Taxation — Payroll tax (French Tax Code art. 231)

Payroll tax
& VAT group:
the sector-based mechanics

Article 231 of the French Tax Code imposes payroll tax on employers not subject to VAT, or whose receipts carrying a right to deduct represent less than 90% of total receipts for the preceding year. The rule looks simple, but its application raises serious difficulties for multi-sector activities (taxable and exempt within a single entity), and with the introduction of the single taxable person regime (French Tax Code art. 256 C) in 2023. Article 231 A of the French Tax Code (introduced by the Finance Act for 2025) has moreover created a specific exemption for members of a VAT group that would not have been subject to payroll tax had they not joined the group, a welcome neutralisation measure. This page summarises the applicable rules and the most frequent pitfalls.

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— In brief
Main provision
French Tax Code art. 231 — liability to payroll tax
90% threshold
Payroll tax due if receipts carrying a right to deduct are < 90% of total receipts for year N-1
Sectorisation
Sector-by-sector application for multi-activity entities
VAT group
French Tax Code art. 231 A — payroll-tax exemption for VAT-group members
Doctrine
BOFiP BOI-TPS-TS-20-30 (updated 05/02/2025)
2026 allowance
€24,256 (associations, trade unions, foundations)
Reporting
Instalment slip no. 2501-SD, then annual return no. 2502-SD filed electronically
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The flip side of VAT: payroll tax on exempt activities

Payroll tax is, historically, the counterpart of VAT exemption: the State offsets the loss of VAT receipts by taxing the remuneration paid by employers who escape VAT. The basic rule of article 231 of the French Tax Code is twofold: payroll tax is due if the employer is not subject to VAT, OR if the share of its receipts carrying a right to deduct VAT is below 90% of its total receipts. The ratio is therefore not measured against "taxable turnover" in the accounting sense, but against the right to deduct within the meaning of VAT law, an essential distinction both for out-of-scope operations and for operations exempt within the scope of VAT.

Application becomes complex for multi-sector activities. The Conseil d'État has confirmed that where a business carries on several activities in distinct sectors within the meaning of VAT law, payroll tax applies sector by sector: for each sector, the liability ratio is computed separately and applies to the remuneration of the staff exclusively assigned to that sector; no tax is due in respect of a sector whose ratio does not exceed 10%. The remuneration of staff shared between several sectors is governed by the company's overall ratio.

The single taxable person regime (French Tax Code art. 256 C, applicable since 2023) adds a further layer of complexity: intra-group operations fall outside the scope of VAT, which can artificially lower the liability ratio of member entities and expose them to payroll tax. Article 231 A of the French Tax Code (introduced by the Finance Act for 2025) corrected this effect by creating a payroll-tax exemption for group members that would not have been subject to payroll tax had they not joined the group.

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5 mechanisms to master

1. The VAT liability ratio (90%)

Payroll tax is due where receipts carrying a right to deduct VAT represent less than 90% of total receipts for the preceding year (and not of "taxable turnover" in the accounting sense). The liability ratio that determines the base of the payroll tax is the ratio between the receipts and other income that did not carry a right to deduct VAT (numerator) and total receipts and other income (denominator), in accordance with article 231, 1 of the French Tax Code. If that ratio stands at 70%, the tax is charged on 70% of the remuneration paid. The 10% threshold is not a tolerance but a statutory threshold: full exemption corresponds to a liability ratio not exceeding 10%, that is, to being subject to VAT on at least 90% of turnover. The tax authorities do, however, allow the base to be tapered for ratios between 10% and 20% (11%: 2% of remuneration; 12%: 4%; and so on up to 20%: 20%), so as to avoid a cliff effect (BOFiP BOI-TPS-TS-20-30, § 220). It is essential to distinguish operations outside the scope of VAT (which carry no right to deduct) from operations exempt within the scope (which are in principle treated as operations carrying no right to deduct, subject to a limited list of exceptions).

2. Sectorisation for multi-sector activities

Where the business carries on several activities in distinct sectors within the meaning of VAT law, the Conseil d'État requires a sector-by-sector application of the payroll tax: (a) computing the liability ratio for each sector; (b) assigning staff to each sector; (c) applying payroll tax to the remuneration of the staff assigned to the sectors whose liability ratio exceeds 10%, at the level of that ratio. Sectorisation can mitigate the payroll tax on the main taxable activities.

3. Mixed staff (assigned to several sectors)

Where an employee is assigned to several sectors (HR, accounting, general management), an allocation key must be applied, in practice the company's overall liability ratio. The rigour of the documentation (organisation chart, job descriptions, analytical breakdown) determines the strength of the defence in the event of a tax audit.

4. Single taxable person regime — payroll-tax neutralisation

Under the single taxable person regime (French Tax Code art. 256 C), intra-group operations fall outside the scope of VAT. Without a corrective measure, this could have lowered the members' liability ratio and made them liable for payroll tax. Article 231 A of the French Tax Code (introduced by the Finance Act for 2025) established an exemption from payroll tax for members that, taken individually, would not have been subject to it, a welcome neutralisation.

5. Progressive scale and allowance

Payroll tax follows a progressive scale by brackets of individual annual remuneration: 4.25% up to €9,229, 8.50% on the fraction between €9,229 and €18,423, and 13.60% on the fraction above €18,423 (French Tax Code art. 231, 2 bis). A specific allowance applies to associations, trade unions, foundations and certain non-profit entities: €24,256 (French Tax Code art. 1679 A). The tax is assessed and paid to the French tax authorities (DGFiP): an instalment slip no. 2501-SD accompanies each monthly or quarterly payment, followed by the annual assessment and adjustment return no. 2502-SD filed electronically, with monthly or quarterly instalments depending on the amount due for year N-1.

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Our approach at the firm

The firm assists businesses with mixed activities (taxable and exempt) in securing their payroll-tax position: sectorisation, computation of the liability ratios, assignment of staff, interaction with the VAT group regime. The objective: optimise without exposing the business to a reassessment.

For groups considering whether to form a single taxable person (French Tax Code art. 256 C), we assess the payroll-tax impact and its interaction with the exemption under article 36 of the Finance Act for 2025.

— Frequently asked questions

Who is liable for payroll tax?

Article 231 of the French Tax Code imposes payroll tax on employers (1) not subject to VAT, or (2) subject to VAT but whose receipts carrying a right to deduct represent less than 90% of total receipts for the preceding year. In practice, this concerns: associations, foundations, liberal professions outside the scope of VAT (doctors, lawyers in part), banks and insurance companies, certain public bodies, and exempt real-estate businesses. For holding companies, exposure to payroll tax is not automatic: everything depends on the nature of the receipts (dividends, financial income, royalties, recharged services) and on whether they carry a right to deduct within the meaning of VAT law; a case-by-case analysis is necessary.

How does the 90% liability ratio work?

The liability ratio is: receipts and other income that did not carry a right to deduct VAT / total receipts and other income, computed for year N-1, with out-of-scope income appearing in the denominator (French Tax Code, art. 231, 1). It is therefore not a "taxable turnover" ratio, but a measure of the right to deduct within the meaning of VAT law. The employer is fully exempt where that ratio does not exceed 10%, that is, where it has been subject to VAT on at least 90% of its turnover. Above that, payroll tax applies to the base obtained by applying that ratio to the remuneration: if the ratio is 70%, payroll tax applies to 70% of remuneration.

How is a business with mixed activities sectorised?

Sectorisation requires a clear accounting and organisational separation of the sectors (exempt residential letting versus commercial letting, for example). The Conseil d'État has confirmed the sector-by-sector application of the payroll tax: computation of the liability ratio for each sector, and application of the payroll tax to the remuneration of staff assigned to each under-taxable sector. Documentation (organisation chart, analytical accounting) is crucial.

Does joining a VAT group expose members to payroll tax?

Without a corrective measure, yes: intra-group operations fall outside the scope of VAT and therefore lower the members' liability ratio. But article 231 A of the French Tax Code (introduced by the Finance Act for 2025) established an exemption from payroll tax for group members that, taken individually, would not have been subject to it. This neutralisation makes the VAT-group election more attractive, without collateral payroll-tax risk.

What are the reporting obligations for payroll tax?

The tax is assessed and paid to the French tax authorities (DGFiP): an instalment slip no. 2501-SD accompanies each monthly or quarterly payment, followed by the annual assessment and adjustment return no. 2502-SD, filed electronically by 15 January of the following year at the latest (BOFiP BOI-TPS-TS-40, § 260 to 280; French Tax Code, annex III, art. 369). Return no. 2502-SD therefore remains the standard annual return. Monthly or quarterly instalments apply depending on the amount due for year N-1, with an annual adjustment. The breakdown of remuneration by scale brackets (4.25%, 8.50%, 13.60%) is entered in the DSN. In the event of an error, late-payment interest under art. 1727 and the surcharge under art. 1728 apply.

Are there specific exemptions?

Several: (1) a specific allowance for associations, trade unions and foundations (French Tax Code art. 1679 A) of €24,256; (2) an exemption for certain public structures; (3) a conditional exemption for members of a VAT group (French Tax Code art. 231 A, introduced by the Finance Act for 2025); (4) certain specific items (remuneration paid to interns, etc.). The precise conditions are set out in article 231 A and the following provisions.

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