Taxe sur les salaires

Tax on wages: exclusion of debt write-offs from the calculation of the liability report

Tax on wages (or payroll tax) is a tax that can create complexities in calculating the wage tax liability ratio.

This tax, which affects French wages, is applicable when an operator realizes less than 90% of its turnover in connection with transactions giving rise to the right to deduct VAT (transactions subject to VAT or giving rise to the right to deduct due to regulations (exports, intra-community deliveries, etc.)).

The calculation of this tax involves recognizing products that are not subject to VAT such as dividends or subsidies.

On June 17, 2024, the Council of State overturned the position of the tax administration, which wanted that a repeated forfeiture of debt could constitute a non-taxable turnover for the purposes of VAT, integrated into the numerator and denominator of the liability report.

A good opportunity to take stock of this tax and the exceptional subsidies.

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I. Reminder of the principle of tax on wages

Tax on wages is due by employers established in France who are not subject to VAT on more than 10% of their turnover.

For these persons, the tax on wages base is obtained by multiplying the total amount of taxable remuneration by the ratio existing the year preceding the year in which these remuneration was paid, between the revenue that did not give rise to the right to deduct VAT and the total revenue (French Tax Code, art. 231.1).

This ratio is called the tax on wages liability ratio and can be calculated by sector. The calculation is as follows: revenue and other income not eligible for deduction / total revenue and other income.

II. Integration of grants

As a reminder, unrequited subsidies constitute remuneration outside the scope of VAT, in accordance with article 256 of the French Tax Code.

In this context, they do not entitle VAT to be deducted and must therefore be included in the calculation of the wage tax liability ratio.

III. Exclusion of exceptional grants and equipment

However, by way of derogation, the tax authority states opposably in its doctrine (BOI-TPS-TS-20-30-20220330 paragraph 160 et seq.) that exceptional subsidies and equipment subsidies are not included in the calculation of the liability ratio, both in the numerator and in the denominator.

Exceptional grants are defined as non-recurring grants intended to finance a specific expense or to support a particular event. They must be ancillary to the company's normal revenue.

In this context, a repeated grant, even paid under specific random conditions, loses its exceptional nature in the event of regular payment. It also loses its exceptional character if it is no longer ancillary (more than 20% of turnover according to a reading carried out by the administration in certain tax audits).

With regard to equipment subsidies, the administration does not provide a definition. However, it indicates in the chapters related to the VAT tax base that “In particular, the tax base does not include: equipment subsidies allocated to the total or partial financing of a specific investment asset”. This part seems to indicate that in terms of VAT, the administration is limiting the scope of its comment to equipment subsidies financing an investment good (understood as a fixed asset).

In the field of wagetax, this element is not indicated: as a result, the definition could be determined independently, but an extensive reading could lead to a risk of calling into question the qualification.

In terms of accounting and direct taxes, it seems that an equipment grant finances a fixed asset while an investment grant is broader and aims at a long-term project (for example, marketing costs).

A strict reading therefore implies that companies consider that investment grants that do not finance a specific asset should be included in the liability report.

IV. The particular case of debt write-offs

Within its doctrine, the tax authority indicates that “the abandonment of a debt, non-repetitive, granted exceptionally to a company in difficulty by a company belonging to the same group or by a financial institution”. An a contrario reading implies that regular debt write-offs do not constitute exceptional grants. They must therefore be included in the numerator and the denominator of the liability report.

This interpretation of the tax administration was overturned by the Highest French administrative in a judgment of 17 June 2024 (link). The Council of State strictly specifies that article 231 of the French Tax Code relates to turnover within the meaning of VAT. However, dropouts do not constitute turnover within the meaning of VAT and should therefore not be taken into account when it comes to wage tax.

In this context, dropouts should be excluded from the numerator and denominator, regardless of whether they are exceptional or not.

This case law, which is positive for taxpayers, may make it possible to file claims for wage tax paid in the last three years.

Do not hesitate to contact us if this is your case.

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