logical in that, in the absence of a cash deduction base, the employer cannot operate a payroll deduction of a fiscal and social nature.

As far as social security contributions are concerned, Article R242-1 of the French Social Security Code rules out any social security deductions in the case of payments made solely as benefits in kind. However, while this situation has been resolved with regard to withholding tax, the French tax authorities remain relatively silent when the remuneration paid results in what is generally referred to as a negative net income. This is the case when the employment contract is suspended, but certain purely financial benefits are maintained for the employee.

For example, the continuation of the employer’s contribution to a supplementary protection scheme (specific social protection, individual supplementary pension scheme, etc.) generates a financial benefit for the beneficiary of the scheme, which must be subject to IRPP. This benefit de facto presupposes the implementation of withholding tax. However, this mechanism comes up against a technical obstacle. Like a benefit solely in kind, a benefit solely in cash does not allow any deduction from the employee’s pay slip.

In such cases, the tax authorities would be well advised to neutralize the withholding tax. Remuneration consisting solely of cash benefits could then be treated in the same way as benefits in kind without additional cash. The tax situation would then be regularized the following year, at the end of the tax year.

By Abdelkader BERRAMBANE (Partner), Palmer Consulting

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