Tax expatriation and exit tax
Tax expatriation is an important step for taxpayers.
Many tax implications arise from transferring tax residency out of France.
Once the destination is defined, it is necessary to consider one of the main tax consequences of expatriation: exit tax.
What is exit tax?
This mechanism is provided for in Article 167 of the General Tax Code and concerns taxpayers who transfer their tax residency out of France.
This transfer will result in the taxation of latent capital gains as well as those placed in deferral. The taxation concerns both income tax and social contributions.
At first glance, this exit tax could jeopardize any tax expatriation project; however, there is a deferral mechanism that can apply in certain situations.
Scope of exit tax
This provision concerns, in particular, latent capital gains realized on shares and equity interests held directly or indirectly by a member of the tax household.
Only taxpayers who have been tax residents in France for at least six years out of the last ten preceding the transfer are affected by exit tax.
In addition, the equity interests to be taken into account are those representing at least 50% of the rights in a company, or those whose total value exceeds 800,000 euros.
Beyond latent capital gains, receivables arising from a price supplement, as well as deferred capital gains at the date of transfer, are also subject to exit tax.
Exit tax assessment methods
First, it is necessary to calculate the amount of the taxable latent capital gain. This is determined based on the actual value of the securities at the date of transfer.
In principle, these capital gains are subject to the flat-rate withholding tax of 30%, i.e., 12.8% income tax and 17.2% social contributions.
Taxpayers retain the option to opt for the progressive scale by tranche and thus benefit from holding period allowances. It is advisable to seek the assistance of a tax lawyer to make the choice between the flat-rate withholding tax or the progressive scale.
Possible deferral of payment
Payment deferral is automatic when the taxpayer moves to a European Union Member State. This is also the case if the destination country has concluded with France a convention for assistance in combating fraud and tax evasion, as well as a convention for assistance in recovery.
For all other destinations, the taxpayer must make an express request for a deferral of payment. This request is accepted on the condition that the taxpayer declares the relevant capital gains, designates a tax representative in France, and provides the administration with sufficient guarantees for the recovery of the tax.
The deferral of payment ends in the event of an onerous transfer of equity interests.
Please note, the deferral of payment is also conditional on compliance with declarative obligations at the time of departure and throughout the deferral period.
The tax is subject to a reduction or refund if the taxpayer transfers their tax residence back to France.
Regarding latent capital gains, since 2019, a reduction occurs at the expiration of a period of 2 years after departure, or five if the value of the taxpayer’s portfolio exceeds 2.57 million euros at the date of transfer.
As the tax consequences of expatriation are numerous, it is necessary to seek the assistance of a tax lawyer. They will advise you on the choices to be made, as well as on compliance with declarative obligations regarding exit tax.