Germany announced last February that it had purchased tax data of millions of people living in Dubai.
Questioned by The Echoes, the General Directorate of Public Finances has also confirmed that the sharing of this data with the French tax authorities has already taken place.
The French authorities are now seeking to identify potential fraudsters in this data and the presence of "undeclared income" and "unknown assets" of people wanting to evade tax in their country. This will include verifying whether French entrepreneurs who have gone to Dubai have paid the "exit tax" which applies to unrealized capital gains made in France and abroad (1).
This article will outline the concept of Exit Tax in order to inform French expatriates residing in Dubai about their compliance or not with French tax law due to their change of tax residence from France to the Emirates.
I. THE EXIT TAX, WHAT IS THIS ?
France introduced the Exit Tax, an exceptional tax payable by French taxpayers transferring their tax residence outside France, in 2011 through Article 167 bis of the General Tax Code (the "CGI").
The Exit Tax is defined as a tax on unrealized capital gains (the “latent PV”) observed on the social rights (right to vote), values, securities (stocks and bonds) or rights in a society held by taxpayers before their change of tax residence. Capital gains correspond 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 effective. Conversely, the capital gain is considered latent for the entire period of holding the asset or property, until its disposal.
In other words, the Exit Tax applies to the PV noted on social rights, securities, titles or rights still held by taxpayers as soon as they transfer their tax residence outside of France (after March 3, 2011) even if 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 relevant tax year and/or if their permanent home and vital interests are located there for the relevant tax year (personal and economic ties). Consequently, the transfer of tax residence will take place if a taxpayer spends more than 180 days in a foreign country and/or their vital interests are located outside 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 domiciled in France for 6 of the last 10 years preceding the transfer of tax domicile outside France. As such, for this criterion, the duration of tax domicile in France is assessed with regard to the taxpayer and not the tax household.
2. LATENT CAPITAL GAINS AND REFERRED RECEIPT
a. Threshold for 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 transfer of domicile, at least 50% social benefits of a company; and/or
- When the total value of the securities falling within the scope of the exit tax exceeds 800 000€ on the same date.
These thresholds are assessed by taking 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 total value exceeds €800,000 at the time of the transfer.
b. Securities subject to the Exit Tax
Under Article 167 bis of the CGI, taxpayers are taxable on unrealized capital gains recorded on social rights, values, securities or rights mentioned in articles 150-0 A of the CGI (capital gains carried out by individuals within the framework of management non teacherssional of a portfolio of securities).
Unrealized capital gains on the following securities and rights also fall within the scope of the Exit Tax system:
- Negotiable bonds and debt securities (a bond is a negotiable security that pays interest in exchange for a loan to a company);
- Subscription or allocation rights of social rights or securities;
- Rights arising 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;
- Claims originating from a price supplement clause – part of the transfer price whose actual payment is conditional on the achievement of a performance criterion linked to the activity of the company transferred.
In addition, since January 1, 2019, the Exit Tax system has been extended to securities companies with a real estate focus – company of which more than half of the assets are made up of buildings not used for its exploitationprofessional offeronelle.
Finally, the rise and democratization of the detention of cryptoassets 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 appear to include digital assets, but given the very spirit of the scheme, the legislature will most certainly extend the Exit Tax to cryptocurrencies when the taxpayer resides in a country where the tax rates on the transfer of cryptoassets are more attractive (or even zero) abroad.
Finally, and in addition to the Exit Tax, the transfer of a French taxpayer's tax domicile results in the end of any tax deferral from which they may have benefited.
III. HOW MUCH TAX DO I HAVE TO PAY UNDER THE EXIT TAX?
Unrealized capital gains subject to the Exit Tax system are subject to the Single Flat-Rate Withholding Tax (PFU): they are subject, for their gross amount, to a rate of 12,8% to income tax and 17,2% to social security contributions. Consequently, an overall rate of 30% tax will be levied on unrealized capital gains.
A fixed allowance of €500,000 may be requested, in particular by the taxpayer who is a company manager, under certain conditions.
It is also important to note that, by way of exception, for any transfer of domicile after January 1, 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 upon transfer of tax residence outside France. However, there are cases of deferred payment and also of refund of the Exit Tax.
