Germany announced last February that it had purchased tax data on millions of people living in Dubai.
Questioned by Les Echos,the Directorate General of Public Finance confirmed that the sharing of this data with the French tax authorities has already taken place.
The French authorities are therefore now seeking to get their hands on possible fraudsters in these data and the presence of “undeclared income” and “unknown possessions” of people wishing to escape taxation in their country. In particular, the aim is to verify whether French entrepreneurs who have gone to Dubai have paid the “exit tax” which affects unrealised capital gains realised in France and abroad (1).
This article will retrace the contours of the concept of exit tax in order to inform French expatriates residing in Dubai on their compliance or not 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 payable 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 unrealised capital gains (the “unrealised PV”) recorded on corporate rights (voting rights), securities (shares and bonds) or rights in a company held by taxpayers before their change of tax residence. Capital gain is 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 effective. On the contrary, the capital gain is considered to be unrealised throughout the period of holding the asset or property, until the time of its sale.
In other words, the Exit Tax applies to capital gains found on social rights, securities, securities or rights still held by taxpayers as soon as they transfer their tax residence outside France (after March 3, 2011) even though they have not sold them. The simple change of tax residence outside France makes the taxpayer liable for this tax.
As a reminder, a taxpayer is considered to be a French resident for tax purposes if he or she spends more than 180 days in France during a given tax year and/or if he has his permanent dwelling and vital interests in France for the given tax year (personal and economic ties). Therefore, the transfer of tax residence will take place as soon as a taxpayer spends more than 180 days in a foreign country and/or his vital interests are located outside France.
IO. WHAT IS THE SCOPE OF APPLICATION OF THE EXIT TAX?
- THE TAXPAYERS CONCERNED
Taxpayers who fall within the scope of the exit tax are those who have been domiciled for tax purposes in France for 6 of the last 10 years preceding the transfer of their tax residence outside France. As such, for this criteria, the duration of tax domicile in France is assessed in the light of the taxpayer and not the tax household.
2. UNREALISED GAINS AND DEBTS COVERED
A. Threshold for the application of 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 tax residence, at least 50% of the corporate profits of a company; or
- When the total value of the securities falling within the scope of the exit tax exceeds €800,000 on the same date.
The assessment of these thresholds takes into account the members of the taxpayer’s tax household and the securities held directly or indirectly. However, only direct holdings in companies must be taken into account to assess whether their overall value exceeds €800,000 at the time of transfer.
B. Securities covered by the Exit Tax
Under Article 167a of the CGI, taxpayers are liable for tax on unrealised capital gains, on corporate rights, securities, or rights mentioned in Article 150-0A of the CGI (capital gains realized by individuals in the context of the non professional management of a securities portfolio).
Unrealised gains on the following securities and rights also fall within the scope of the Exit Tax scheme:
- Marketable bonds and debt securities (a bond is a negotiable security earning interest in return for a loan to a company);
- Subscription or allocation rights of social rights or securities;
- Rights resulting from a dismemberment 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 arising from an earn-out clause – part of the transfer price whose effective payment is conditional on the achievement of a performance criterion related to the activity of the transferred company.
In addition, since 1 January 2019, the Exit Tax system has been extended to the securities of companies with a preponderance of real estate assets – companies where more than half of the assets are composed of real estate not allocated to its professional operations.
Finally, the rise and democratization of cryptoasset ownership has raised the question of whether the transfer of a portfolio of digital assets abroad triggers the imposition of the Exit Tax. At the moment, the Exit Tax does not seem to include digital assets, but given the spirit of the scheme, the legislator will most certainly extend the Exit Tax to crypto-currencies when the taxpayer resides in a country where the tax rates on the transfer of crypto-assets are more attractive (or even nil) abroad.
Finally, and in addition to the Exit Tax, the transfer of the tax residence of a French taxpayer entails the end of the tax deferral from which he or she may have benefited.
III. HOW MUCH TAX DO I HAVE TO PAY UNDER THE EXIT TAX?
Unrealised capital gains subject to the Exit Tax scheme are subject to the Single Flat-Rate levy : they are subject, for their gross amount, to a rate of 12.8% to income tax and 17.2% to social security contributions. Therefore, an overall tax rate of 30% will be levied on unrealised capital gains.
A fixed deduction of €500,000 may be requested, in particular by the taxpayer managing a company, under certain conditions.
It is also important to note that by way of derogation, for any transfer of domicile after 1 January 2018, and under certain conditions, these capital gains may be taxed according to a progressive scale. This progressive scale cannot be combined with the fixed allowance of €500,000.
IV. WHAT ARE THE EXCEPTIONS/EXEMPTIONS TO THE EXIT TAX?
In principle, the tax resulting from the Exit Tax must be paid immediately when the tax domicile is transferred out of France. Nevertheless, there are hypotheses of deferment of payment and of reimbursement of the Exit Tax.
