The ceiling is applied to the annual amount of the employee's remuneration.
French resident employees sent by their employer to perform their professional activity abroad may benefit from a tax exemption applicable to the top-up allowances paid to compensate the additional constraints faced as a result of family separation or difficult working conditions in certain countries so-called expatriate premiums (FTC, art. 81 A II). These amounts are nevertheless still taken into account to determine the effective tax rate applicable to taxable items.
The amount of these exempt “expatriate premiums” cannot however exceed a prescribed ceiling, which the Tax Code sets up at 40% of the remuneration excluding expatriate premiums. The wording of the legal provision casts doubts on how this ceiling is to be calculated. Indeed, does it apply to the employee’s remuneration in proportion of his/her foreign workdays, or globally, on the whole annual remuneration?
The doctrine as well as the practice of the French tax authorities have been taking the first alternative, considering that the ceiling had to be determined by only taking into account the portion of the remuneration relating to the period for which the expatriate premiums have been granted, in other words by doing a prorata of the remuneration based on foreign workdays.
In a case law dated April 10th 2015, the French administrative Supreme Court (the Conseil d’Etat) has stated that one must take into account, to determine the ceiling, the global amount of the remuneration excluding additional allowances, and not the sole portion of this remuneration related to the activity performed abroad and giving right to the said allowances.
The Conseil d’Etat thus overturns the restrictive position of the tax authorities and paves the way for new opportunities by allowing a wider exemption of expatriation premiums. This decision might also afford claiming back the exemptions of such premiums whose amount, fixed in the employment contract, would have been higher than the above ceiling chosen by the tax authorities.
Due to the financial impacts of this decision, we recommend an audit of premium scales, employment contracts or addenda thereto providing the payment of expatriate premiums and a thorough review of personal situations.