Following a decision by the French Supreme Administrative Court, French tax residents who travel abroad for business may now claim tax exemption on any additional compensation they receive (known as ‘Foreign Service Premiums) up to a value of 40% of their total annual compensation.
The decision by the French Court overrules previous limits set by the French tax authorities, which limited tax exemption to the number of days spent working outside France during the tax year. Under the new rules, the 40% tax exemption for Foreign Service Premiums will now be calculated based on total annual compensation, without taking into account the number of days spent abroad. So, for a total annual salary of EUR 200,000, up to EUR 80,000 worth of Foreign Service Premiums would be exempt from tax.
The Court’s decision will also apply to any Foreign Service Premiums paid in the past three years. Employees who paid tax on a portion of their Foreign Service Premiums, which under the new rules would be tax exempt (ie. within 40% of their total annual compensation), may file a claim with the French tax authorities for a refund of the additional tax. Claims may be made until 31 December of the second year following the year in which tax was due (ie. for a Premium paid in 2012, tax may be reclaimed until 31 December 2015).
As well as benefiting employees, the new tax rules will allow companies to use the Foreign Service Premium as a great tool for attracting and retaining talent, which allows significant tax benefits for even a relatively low number of trips abroad.
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