In a recent ruling rendered in plenary session, the Conseil d’État (which is the supreme administrative court in France) significantly awarded greater flexibility to the rules on assessment of the partial exemption of personal income tax, applicable to additional compensation related to the work activity carried abroad by an employee, frequently known as « expatriation bonus », set forth under Article 81 A, II of the French tax code (Conseil d’État, 10 April 2015, n° 365851).
40 % Threshold
According to this regime, French tax resident employees can benefit from a partial exemption of personal income tax applicable to the bonus corresponding to the work activity carried abroad.
Among the numerous conditions set forth by the law, the additional compensation must notably (i) be provided for in the employment contract or in an amendment and (ii) be justified by a consecutive 24-hour time period effectively spent outside of France (which excludes, for instance, a roundtrip from Paris to London in the same day). But most importantly, the tax exemption must not exceed 40% of the employee’s annual gross salary.
Until now, the French Tax Authorities (“FTA”) have considered that the exemption should be assessed on the basis of daily compensation (BOI-RSA-GEO-10-30-10 §190).
This pro rata temporis assessment method seemed to have been validated by the lower courts. In this context, a ruling by the Paris Administrative Appeal Court, dated December 7, 2012, n°11PA05199, confirmed the application of the 40% threshold to the daily compensation (for 21 days abroad out of a total of 216 days worked in 2006, the tax exemption was limited to: Annual gross salary x 40% x 21/216).
New assessment methods
The Conseil d’État recently modified said interpretations by stating, contrary to the lower courts and the FTA, that the 40% threshold should be applicable to the total amount of the compensation for the tax period covered. It is therefore not necessary to assess the 40% threshold on the basis of the days spent abroad, and accordingly, to make an assessment on the basis of daily compensation.
In light of this new ruling from the Conseil d’État, if an employee, whose annual compensation amounts to €200,000 regardless of the number of days worked abroad, the maximum amount of additional compensation subject to the exemption of personal income tax amounts to: 200,000 x 0.4 = €80,000.
The ruling issued by the Conseil d’État should encourage the expatriation bonus mechanism.
Amendments to employment contracts will have to be taken into account for new beneficiaries. For employees already benefitting from the expatriation bonus, the current employment contracts or amendments must be modified as soon as possible to take into account this new statement.