Deduction at source and 2017 incomes

Newsletter - February 2017

The finance law for 2017 introduced deduction at source of income tax. This new arrangement for collecting tax will apply to income as of 2018. It also includes a special tax credit mechanism intended to offset taxation of current income for 2017.

The principle

Starting on 1 January 2018, income will be subject to withholding at source. There will no longer be the lag that currently applies between the year in which income is received and payment of the corresponding tax that occurs in the following year.

The new system could not be adopted without the issue of income received in 2017 being addressed: in light of the legislation in effect, it will be taxed in 2018. Thus, there would be a double cash outflow for the taxpayer: payment of the 2017 income tax as well as the deduction at source of the tax for 2018 income.

The collection modernisation tax credit (“CIMR”)

To avoid this double disbursement, Parliament introduced a tax credit mechanism: the collection modernisation tax credit (“CIMR”), which will be charged against the income tax of 2017, typically due in 2018.

However, the CIMR will apply only to “current” income (i.e., non-exceptional, according to the terminology used by the law).

The income deemed exceptional, therefore, will not benefit from the CIMR and will be taxed in 2018, at the same time as the income received in 2018. This non-exceptional revenue is defined according to the criteria specific to each category of income concerned.

The employee’s situation

The following income types, explicitly specified by the law, are among those deemed “exceptional”:

– compensation paid at termination of an employment agreement or the end of a term as director;
– those amounts received as mandatory or optional profit-sharing that is not allocated to a company saving plan;
– those amounts arising out of the monetisation of entitlements recorded on a time bank, for those that correspond to entitlements in excess of ten (10) days;
– optional bonuses, i.e., bonuses granted without any link to the employment agreement or the position as director, or that go beyond what they provide for, regardless of the name used by the employer when it made these payments;
– pension compensation.

Added to this list is income that is not likely to be collected every year.

Non-exceptional salaries are those that are not considered to be exceptional. Therefore, this is a residual income category.

Where an employer has doubt, it can seek an advance ruling to obtain a formal – but not unequivocal – position from the taxation authority that will let it know the tax treatment that applies to the various items of compensation paid in 2017.

The executive director’s situation

Since the executive director is often able to modulate his compensation, the income received in 2017 will be considered non-exceptional up to the limit of the lower amount between the 2017 net taxable amount and the highest net taxable amount for the same 2014, 2015 or 2016 income. This capping process will also apply to the income received in 2017 by the executive director’s family members if they are employees of the company he manages.

Example : Executive director’s compensation
2014 : 80 000 €
2015 : 85 000 €
2016 : 90 000 €
2017 : 100 00 €

The taxable amount for 2017 (€ 100,000) and the highest taxable amount of the previous three years (€ 90,000) must be compared. The lower of the two amounts, i.e., € 90,000, is therefore classified as non-exceptional income. In 2018, the taxpayer will therefore be able to take advantage of the CIMR, on the basis of compensation of € 90,000. The tax on the residual income, calculated at the marginal rate on exceptional income (€ 10,000), will be payable in 2018.

It is to be noted that if the capping of the CIMR was applied in 2017, but the director’s compensation in 2018 is greater than or equal to that of 2017, the director will be entitled to request repayment of the portion of the CIMR calculated on his 2017 non-capped income and the CIMR actually given. In this way, the tax due for 2017 will be cancelled.

We are entirely available if you have any further queries about the issues discussed in this newsletter or about any other accounting, tax, social security or law related topic.

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