Are you about to leave France and wondering whether you are tax-compliant?
If you leave France and change your tax residence to a country outside France, you may be liable, under certain conditions, for income tax and social security contributions on your unrealized capital gains, claims arising from an earn-out clause, and capital gains from disposals or exchanges subject to a tax deferral regime.
But what exactly is the EXIT TAX?
The Exit Tax is nothing more and nothing less than a tax. It was first introduced in 2011 and then amended in 2013 following a revision of the Finance Act. This tax was introduced solely to restrict the relocation of French nationals abroad, particularly to the United Arab Emirates. This tax can be seen as a way for the government to make up for the financial losses resulting from these French nationals no longer paying tax in France.
The Exit Tax applies to taxpayers who meet the following conditions:
- Having been a French tax resident for at least six (6) years during the ten (10) years preceding the transfer of their French residence abroad;
- Holding shares, securities or rights with a total value of at least €800,000, or representing at least 50% of a company’s profits.
This change in tax residence will trigger the application of the EXIT TAX and therefore subject the following to income tax and social security contributions:
- capital gains subject to tax deferral;
- unrealized capital gains relating to a direct or indirect interest of at least 50% in a company’s capital, or to a direct interest in one or more companies whose total combined value exceeds €800,000;
- claims representing an earn-out payment.
The tax regime/Calculation of the Exit Tax
The persons concerned are subject to a flat rate of 12.8% for income tax and 17.2% for social security contributions.
The calculation is based on the value of the securities at the time they were acquired. The difference is then calculated between the value of the securities when the tax residence changes and their cost price for the owner.
Please note that, in certain cases, you may benefit from a payment deferral and a tax relief.
Payment of the Exit Tax
The taxpayer is required to pay this tax as soon as they transfer their tax residence, that is, immediately after filing the declaration.
However, it is possible to obtain a payment deferral. This point will be addressed in the next paragraph.
Tax payment deferral
A payment deferral is a situation in which payment may be postponed to a later date.
This deferral is granted automatically and only if you decide to settle in a Member State of the European Union or in a State or territory that has concluded with France an agreement on administrative assistance to combat tax fraud and evasion, as well as a mutual assistance agreement for the recovery of taxes (except for a State considered non-cooperative).
If you decide to settle in a country that does not fall within the scope of the tax payment deferral, you may still request this deferral within the thirty (30) days preceding the transfer of your tax residence.
However, if you move to a country other than a State or territory that is not party to the EEA agreement but has concluded an administrative assistance agreement with France, no guarantee will be required for the payment deferral to apply.
Advantage of the tax payment deferral
If you are eligible for this deferral, you will not have to pay the Exit Tax immediately. It will become payable only in the following cases:
- disposal, redemption, repayment or cancellation of the securities.
In the event of the taxpayer’s death or return to France, the Exit Tax may be automatically waived by the tax authorities.
The EXIT TAX form
If you transferred your tax residence outside France after 1
st January 2019, you may benefit from certain adjustments, with no retroactive effect for taxpayers who transferred their tax residence before that date (Article 112 of the 2019 Finance Act).
A taxpayer who transfers their tax residence outside France may benefit from a payment deferral for the taxes relating to the transfer of residence. The request must be made using
form n2074 ETD, accompanied by a proposed guarantee.
Since 2019, the deferral upon request that applied to taxpayers transferring their residence to a country outside the European Economic Area applies only to those transferring their residence to a non-cooperative State (a State considered non-cooperative) or to a State or territory outside the EU that has not concluded with France agreements on assistance in combating tax fraud and evasion and assistance with tax recovery (Law 2018-1317 of 28-12-2018, Article 112).
Tax relief subject to conditions
The new system provides for a reduction in the period after which the taxpayer may obtain relief from the Exit Tax under payment deferral, unless the securities are disposed of, redeemed or cancelled, or the company is liquidated during that period. This period has been reduced from 15 years to 5 or 2 years, depending on the case:
- 2 years for taxpayers whose securities within the scope of the Exit Tax are worth less than €2,570,000;
- 5 years for those whose value exceeds €2,570,000.
This system now covers securities in predominantly real-estate companies subject to corporate income tax on the date the taxpayer’s tax residence is transferred.
Exit Tax and returning to France
If you decide to leave the United Arab Emirates and return to settle in France, the Exit Tax will then be waived or refunded, provided that the securities are still included in your assets when your tax residence is transferred to France.
Which declarations must be filed?
Do not be mistaken: many declarations must be filed in connection with the Exit Tax. In addition to the income tax return, you will need to complete:
- declaration no. 2074-ETD for the transfer of your tax residence outside France. If an express request for a payment deferral is made, declaration no. 2074-ETD must also be filed (within the 30 days preceding the date of the tax residence transfer);
- declaration no. 2074-ETS3 for the years following the year in which your tax residence was transferred outside France (the form applies to transfers that took place since 2014);
- if payment is fully deferred and no event terminating the deferral or generating tax relief occurred in year N-1, declaration 2074-ETSL must be filed in year N. The total amount of tax under payment deferral must also be entered in box 8TN of income tax return no. 2042C (carried over from declaration 2074 ETS3 when the latter is completed).
For all procedures relating to leaving or returning to France, you can consult the official tax website directly or contact a French tax lawyer.
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