- DEFERMENT OF PAYMENT
The deferment of payment until the effective sale of the securities is automatic if the taxpayer transfers his or her tax domicile to:
- A Member State of the European Union; or
- A State which is located within the European Economic Area (excluding Liechtenstein) and which has concluded with France an Administrative Assistance Convention to Combat Tax Evasion and Avoidance and a Mutual Assistance In Recovery Agreement on mutual assistance for the recovery of claims relating to taxes, duties and other measures.
If the taxpayer transfers his or her tax residence to a State outside the European Economic Area as is the case of the United Arab Emirates, then he or she may benefit from the automatic suspension of payment, without the constitution of guarantees, if the third State:
- Concluded an administrative assistance agreement with France to combat fraud and tax evasion; and
- Concluded with France a convention on mutual assistance for recovery similar in scope to that provided for in 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 (NCCTs) within the meaning of article 238-0 A of the CGI.
Thus, the suspension of payment seems to be automatically open to taxpayers who have transferred their tax residence to the United Arab Emirates. Indeed, the Emirates have signed with France an administrative assistance agreement to combat fraud and tax evasion that entered into force on 1 January 2019 and a mutual assistance agreement on recovery – which also entered into force with France on 1 January 2019 according to the OECD website but not updated on the French tax website (2).
Taxpayers transferring their residence to States that have not concluded one of the two required Conventions will still be able to benefit from a suspension of payment, by making an express request for a suspension of payment and by providing several guarantees, including:
- A declaration of unrealised capital gains to the tax authorities at least 30 days before their departure
- The appointment of a tax representative resident in France; and
- The provision of a guarantee of 12.8% of the total amount of unrealised capital gains.
In the event that the suspension of payment is granted to the taxpayer, the deferral expires at the time when one of the following events occurs :
- Sale for valuable consideration, redemption, repayment or cancellation of corporate rights, securities or rights in respect of which unrealised capital gains have been established or the acquisition of which has given entitlement to a deferral of taxation;
- Donation of corporate rights, securities or rights in respect of which unrealised capital gains have been established when the donor is domiciled for tax purposes in Liechtenstein or outside the European Economic Area, unless he or she demonstrates that the donation is not made for the main reason of evading the tax established pursuant to this arrangement;
- Death of the taxpayer.
In the case of claims arising from a earn-out clause, the suspension ends when the earn-out is collected or in the event of a contribution or transfer of the claim or in the event of a gift of the claim where the donor is domiciled for tax purposes in a NFCT or a non-EU state or territory that has not entered into the agreements referred to above. The taxpayer will then have to pay the amount of the Exit Tax that was subject to a deferral of payment
2. CANCELLATION OR REFUND OF THE EXIT TAX POSSIBLE UNDER CERTAIN CONDITIONS
In the event that the taxpayer is not granted a deferral of payment, the tax may be cancelled or refunded in the event of payment, if it was paid at the time of the transfer of tax residence, in several cases :
- If the taxpayer stays abroad for more than 2 years or more than 5 years (depending on the value of the securities (3)) and keeps his securities without selling them then a cancellation or refund of the taxation if paid on the latent PV relating to these securities is attributed to the taxpayer.
- If the taxpayer, domiciled outside France, dies or donates his securities:
- in the event of death, the tax paid on latent PV is refunded;
- in the case of a donation of the securities where the taxpayer has established his tax domicile in one of the States covered by the scope of the automatic suspension of payment, the non-taxation of the amount of the Exit Tax shall apply. The donation will then constitute a case of relief (or refund) of law, unless the Administration proves that the main reason for the gift is to evade the tax;
- in the case of a gift where the taxpayer does not reside in a State covered by the suspension of payment, the benefit of the relief or refund is subject to the condition that the taxpayer proves that the transaction is not carried out with the main reason of evading the tax.
When the taxpayer returns to France, the tax established on the unrealised capital gains at the time of the transfer is automatically deducted, or refunded if it had been the subject of an immediate payment at the time of the transfer of tax domicile outside France, when the securities remain, on that date, in the taxpayer’s assets.
(2) https://www.oecd.org/tax/automatic-exchange/country-by-country-exchange-relationships.htm and https://www.oecd.org/fr/fiscalite/echange-de-renseignements-fiscaux/convention-concernant-l-assistance-administrative-mutuelle-en-matiere-fiscale.htm, there is still a legal vacuum because France has not updated the annex containing the list of countries that have signed this convention since 2012 on the tax doctrine site.
(3) Two years if the value of the securities does not exceed €2,570,000 on the date of the transfer of tax domicile, 5 years if the value exceeds €2,570,000.