The exit tax, or when French expatriates in the UAE are targeted by French tax authorities
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Germany announced that last February it purchased the tax data of millions of people residing in Dubai.
When questioned by Les Echos, the Directorate General of Public Finance confirmed that this data has already been shared with the French tax authorities.
The French authorities are therefore now looking to hunt down potential fraudsters in this data and check for the presence of "undeclared income" and "unknown assets" of individuals seeking to evade tax in their home country. This will notably involve verifying whether French entrepreneurs who moved to Dubai have duly paid the "exit tax" levied on unrealized capital gains accrued in France and abroad (1).
This article will outline the concept of the Exit Tax in order to inform French expatriates residing in Dubai of their compliance, or lack thereof, with French tax law resulting from their change of tax residence from France to the United Arab Emirates.
I. What is the exit tax?
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 "unrealized capital gain") found on corporate nights (voting rights), shares, securities (stocks and bonds) or rights in a company held by taxpayers before changing their tax residence. 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 recognized at the time of the sale of the asset or property, the capital gain is realized. On the other hand, the capital gain is considered unrealized for the entire duration of holding the asset or property, up until the moment of its disposal.
In other words, the Exit Tax applies to capital gains found on corporate rights, shares, 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 a French tax resident if they spend more than 180 days in France in a given tax year and/or if they have their permanent home and vital interests there for the tax year in question (personal and economic ties). Consequently, the transfer of tax residence will occur when a taxpayer spends more than 180 days in a foreign country and/or when their vital interests are located outside France.
II. What is the scope of the exit tax?
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 10 years preceding the transfer of tax domicile outside France. For this criterion, the duration of tax domiciliation in France is assessed with respect to the taxpayer and not the tax household.
2. UNREALIZED CAPITAL GAINS AND RECEIVABLES TARGETED
a. Exit Tax Application Threshold
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 domicile, at least 50% of the company benefits; and/or
When the global 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. Nevertheless, only direct shareholdings in companies should be taken into account to assess whether their overall value exceeds €800,000 at the time of the transfer.
b. Securities targeted by the Exit Tax
Under Article 167 bis of the French General Tax Code (CGI), taxpayers are subject to tax on unrealized capital gains recorded on social rights, securities, shares or rights mentioned in Article 150-0 A of the CGI (capital gains realized by individuals within the framework of the non-professional management of a securities portfolio).
Unrealized capital gains on the following securities and rights also fall within the scope of the Exit Tax mechanism:
Bonds and negotiable debt securities (a bond is a negotiable security producing interest in exchange for a loan to a company);
Subscription or allocation rights of social rights or securities;
Rights resulting from a split of ownership (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 transfer price whose actual payment is conditioned by the achievement of a performance criterion linked to the activity of the transferred company.
Furthermore, since January 1, 2019, the Exit Tax mechanism has been extended to shares of predominantly real estate companies – a company of which more than half of its assets consist of real estate not allocated to its professional activity.
Finally, the rise and democratization of holding cryptoassets raised the question of whether the transfer of a digital asset portfolio 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 mechanism, the legislator will almost certainly extend the Exit Tax to cryptocurrencies when the taxpayer resides in a country where the tax rates on transfer of cryptoassets are more attractive (or even zero) abroad.
To conclude and in addition to the Exit Tax, the transfer of the tax domicile of a French taxpayer entails the end of the 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 hit by the Flat Tax (PFU): they are subject, on their gross amount, to 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 unrealized capital gains.
A fixed allowance of €500,000 may be requested, notably by the managing taxpayer of a company, under certain conditions.
It is also important to note that by way of derogation, for any transfer of residence 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 taxation resulting from the Exit Tax must be paid immediately upon the transfer of tax residence outside of France. However, there are scenarios of deferral of payment and also of refund of the Exit Tax.
DEFERRAL OF PAYMENT
The payment deferral until the actual sale of the titles is automatic and by right if the taxpayer transfers their tax residence to:
A member State of the European Union; or
A State located within the European Economic Area (excluding Liechtenstein) which has concluded an administrative assistance agreement with France to combat fraud and tax evasion, as well as a mutual assistance agreement in recovery matters concerning mutual assistance in the recovery of claims relating to duties, taxes, fees and other measures.
If the taxpayer transfers their tax residence to a State outside the European Economic Area, as is the case with the United Arab Emirates, they may benefit from the payment deferral by right without providing guarantees, if the third State:
Has concluded an administrative assistance agreement with France to combat tax fraud and evasion; and
Has concluded a mutual assistance agreement in recovery matters with France having a scope similar to that provided by Council Directive 2010/24/EU of 16 March 2010 concerning mutual assistance for the recovery of claims relating to taxes, duties, levies and other measures; and
Is not included in the list of non-cooperative States or territories (ETNC) within the meaning of Article 238-0 A of the CGI (French general tax code).
Regarding the United Arab Emirates (or the Emirate of Dubai), the payment deferral appears 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 to combat tax fraud and evasion which entered into force on 1 January 2019, and a mutual recovery assistance agreement – which also entered into force with France on 1 January 2019 according to the OECD website, but which has not been updated on the French tax website (2) – but which does not include sufficient measures for France.
Thus, taxpayers transferring their residence to States that have not concluded one of the two required Agreements, as is the case for the United Arab Emirates, can still benefit from an optional payment deferral by making an express request for payment deferral 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 residing in France; and
The setting up of a guarantee representing 12.8% of the total amount of the unrealized capital gains.
In the event that the payment deferral is granted to the taxpayer, the deferral expires when one of the following events occurs:
Sales for consideration, purchase, redemption or cancellation of the social rights, securities, shares or rights for which unrealized capital gains were recorded or whose acquisition entitled to a tax rollover;
Donation of social rights, securities, shares or rights for which unrealized capital gains were recorded when the donor istax-domiciled in Liechtenstein or outside the European Economic Area, unless they prove that the donation was not made with the main purpose of evading the tax established in application of this mechanism;
Death of the taxpayer.
For claims originating from an earn-out clause, the deferral ends upon receipt of the earn-out payment, or in the event of transfer or assignment of the claim, or in the event of donation of the claim when the donor is tax-domiciled in an ETNC or a third-party 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 previously subject to a payment deferral.
2. CANCELLATION OR REFUND OF THE EXIT TAX POSSIBLE UNDER CERTAIN CONDITIONS
In the event that the payment deferral is not granted to a taxpayer subject to payment of the Exit Tax, the tax may be canceled or refunded if paid, if it has been cleared during the transfer of tax residence, in several scenarios:
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 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 donates their securities:
in the event of death, the tax paid on the unrealized capital gains is refunded;
in the case of a donation of securities when the taxpayer has established their tax residence in one of the States covered by the scope of the automatic deferral of payment, non-taxation of the amount of the Exit Tax applies. This donation will then constitute a ground for tax discharge (or refund) by right, unless the Administration demonstrates that this donation has the main purpose of evading the tax;
in the case 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 was not carried out with the main purpose of evading the 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 during the transfer of tax residence outside France, provided that the securities remain in the taxpayer's patrimony at that date.
(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 because France has not updated the appendix containing the list of signatory countries of 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.
