The exit tax, or when French expatriates in the UAE are targeted by French tax authorities
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Germany announced that it had purchased tax data last February on millions of people living in Dubai.
When questioned by Les Echos, the Directorate General of Public Finances confirmed that the sharing of this data with French tax authorities has already taken place.
The French authorities are therefore now looking to track down potential fraudsters within this data and the presence of "undeclared income" and "unknown assets" of individuals wishing to evade taxes in their country. This will include verifying whether French entrepreneurs who moved to Dubai have duly paid the "exit tax" levied on unrealized capital gains acquired in France and abroad (1).
This article will outline the concept of the Exit Tax to inform French expatriates residing in Dubai about their compliance or non-compliance with French tax law due to their change of tax residence from France to the Emirates.
I. What is the exit tax?
France introduced the Exit Tax, an exceptional tax due by French taxpayers transferring their tax residence outside of France, in 2011 through Article 167 bis of the General Tax Code (the "CGI").
The Exit Tax is defined as a tax on latent capital gains (the "latent CG") recorded on social rights (voting rights), securities, shares (stocks and bonds) or rights in a company held by taxpayers before their change of tax residence. The capital gain corresponds to the positive difference in value between the purchase price and the resale price of an asset or property. There are two types of capital gains: when the capital gain is considered at the time of the sale of the asset or property, the capital gain is realized. Conversely, the capital gain is considered latent throughout the entire period of holding the asset or property, until the moment of its disposal.
In other words, the Exit Tax applies to CGs recorded on social rights, securities, shares, or rights still held by taxpayers as soon as they transfer their tax residence outside of France (after March 3, 2011), even though they have not sold them. The simple change of tax residence outside of France makes the taxpayer liable for this tax.
As a reminder, a taxpayer is considered a French tax resident if they spend more than 180 days in France during a given tax year and/or if their permanent home and vital interests (personal and economic ties) are located there for the relevant tax year. Consequently, the transfer of tax residence will occur as soon as a taxpayer spends more than 180 days in a foreign country and/or their vital interests are located outside of France.
II. What is the scope of the exit tax?
THE TAXPAYERS CONCERNED
Taxpayers who fall within the scope of the exit tax are those who have been tax resident in France for 6 of the last 10 years preceding the transfer of tax residence outside France. As such, for this criterion, the duration of tax residence in France is assessed with regard to the taxpayer and not the tax household.
2. UNREALIZED CAPITAL GAINS AND RECEIVABLES TARGETED
a. Threshold for applying the Exit Tax
There is a threshold above which the Exit Tax will apply:
When the securities falling within the scope of the Exit tax represent, on the date of the transfer of residence, at least 50% of the social benefits of a company; and/or
When the overall value of the securities falling within the scope of the exit tax exceeds €800,000 on that same date.
The assessment of these thresholds is carried out by taking into account the members of the taxpayer’s tax household and the securities held directly or indirectly. However, only direct shareholdings in companies must be taken into account to assess whether their overall value exceeds €800,000 at the time of transfer.
b. Securities targeted by the Exit Tax
Under Article 167 bis of the CGI, taxpayers are taxable on unrealized capital gains observed on social rights, values, securities or rights mentioned in Article 150-0 A of the CGI (capital gains achieved by individuals in the context of the non-professional management of a portfolio of securities).
Unrealized capital gains on the following securities and rights also fall within the scope of the Exit Tax system:
Bonds and negotiable debt securities (a bond is a negotiable security generating interest in return for a loan to a company);
Subscription or allocation rights of social rights or securities;
Rights resulting from a division of property (usufruct/bare ownership) – these rights will only be taken into account for the assessment of the value threshold (€800,000) but will not be subject to the Exit Tax;
Receivables originating from an earn-out clause – part of the sale price whose actual payment is conditional on the achievement of a performance criterion linked to the activity of the sold company.
In addition, since January 1, 2019, the Exit Tax system has been extended to shares in real estate wealth companies – companies where more than half of the assets consist of real estate not allocated to its professional operations.
Finally, the rise and democratization of holding crypto-assets has raised the question of whether the transfer of a portfolio of digital assets abroad was a triggering event for the exit tax. At present, the Exit Tax does not seem to include digital assets, but given the very spirit of the system, the legislator will almost certainly extend the Exit Tax to cryptocurrencies when the taxpayer resides in a country where tax rates on the sale of crypto-assets are more attractive (or even zero) abroad.
Finally, and in addition to the Exit Tax, the transfer of a French taxpayer's tax residence entails the end of the tax deferral they may have benefited from.
III. How much exit tax do I have to pay?
Unrealized capital gains subject to the Exit Tax system are hit by the Single Flat Tax (PFU): they are taxed, on their gross amount, at a rate of 12.8% for income tax and 17.2% for social security contributions. Consequently, an overall tax rate of 30% will be levied on the unrealized capital gains.
A fixed allowance of €500,000 can be requested, notably by the company-managing taxpayer, under certain conditions.
It is also important to note that by way of derogation, for any transfer of residence after January 1st, 2018, and under certain conditions, these capital gains may be taxed according to a progressive scale. This progressive scale cannot be combined with the €500,000 fixed allowance.
