Tax residency of corporate executives: what changes in 2020

February 10, 2020

The new tax residency rule sought by the French government, applicable only to executives of large French corporations, underwent some final changes during the parliamentary debates. The goal: to ensure that the measure will not detract from France’s attractiveness by having the ricochet effect of penalizing foreign investors who perform merely “accessory” managerial duties in France. Explanations….

The 2020 Finance Act broadens the tax residency criteria for executives of large French corporations. From now on, executives who perform managerial duties in companies whose registered office is in France and whose annual group turnover exceeds €250 million (down from €1 billion in the draft legislation) are automatically deemed to perform their primary professional activity in France and, consequently, to be French tax residents.

During the parliamentary debates, the senators attempted (in vain) to raise the turnover threshold to €750 million, but the government strongly opposed. However, other adjustments narrowing the scope of the measure were ultimately adopted:

  • The new rule will apply only to “executive” management functions: the chairman of the board of directors where he or she assumes the general management of the company, the managing director, the deputy managing directors, the chairman and the members of the executive committee, the managers and other officers with similar functions. The chairman of the supervisory board is, however, excluded from the scope.
  • Such executives can, moreover, prevent the application of this measure if they can prove that their professional activity is not exercised primarily in France (based on, for example, (i) the actual time spent on the activity in France if they perform a portion of their duties abroad or hold several corporate offices or (ii) their remuneration). Accordingly, executives who exercise “accessory” managerial duties in France will not be considered as French tax residents.

If, under these criteria, an executive is deemed to be a French tax resident, he or she could be subject to taxation in France on:

  • all of his/her income (of both French and foreign source), unless a tax treaty covering personal income tax applies (which is often the case); and/or
  • his/her personal assets (real estate wealth tax) and gifts and inheritances, as few treaties cover such taxes.

Therefore, while tax treaties – which override domestic law – may to a large extent prevent the actual application of this new rule in the area of personal income tax, the same is not true for the taxation of the assets, gifts and/or inheritances of executives operating in an internationalized context.

Such executives, present in the governing and management bodies of large French corporations, could be impacted by collateral effects that fall well outside the measure’s initial purpose: to tax in France income earned in France…

French tax residency analyses are thus worth revisiting in light of these new rules, which apply as from 2019 for personal income tax and as from 1 January 2020 for real estate wealth tax and gift and inheritance taxes.

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