Deduction at source of personal income tax
Newsletter - February 2018
Deduction at source of personal income tax, while initially planned for 2018, will now not come into effect until 2019. One reason this additional time was provided was to determine certain aspects of the reform that was adopted in the context of the finance law for 2017.
How deduction at source works
Starting in January 2019, personal income from wages and salaries and replacement income will be subject to withholding at source performed by the payer. To avoid double assessment of the taxpayer in 2019 (payment of the monthly deduction at source and payment of tax for 2018), a mechanism been set up called the collection modernisation tax credit (“CIMR”). Taxpayers will be subject to withholding at source starting in January 2019, will not pay progress payments in 2019 in respect of tax year 2018 and will fill out their 2018 tax returns in May 2019. They will then receive a notice of assessment on their 2018 income in September 2019, which will in most cases show that the CIMR cancels out the previous form of assessment.
So, is 2018 a year off?
The term “year off,” which is often heard, is quite misleading since, where income remains constant, there will be no impact at all in terms of cash flow. In 2018, tax will be paid according to the 2017 personal income. In 2019, it will be paid according to the 2019 personal income. Each year, then, taxpayers pay their personal income tax, only the reference basis changes. However, the tax debt on the income in respect of 2018 will be wiped out on 31 December, which will represent an increase in personal assets of the same amount.
The impacts of the withholding at source will be noticeable for those taxpayers whose income will undergo significant variations in 2019. So, in the case of a decrease in income (unemployment, retirement), taxpayers will have the full benefit of the impacts of the withholding tax, since they escape tax on this 2018 income. If a taxpayer dies, the assigns will no longer have to confront the personal income tax liability of the deceased for the year of the death.
Conversely, newcomers to the labour market will be penalised, since withholding at source will apply to their income from the moment they begin work.
To avoid certain opportunistic behaviours, the CIMR will be calculated only on regular income. “Non-recurring income” earned in 2018 will not escape income tax in September 2019 (tax that will, therefore, be in addition to the withholding tax that was already paid from January 2019 onwards). Including among non-recurring income are items such as severance pay from termination of a contract or from retirement, and bonuses that are not associated with the employment agreement.
What happens to income from real estate?
Income from real estate will be covered by the CIMR, but to avoid postponements of expenditure on renovations in 2019, only the average value of the renovations done in 2018 and 2019 will be deductible from real estate income earned in 2019.
Exemple 1 : Payment in 2018 : 10 000 € and payment in 2019 : 0 €, so the deduction in 2019 will be restricted to 5 000 €
Exemple 2 : Payment in 2018 : 0 € and payment in 2019 : 30 000 €, so the deduction in 2019 will be restricted to 15 000 €
Exemple 3 : Payment in 2018 : 10 000 € and payment in 2019 : 30 000 €, so the deduction in 2019 will be restricted to 20 000 €
The special case of small business owners
Since small business owners often have the ability to modulate their income, the income received in 2018 will be deemed current up to the limit of either the taxable net amount of 2018 or the highest taxable net amount for the same income in 2015, 2016 and 2017, whichever is lower. This capping will also apply to income received in 2018 by the small business owner’s family members if they are employees of the company he manages.
Small business owner’s compensation :
2015 : 80 000 € / 2016 : 85 000 € / 2017 : 90 000 € / 2018 : 100 000 €
The taxable amount for 2018 (€ 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 current income. In 2019, therefore, the taxpayer will be able to take advantage of the CIMR, on the basis of compensation of € 90,000. The tax on the residual income (€ 10,000), calculated at the 2018 mean rate of assessment, will be payable in 2019.
It is to be noted that if the capping of the CIMR was applied in 2018, but the manager’s compensation in 2019 is greater than or equal to that of 2018, the manager will be entitled to request repayment of the portion of the CIMR calculated on his 2018 non-capped income and the CIMR actually given. In this way, the tax due for 2018 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.