The Exit Tax is a key fiscal measure implemented by the French authorities to deter tax avoidance linked to the transfer of tax residence outside France. It applies to individuals holding significant shareholdings in companies who choose to relocate abroad. This overview highlights the core features of the Exit Tax, including the conditions for exemption, potential advantages and risks, and recent legal developments concerning its retroactive application.
Application of the Exit Tax: Key Conditions
The Exit Tax applies to individuals who transfer their tax residence out of France, provided the following conditions are met:
- Tax residence status: The individual must have been a French tax resident for at least 6 of the last 10 years prior to departure.
- Significant shareholdings: The individual must directly or indirectly hold:
- More than 50% of a company’s profits; or
- Shares with a total value exceeding €800,000.
- Tax on latent capital gains: The Exit Tax is triggered on unrealized capital gains associated with shares held at the time of departure. These gains are considered as realized on the date of the change in tax residence.
Who Is Not Subject to the Exit Tax?
Certain categories of individuals are not subject to the Exit Tax:
- Employees and civil servants on assignment abroad: If an individual is temporarily assigned abroad by their employer or the government, they maintain their French tax residency.
- No significant shareholdings: If the value of shareholdings is below €800,000, the Exit Tax does not apply.
- Individuals without substantial financial assets: Retirees and students without significant investment portfolios are not affected.
- Expatriates in countries with favorable tax treaties: If the destination country has a tax treaty with France that covers unrealized gains, the Exit Tax may not apply.
- Temporary exemption: If the individual returns to France within 5 years of departure, the Exit Tax can be cancelled under certain conditions.
Tax Treaties that May Exempt from the Exit Tax
France has signed bilateral tax treaties with several countries that can limit or fully eliminate the application of the Exit Tax. Examples include:
- Belgium: Treaty avoids double taxation of latent gains.
- Luxembourg: Exemption possible under certain conditions.
- Switzerland: If the shares are not sold after departure, the Exit Tax does not apply.
- United Kingdom: Taxation of latent gains occurs only in the country of tax residence.
- Portugal: The treaty limits taxation of latent gains under specific circumstances.
- Russia: The treaty prevents double taxation, depending on asset ownership structures.
- UAE (Dubai): No capital gains tax in Dubai; the treaty with France may allow exemption if conditions are met.
- Ukraine: While a treaty exists, taxation depends on the local laws and specific situation.
Tax Rates and Reliefs
Latent capital gains are taxed as follows:
- Flat Tax (PFU) of 30%: Includes 12.8% income tax and 17.2% social contributions.
- Progressive income tax scale: Individuals can opt for the progressive income tax regime.
- Holding period tax relief: If shares are held for more than 2 years after departure, partial exemption may apply.
- Tax deferral: If the taxpayer returns to France within 5 years, the Exit Tax can be cancelled.
Risks and Penalties for Non-Compliance
Failure to comply with Exit Tax obligations may lead to:
- Penalties for late payment or non-declaration: Interest and additional taxes may be applied.
- Loss of tax benefits: If conditions (e.g. asset retention) are not met, previously granted reliefs can be withdrawn.
- Risk of double taxation: If the destination country also taxes unrealized capital gains, there is a risk of being taxed twice.
Retroactivity and Legislative Revisions
- Law relaxed in 2019: Since 2019, the scope of the Exit Tax has been reduced, including a shorter monitoring period (from 15 to 5 years).
- Old rules still apply to departures before 2019: Those who left France before 2019 remain subject to the previous version of the Exit Tax, requiring strict compliance.
- Review of retroactivity (2023): In light of evolving international tax practices, France began reconsidering the retroactive application of the Exit Tax. This may lead to tax cancellations for departures before 2019, provided certain conditions are met (e.g., asset retention or timely return to France).
How to Prepare for Changing Tax Residence
Changing your tax residence requires careful planning to minimize tax risks:
- Asset analysis: Assess your holdings (shares, real estate, bank accounts) and identify unrealized gains.
- Review applicable tax treaties: Ensure the destination country has a treaty with France covering capital gains.
- Forecast potential Exit Tax: Explore available deferrals or exemptions (e.g., 2-year holding, return within 5 years).
- Optimize asset structure: Consider strategies such as asset donations or using investment vehicles.
- Fulfill tax obligations: Notify the French tax authorities of your departure using the appropriate forms.
- Organize banking and administrative matters: Open foreign accounts and ensure proper transfer of insurance and other assets.
Conclusion
The Exit Tax remains a significant consideration for French tax residents planning to leave the country. Despite a more lenient framework since 2019, it is crucial to anticipate the tax implications and prepare adequately. To minimize risks and ensure compliance, consulting with qualified tax professionals is highly recommended.
