The “exit tax” allows the French tax authorities to tax certain unrealized capital gains when a taxpayer transfers their tax residence outside of France. Introduced in 2011 to combat tax avoidance strategies and tax evasion, this measure primarily targets significant shareholders in companies.
We suggest you consider the following key points:
- Definition of the exit tax;
- How it works;
- Pitfalls to avoid.
I- DEFINITION OF THE EXIT TAX:
The exit tax is a tax mechanism designed to prevent French taxpayers from circumventing capital gains tax by transferring their tax residence abroad.
In practical terms, the French authorities tax unrealized capital gains on securities (shares, stocks, etc.), even if you have not yet sold them, at the time of your departure from France.
Three types of assets are targeted by this measure: unrealized capital gains on securities or equity interests, receivables from earn-out clauses, and capital gains already subject to deferral of taxation, particularly in the context of a contribution to a holding company.
Therefore, upon leaving France, you may be taxed on unrealized gains if:
- you have been a tax resident there for at least 6 of the last 10 years;
- you hold unrealized capital gains on shares, securities, or rights in a company, held directly or indirectly with members of your tax household;
- when this shareholding represents at least 50% of the company’s profit rights or a value exceeding €800,000.
II- HOW THE EXIT TAX WORKS:
1- Taxpayers concerned:
This applies to taxpayers who were domiciled in France for six years during the ten years preceding their departure (there is no exit tax on companies).
The households concerned must also meet the following conditions on the date of the change of domicile:
- hold at least 50% of the profits of a company;
- or hold rights whose total value exceeds €800,000 (including receivables arising from a price adjustment clause).
When, within a married or civilly partnered couple, the spouses arrived in France on different dates, the successive tax households and their matrimonial property regime must be taken into account to calculate the period of residence.
Note: The text refers to the tax household; therefore, the tax contributions of both spouses must be taken into account in the case of a married or civilly partnered couple subject to joint taxation, as well as those of any individuals included in the tax household.
2- Equity interests and securities covered:
The French General Tax Code (CGI) does not provide an exhaustive list in this regard, but the following assets can be considered to fall within the scope of this tax:
- shares, bonds, and equity interests;
- receivables for additional payments;
- securities subject to a previous tax deferral.
Note: Transferring tax residence outside of France terminates the deferral of taxation and therefore makes capital gains placed under deferral immediately taxable.
All direct and indirect shareholdings must be taken into account when calculating the requirement of at least 50% ownership of a company’s profits.
In return, the following securities and assets are exempt from exit tax:
- securities held in a PEA or PEA-PME;
- BSPCE, free shares, stock options;
- life insurance contracts and capitalization contracts;
- directly held real estate.
3- Determining the amount of the unrealized capital gain:
Each unrealized capital gain is determined by the difference between the value of the securities on the date of the transfer of tax residence outside of France and their acquisition price or value.
The determination of the value of the investment on the date of the transfer depends on the nature of the securities held.
- for securities of companies listed on a regulated market, the value of the securities on the date of the transfer of tax residence is equal to the last known price on the date of the transfer or the average of the last 30 prices preceding the transfer;
- for securities of unlisted companies and for other securities (SICAVs and FCP), the market value must be estimated on the date of the transfer of tax residence.
The acquisition price or value to be used for calculating exit tax is, in principle, the price actually paid when acquiring or subscribing to the securities, plus any additional costs and contributions. Accounting adjustments made during a capital increase or merger should not be taken into account, except in specific cases where a capital gain is actually realized.
III- EXIT TAX PAYMENT:
Tax rate: It is 31.40% (12.80% for income tax plus social security contributions at a rate of 18.60%).
The tax should, in principle, be paid upon departure from France. However, in order to avoid hindering the free movement of people, a payment deferral mechanism, automatic or optional, has been put in place.
Automatic deferral of payment: This is granted automatically, without the need for guarantees, in the following cases:
- upon departure to an EU Member State or to any other State or territory that has concluded an administrative assistance agreement with France for the purpose of combating tax fraud and evasion;
- upon transfer of tax residence outside of France (since January 1st 2019) to a non-cooperative or non-agreement State or territory, followed by a subsequent transfer to an agreement State or territory.
Deferral upon express request: A deferral of payment may be granted upon express request. To do so, the capital gains tax return must be filed and a tax representative established in France must be appointed. Furthermore, it is necessary to provide guarantees generally amounting to 12.8% of the capital gains in question.
Guarantees may consist of:
- a cash deposit into a Treasury escrow account;
- claims against the Treasury;
- the presentation of a surety bond;
- securities;
- goods deposited in state-approved warehouses;
- mortgages;
- pledges of business assets.
Holding period for securities to qualify for the tax relief on unrealized capital gains: The holding periods vary depending on the total value of the shares, securities, or rights held by the taxpayer’s household on the date of the transfer of their tax residence outside of France:
- 2 years, if this total value does not exceed €2,570,000 on the date of the transfer of tax residence;
- 5 years, if this total value exceeds €2,570,000.
Note: If you return to France before the expiry of this period, the tax on unrealized capital gains placed under deferral of taxation is waived or refunded if paid upon departure.
The 2 or 5 years periods for obtaining relief from exit tax do not apply to capital gains subject to tax deferral. These gains will remain taxable upon the subsequent sale of the securities concerned, regardless of the date.
Reporting obligations:
- Form 2074-ETD at the time of the transfer of residence. This form must include:
- the date of the transfer of tax residence outside of France;
- the address of the new tax residence;
- the amount of unrealized capital gains, receivables arising from a price adjustment clause, and deferred capital gains;
- the information necessary to determine them.
Form 2074-ETD must be filed the year following the transfer of tax residence, within the same timeframe and at the same time as the income tax return (forms 2042 and 2042 C).
If a deferral of payment is requested by option, the deferral request and Form 2074-ETD must be filed no later than 90 days before the transfer of tax residence.
- Form 2074-ETS In the years following the transfer: The taxpayer must, in principle, file a tax monitoring return to track deferred tax payments.
However, if the taxpayer benefits from the deferral of payment only for unrealized capital gains, they are no longer required to file Form 2074-ETS every year. This return only needs to be filed in the event of an occurrence that terminates the deferral or justifies a tax reduction.
- If the deferral of payment expires, the returns (2042, 2042-C, and 2074-ETD) must be filed with the Non-Resident Individuals Tax Office in the year following the expiration of the deferral.
IV- PITFALLS TO AVOID WITH EXIT TAX:
The exit tax does not appear to pose any major problems in its application. However, extreme caution is advised in certain specific cases that could lead to unexpected taxation; here are a few examples:
- Pay attention to your destination country: double taxation (taxation by France and the host country) is generally impossible, as taxes paid abroad can be deducted from French taxes, subject to a tax treaty. It is therefore essential to verify the existence of such a treaty between the two countries.
- Avoid contributing shares to a holding company you control after leaving France: In this situation, there is no mechanism to waive the tax deferral. Therefore, you remain permanently liable for a theoretical tax without ever being able to escape it. Even returning to France does not end this liability.
- Avoid a contribution-sale transaction as much as possible: If a contribution is followed by reinvestment of the sale proceeds, it will be essential to strictly adhere to the reinvestment conditions to maintain the tax deferral. French rules regarding the monitoring of contribution transactions will only cease in the event of a subsequent sale, and the tax deferral should be maintained after the exit tax payment suspension period ends.
The exit tax, a major instrument in the fight against international tax evasion, must be well understood by people planning international mobility. Misinterpreting tax laws in this area can have significant consequences. Our experts are available to assist you if you have such a project.
