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Using foreign subcontractors: be mindful of french tax and social security obligations

September 07, 2021

1. From a tax standpoint

If the employee is a tax resident of France:

  • the foreign employer must withhold French personal income tax, failing which it may be subject to tax fines ranging from 5% to 80%, and even to criminal penalties.
  • the foreign employee must file an income tax return in France under the conditions of ordinary law.

If the employee is not a tax resident of France:

  • the foreign employer must levy a specific withholding tax (“retenue à la source”) comprising three brackets, i.e. of 0%, 12% and 20%, failing which it may be subject to default interest and penalty increases, and even to criminal penalties.
  • the foreign employee must file a French tax return solely for his/her income taxable in France.

As a general principle, tax treaties attribute the right to tax employment income to the State in which the work is performed.

The temporary assignment clause derogates from this principle if the (non-French resident) employee is present in France for a period or periods not exceeding in the aggregate 183 days in the fiscal year concerned (anti-abuse mechanism) and the remuneration is not ultimately borne by an enterprise established in France.

Lastly, depending on the extent of the resources implemented in France, the foreign employer may have a permanent establishment in France whose business is taxable in France (CIT, VAT…).

Failure by such establishment to register with the relevant French administrative authorities constitutes a hidden activity (80% fine, 10-year limitations period and criminal penalties).

2. From a social security standpoint

When a French company hires the services of companies established outside of France, which then post employees to France to perform their services, the French company, in its capacity as principal, has an enhanced duty of vigilance regarding: compliance with the provisions on undeclared work, the employment of foreign workers without work permits, the social security rules on the posting of workers, and compliance with certain French labor law rules (hardcore rules).

In this context, the French principal must conduct certain checks and collect certain documents.

Otherwise, the French company could be held criminally liable (as an accomplice in undeclared work) and declared jointly liable for the URSSAF debts of its subcontractor.

The foreign company will of course be required to comply with French legislation, which necessarily involves taking a comprehensive legal approach (tax, corporate, labor, social security, immigration law).

One of the vigilance points will concern the conditions under which the employees will work in France (posting, expatriation, local contract, etc.).

Certain administrative steps must be taken by the foreign company (pre-employment declaration, affiliation to URSSAF, to the pension regimes etc.), which can, where applicable, be carried out through a one-stop shop set up by the French administration (Foreign Firms Slip - Titre Firmes Etrangères or TFE).

Regardless of what status the employees have during their assignment, compliance with all or part of the French regulations is critical, as failure to do so may result in criminal penalties for the subcontractor, notably if it is found to have committed the offence of undeclared work.

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