- THE DEFERRAL OF PAYMENT
THE suspension of payment until the actual sale of the securities is automatic and by right if the taxpayer transfers his tax domicile to:
- A State member of the European Union; Or
- A State located within the European Economic Area (excluding Liechtenstein) and which has concluded with France an Administrative Assistance Convention to combat tax fraud and evasion as well as a Mutual Assistance Convention in the area of recovery concerning mutual assistance in the recovery of debts relating to taxes, duties, duties and other measures.
If the taxpayer transfers his tax residence to a State outside the European Economic Area as is the case of the United Arab Emirates, then it will be able to benefit from the automatic suspension of payment, without the provision of guarantees, if the third State:
- Concluded with France an administrative assistance agreement to combat fraud and tax evasion; and
- Has concluded with France a convention on mutual assistance in the recovery of claims having a scope similar to that provided for in Council Directive 2010/24/EU of 16 March 2010 concerning mutual assistance for the recovery of claims relating to taxes, duties and other measures; and
- Not included on the list of non-cooperative states or territories (NCST) within the meaning of article 238-0 A of the CGI.
Thus, the suspension of payment appears to be automatically open to taxpayers who have transferred their tax residence to the United Arab Emirates. Indeed, the Emirates signed an administrative assistance agreement with France to combat fraud and tax evasion, which came into force on 1 January 2019, and a mutual assistance agreement in recovery matters – which also came into force with France on 1 January 2019 according to the OECD website but has not been updated by the French tax website (2).
Taxpayers transferring their residence to States which have not concluded one of the two Conventions required may still benefit from a payment suspension, by making a express request of suspension of payment and providing several guarantees, including:
- A declaration of latent capital gains to the tax authorities at least 30 days before your departure
- The appointment of a tax representative resident in France; and
- The constitution of a guarantee of 12.8 % of the total amount of latent capital gains.
In the event that the deferral of payment is granted to the taxpayer, the reprieve expires at the time when one of the following events occurs:
- Transfers for consideration, repurchase, reimbursement or cancellation social rights, securities, titles or rights for which latent capital gains have been recorded or the acquisition of which has given rise to a tax deferral;
- Donation of social rights, securities, titles or rights for which latent capital gains have been recorded when the donor is tax resident in Liechtenstein or outside the European Economic AreaEuropean, unless it demonstrates that the donation is not made with the main motive of evading the tax established in application of this system;
- Death of the taxpayer.
For claims originating in a price supplement clause, the suspension ends upon receipt of the additional price or in the event of contribution or transfer of the debt or in the event of donation of the debt when the donor is tax resident in an ETNC or a State or territory outside the EU which has not concluded the conventions referred to aboveThe taxpayer will then have to pay the amount of Exit Tax which was subject to a payment suspension.
2. CANCELLATION OR REFUND OF THE EXIT TAX POSSIBLE UNDER CERTAIN CONDITIONS
In the event that the deferral of payment 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 transfer of tax domicile, in several cases:
- If the taxpayer stays abroad for more than 2 years or more than 5 years (according to the value of the securities (3)) and keeps its securities without selling them then a cancellation or a refund of the tax 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 the latent PV is refunded;
- in the event of a donation of securities when the taxpayer has established his tax domicile in one of the States covered by the scope of the automatic deferral of payment, the non-taxation of the amount of the Exit Tax applies. This donation will then constitute a case of tax relief (or reimbursement), unless the Administration demonstrates that the main reason for this donation is to evade tax;
- in the event of a donation when the taxpayer does not reside in a State covered by the deferral of payment, the benefit of the tax relief or restitution is subject to the condition that the taxpayer demonstrates that the transaction is not made with the main motive of evading tax.
When the taxpayer returns to France the tax established on latent capital gains at the time of the transfer is automatically reduced, or refunded if it had been the subject of immediate payment at the time of the transfer of tax domicile outside France, when the securities remain, at that date, in the taxpayer's assets.
(2) https://www.oecd.org/fr/fiscalite/echange-de-renseignements-fiscaux/convention-concernant-l-assistance-administrative-mutuelle-en-matiere-fiscale.htm, there still remains 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 website.
(3) Two years if the value of the securities does not exceed €2,570,000 on the date of this transfer of tax domicile, 5 years if the value exceeds €2,570,000.