IV. What are the exceptions/exemptions to the exit tax?
In principle, the taxation resulting from the Exit Tax must be paid immediately upon the transfer of tax residence outside of France. Nevertheless, there are possibilities of deferral of payment and also reimbursement of the Exit Tax.
DEFERRAL OF PAYMENT
The deferral of payment until the actual sale of the securities is automatic and of right if the taxpayer transfers their tax residence to:
A State member of the European Union; or
A State located within the European Economic Area (excluding Liechtenstein) which has concluded an administrative assistance agreement with France with a view to combating tax fraud and evasion as well as a mutual assistance agreement in the field of recovery concerning mutual assistance in the recovery of claims relating to taxes, duties, and other measures.
If the taxpayer transfers their tax residence to a State outside the European Economic Area, as is the case for the United Arab Emirates, then they may benefit from the deferral of payment of right, without setting up guarantees, if the third State :
Has concluded an administrative assistance agreement with France with a view to combating tax fraud and evasion; and
Has concluded a mutual recovery assistance agreement with France with a scope similar to that provided for by Council Directive 2010/24/EU of 16 March 2010 on mutual assistance for the recovery of claims relating to taxes, duties, and other measures; and
Does not appear on the list of non-cooperative States or territories (ETNC) within the meaning of Article 238-0 A of the CGI.
Regarding the United Arab Emirates (or the Emirate of Dubai), the deferral of payment seems to be optional for taxpayers who have transferred their tax residence to the United Arab Emirates. Indeed, the UAE and France signed an administrative assistance agreement with a view to combating tax fraud and evasion which entered into force on January 1, 2019, and a mutual recovery assistance agreement – also entered into force with France on January 1, 2019, according to the OECD website, but not updated by the tax website in France (2) but which do not include sufficient measures for France.
Thus, taxpayers transferring their residence to States that have not concluded one of the two required Conventions, as is the case for the United Arab Emirates, will still be able to benefit from an optional deferral of payment, by making an express request for deferral of payment and providing several guarantees, including:
A declaration of unrealized capital gains to the tax administration at least 30 days before your departure
The designation of a tax representative resident in France ; and
The setting up of a guarantee of 12.8% of the total amount of the unrealized capital gains.
In the event that the deferral of payment is granted to the taxpayer, the deferral expires when one of the following events occurs:
Sales for consideration, redemption, reimbursement, or cancellation of the underlying social rights, securities, shares, or rights for which unrealized capital gains were recognized or whose acquisition generated a tax deferral;
Donation of social rights, securities, shares, or rights for which unrealized capital gains were recognized when the donor is fiscally domiciled in Liechtenstein or outside the European Economic Area, unless they demonstrate that the donation is not made with the main purpose of avoiding the tax established under this scheme;
Death of the taxpayer.
For claims originating from an earn-out clause, the deferral ends upon collection of the earn-out payment or in the event of contribution or transfer of the claim or in the event of donation of the claim when the donor is fiscally domiciled in an ETNC or a third State or territory to the EU that has not concluded the agreements referred to above. The taxpayer must then pay the amount of the Exit Tax which was subject to a payment deferral.
2. CANCELLATION OR REIMBURSEMENT OF THE EXIT TAX POSSIBLE UNDER CERTAIN CONDITIONS
In the event that the payment deferral is not granted to a taxpayer subject to the payment of the Exit Tax, the tax may be cancelled or refunded in the event of payment, if it was paid upon the transfer of tax residence, in several situations :
If the taxpayer remains abroad for more than 2 years or more than 5 years (depending on the value of the securities (3)) and retains their securities without selling them, then a cancellation or a refund of the tax, if paid on the unrealized capital gains relating to these securities, is granted to the taxpayer.
If the taxpayer, domiciled outside of France, dies or makes a donation of their securities :
in the event of death, the tax paid on the unrealized capital gain is refunded;
in the event of donation of the securities when the taxpayer has established their tax residence in one of the States covered by the scope of the automatic payment deferral, non-taxation of the amount of the Exit Tax applies. This donation will then constitute a case of discharge (or reimbursement) of right, unless the Administration demonstrates that the main purpose of this donation is to avoid tax;
in the event of a donation when the taxpayer does not reside in a State covered by the payment deferral, the benefit of the discharge or refund is subject to the condition that the taxpayer demonstrates that the transaction is not made with the main purpose of avoiding tax.
When the taxpayer returns to France the tax established on the unrealized capital gains at the time of transfer is automatically discharged, or refunded if it had been subject to immediate payment upon the transfer of tax residence outside of France, when the securities remain, on that date, in the taxpayer's asset portfolio.
(2) https://www.oecd.org/fr/fiscalite/echange-de-renseignements-fiscaux/convention-concernant-l-assistance-administrative-mutuelle-en-matiere-fiscale.htm, there remains a legal vacuum, however, because France has not updated the appendix containing the list of signatory countries to this convention since 2012 on the tax doctrine website.
(3) Two years if the value of the securities does not exceed €2,570,000 on the date of this transfer of tax residence, 5 years if the value exceeds €2,570,000.
