The impatriate regime in France: income tax exemption for up to 50% of remuneration!

This case study explains how Mr X, arriving from the UK to take up a job with a company based in France, will earn tens of thousands of euros a year over the next 8 years thanks to the impatriate regime.

Mr X’s case study also shows that the impatriate regime is a very complex tool and has to be implemented properly (article 155 B du Code Général des Impôts). A calculation error can lead to a loss of earnings over 12,000€ a year and a misunderstanding of the rules of the regime can lead to a total loss of profits.

A thorough study of the regime is needed before arriving to France

Mr X has been a UK tax resident for the past 10 years and works for company A. He receives a job offer from company B to work in the French branch as an employee from November 2022.

Why should Mr X wait until January 2023 to start work in his new position ?

The impatriate regime applies until the 31^st of December of the eighth calendar year following the year in which the employee takes up employment.  Thus, if Mr X starts his new job in November 2022, he will benefit from the impatriate regime until December 31^st, 2030. If he starts work in January 2022, he can apply the regime until December 31^st, 2031. Years are assessed on a calendar basis, so no prorating is allowed.

By postponing his new position by 2 months, Mr X will gain 10 months as an impatriate employee.

The impatriate regime offers greater flexibility when it is properly analyzed before the employment contract is signed.

One of the benefits of the impatriate regime is the exemption of a portion of remuneration, known as the impatriation bonus. This bonus is a remuneration supplement that can take two forms.

Option 1 : actual impatriation allowance

That allowance can be predefined or tailored to Mr X. For instance, the allowance can consist of an apartment or a lump sum. This option requires the indemnity to be mentioned in the employment contract and applies if it takes place before Mr. X starts his new job.

Option 2 : flat impatriation bonus 

The impatriation bonus can also be assessed on a flat-rate basis. With this option, the impatriate employee will be entitled to a flat-rate payment of 30% of net taxable remuneration.  This option is applicable even if the employment contract makes no specific provision for it.

By implementing the impatriate regime before his arrival in France, Mr. X will therefore have two options at his disposal.

A complex tax tool

Mr X’s future employer is offering him a total compensation of 220,000€, including a 130,000€ impatriation bonus. Mr X is also going to spend some days working abroad in the direct and exclusive interest of his future employer, for which he will be paid an additional 30,000€.

The impatriate regime allows, under certain conditions, a tax exemption on the impatriate bonus as well as for the share of compensation paid for days worked abroad. For Mr X, this means up to €160,000, so he is wondering how much of his remuneration is tax-exempt, and how much tax he is going to save.

Can the whole impatriation bonus be tax-exempt?

The impatriate regime states that the employee’s net taxable remuneration must be greater than or equal to that of an employee performing similar duties.

Mr X’s job is paid on average 100,000€. His net taxable income (total compensation – bonus = 90,000€) is lower than the average pay, thus he must reintegrate the difference. The impatriation bonus is therefore tax-free for 120,000€ and not 130,000€.

What are the benefits for Mr X ?

The benefits of the regime are capped. Two options are available to determine the overall exemption. The more favorable of the two is used.

• Option 1 : 50% of the total compensation, or : 220,000€ x 50% = 110,000€.
• Option 2 : 20% of taxable income for days worked abroad plus impatriation bonus : 20% x (220,000€ – 120,000€) + 120,000€ = 140,000€.

This way, by applying the option best suited to his situation, Mr. X will realize tax savings of almost 60,000€ per year for the next 8 years. If he is not properly supported during the set-up phase and applies option 1, he will lose over 12,000€ a year.

A study to be continued throughout the whole application of the regime

It is very important that Mr X is properly advised for the next 8 years.

The average pay for similar functions and the tax exemption cap have to be updated every year. The goal is always to apply the most favorable option for Mr X and to respect the legal framework of the regime.

Moreover, Mr X should seek advice when filing his tax declaration in order to secure the impatriation regime’s proper application.

Last but not least, certain factors can make him lose out on all of the regime’s benefits, for example, if his family does not move with him during the year following his job change, or if he takes on a job within a new company.

What you should remember

In this case study we have seen that the French impatriate regime is fiscally very beneficial. It is, however, complex and requires proper tax advice as it contains many subtleties.

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