Tax on the salaries for directors’ remuneration: last section

April 11th 2016

The employers who are not subject to VAT or who were not subject to VAT for at least 90% of their turnover for the calendar year preceding that of the payment of remunerations shall be subject to payroll tax.

In this case, the tax is calculated according to a liability ratio equal to the turnover not subject to VAT over the total turnover excluding taxes for the previous year. The companies which have set up VAT segregations must calculate the tax by applying the specific liability ratio in each sector to the employee remunerations concerned.

For the employees that are concerned in various sectors, the general liability ratio must be applied.

The situation that shall have to be analyzed is that of the director who, as has been decided by case law, clearly carries out a cross-company function and for whom the remuneration should therefore be subject to the general liability ratio.

For the directors of the company, this issue has, for some time, been mitigated in practice as it is quite rare for commercial companies to carry out activities not subject to VAT.

Nonetheless, it has become a concern for active holding companies of groups which, by their nature, pivot around two sectors, those of service provisions for subsidiaries subject to VAT and the financial aspect, as a result of the collection of dividends, outside of the scope of the VAT.

The directors of these companies should therefore have their remuneration subject to payroll tax on the basis of the general liability ratio.

Yet, does the remuneration of a director fall within the scope of the payroll tax?

Many directors have opposed this based on two arguments:

  • The text of Article 231 of the French General Tax Code, in its version prior to January 1, 2013, pursuant to which the base for the payroll tax is calculated for employers hiring employees by reference to Article L 242-1 of the French Social Security Code, which determines the base for the contributions of the general social security regime; as this text only makes reference to employees within the meaning of labor law, i.e. under the employer’s subordination, the directors shall not be included therein. The Nancy Administrative Court of appeal has recently confirmed this analysis.
  • The provisions of new Article 231 of the French General Tax Code, which includes in the payroll tax “the amounts paid as remuneration to the employees”; this formulation would allow for an unambiguous application of the solution upheld by the Nancy Administrative Court of appeal.

Yet, basing its arguments on parliamentary works, the Conseil d’Etat has recently decided that the remuneration of directors which is covered by the employee social contribution scheme shall fall within the scope of the payroll tax.

Only the directors’ remuneration which is covered by the Non-Salaried Workers’ regime shall be exempt from this tax.

The cost of this taxation may not be limited by past solutions, which have now been concurred.

Julien Charnay-Rousset

Link to the ruling: