The question of whether one can receive a credit for the payment of social taxes such as CSG, CRDS, or social contributions and the solidarity tax in France against Israeli income is one of the common questions raised by individuals who pay taxes in both countries. You might be surprised to learn that despite the stance of the Income Tax Authority, sometimes it is possible to receive a credit for these taxes in Israel.
A foreign tax credit is one of the important mechanisms in preventing international double taxation. This credit allows an Israeli resident to receive a credit for foreign tax paid on income earned or accrued outside of Israel, against the Israeli tax due on the same income.
The mechanism of foreign tax credit is anchored both in the Income Tax Ordinance and in the tax treaties that Israel has signed. The tax treaty between Israel and France details the taxes covered by the treaty for which a foreign tax credit can be received. This treaty was signed in 1995 and came into effect in 1997. Over the years, significant changes have occurred in the French tax system, introducing new mandatory payments on individuals for income and capital gains sourced in France. These payments include “social” contributions, such as:
- General social contribution (Contribution sociale généralisée – CSG) at a rate of 9.2%.
- Contribution to the social debt repayment (Contribution au remboursement de la dette sociale – CRDS) at a rate of 0.5%.
- Solidarity levy (Prélèvement de solidarité) at a rate of 7.5%.
Generally, a foreign tax credit is not available for social contributions like national insurance and health insurance payments since these are not considered “taxes.” Against this background, the question arises whether an Israeli resident is entitled to a credit for the above three mandatory French payments, imposed on income and capital gains sourced in France, against the Israeli tax on the same income. This question becomes more significant considering that the total rate of these mandatory French payments is 17.2%.
The Israeli tax authorities have not yet published their position on this matter, and the general stance is not to allow the credit. This issue has not been discussed in the professional tax literature in Israel either. However, based on several arguments, we believe that in many cases, the three mandatory French payments made for income earned or accrued in France are eligible for a credit against Israeli tax, despite the social nature of these payments.
Given the French tax rate for these mandatory payments – 17.2% – a credit for these payments against Israeli tax could significantly reduce the Israeli tax liability. In light of this, and where appropriate, we recommend exploring the possibility of claiming a credit for the mandatory French payments, including requesting amendments to previously submitted reports.
Our office has successfully handled complex cases on this issue, including cases with high capital gains in France, voluntary disclosures, new immigrants from France, returning residents who were residents in France, and more.
