Thinking of leaving?
Do you hold substantial shareholdings?
–What you need to know–
The principle of exit tax in France (Article 167 bis of the General Tax Code):
The Exit Tax regime aims to ensure that taxpayers do not escape taxation on their capital gains simply by transferring their tax residence abroad.
In principle, leaving France should result in the taxation of unrealized capital gains.
In order to maintain France’s attractiveness, and in compliance with European rules, the law provides that individuals holding substantial shareholdings in companies (French or foreign) at the time of their departure from France crystallize an unrealized capital gain (or loss), but do not pay tax on these observed unrealized capital gains, which can then be placed in deferment of payment.
Characteristics:
Who is concerned?
- This applies to taxpayers who have been domiciled in France for 6 of the 10 years prior to departure (there is no Exit tax on companies themselves in France)
- A tax household is concerned if it holds shareholdings representing at least 50% of a company’s social benefits or if the value of the shareholdings exceeds €800,000
Which capital gains?
- Unrealized capital gains on shareholdings (see below)
- Receivables originating from an earn out clause are concerned by the measure
- Capital gains already placed in tax deferral, for example in the case of contribution to a controlled company (150-0 B Ter of the CGI) or in suspension, for example in the case of share exchange (150-0 B) may also be concerned
Which shareholdings?
All direct and indirect shareholdings are taken into account. This obviously raises a large number of questions, including:
- What about shareholdings held through PEA, BSPCE, life insurance and capitalization bonds? Answer: although the texts do not explicitly exclude them, it seems logical to exclude them from the scope of the measure.
- What about shareholdings held before arriving in France? Answer: They should be included in the base.
- What about dismembered shareholdings? Answer: a bare owner has been considered as falling under the Exit tax in respect of their rights.
How to benefit from it?
- The amount of the capital gain concerned must be mentioned in the income tax return filed in the year after departure, via the annex form 2074-ET
- A deferment of payment is automatically granted in case of transfer of domicile to an EU country or a country that has concluded an administrative assistance agreement with France to combat fraud and tax evasion, as well as a mutual assistance agreement for recovery.
Attention: this is not the case for Liechtenstein or even Switzerland for example. However, this is the case for the United Kingdom.
- A deferment of payment can be granted upon request for any other country.
To do this, the capital gain declaration must be filed, a tax representative established in France must be designated and it is necessary to provide guarantees to ensure recovery by the Treasury, corresponding in principle to 12.8% of the amount of the capital gain concerned (e.g., security, pledge…).
Attention. The proposal of guarantees must reach the non-resident individual tax office no later than 90 days BEFORE the transfer of domicile.
Attention bis. The administration often asks to provide guarantees up to 30% of the amount of capital gains, in order to cover both income tax (12.8%) and social charges (17.2%). Note that the amount of guarantees can be regularized after departure.
What happens next?
- A specific declaration must then be filed annually, to allow the French administration to monitor the fate of the shareholdings
- In case of failure to comply with declarative obligations, disposal / buyback / reimbursement / cancellation of the concerned shareholdings, donation of said shareholdings: the capital gains then become taxable. Of course, there are various adjustments and exceptions that should be examined on a case-by-case basis.
Caution. In the event of taxation, it is important to be aware of the applicable regime in the host country, in order to avoid double taxation.
- In case of maintaining shareholdings for the period prescribed by the exit tax regime, returning to France, or in the event of death: the tax on latent capital gains (or deferred gains, or earn-out receivables) placed in deferral is discharged (or refunded in case of payment upon departure without the benefit of deferral).
Required holding period after departure:
- Shareholdings between €800K and €2.57M – > 2 years
- Shareholdings over €2.57M – > 5 years
Caution. The discharge related to maintaining the shareholding for the required period only concerns latent capital gains! It does not apply to earn-out receivables or deferred capital gains.
Can one be subject to a tax audit and/or reassessment?
- The answer is obviously yes: there are audits focusing particularly on the value of the capital gain considered in this context.
For reference:
The Finance Act of 1999 created the mechanism for taxing latent or deferred capital gains when the shareholding was greater than 25% at the time of the transfer of a person’s domicile out of France. A deferral of payment was then applicable, upon request, with the provision of guarantees.
As the measure was considered contrary to EU law by the ECJ (Lasteyrie du Saillant case), this first regime was simply abolished in 2005.
The Exit tax was reintroduced in 2011, with modified conditions of application.
Since then, it has undergone various modifications to its regime, particularly regarding the period for maintaining shareholdings to be eligible for discharge:
- From 2011 to 2013, the post-departure shareholding retention period was 8 years
- This period was extended to 15 years in 2014
- It was reduced to 2 / 5 years in 2018.
So, contrary to what some claim in the press… the exit tax has not disappeared, and it is unlikely to disappear anytime soon… on the contrary, it risks having its period extended again in the near future.
