Although an 'exit tax' exists in France, there is widespread misunderstanding about its scope, in part due to misinformed reports in social media and the English language press in France.
The tax was created in 2011 to combat tax evasion by business owners with substantial shareholdings who relocate to another country with the aim of reducing taxes on the sale of their shares. It was substantially revised in 2018 so as not to discourage investment. Several other countries in Europe have a similar tax, as is the case in the USA.
Under the law, partners in companies who transfer their tax residence outside France may immediately become taxable in respect of unrealised (latent) capital gains on the value of their shares. However, provided they comply with the reporting requirements, they benefit from an exemption at the expiration of a defined period.
Tax Liability
Liability to the exit-tax arises if:
A business associate has been tax domiciled in France for at least 6 of the 10 years preceding their departure;
And either they own, directly or indirectly, with all the members of their tax household and on the date of the transfer, at least 50% of the shares in their company, OR the total value of their share portfolio exceeds €800,000.
If a business owner meets the above conditions, they are in principle subject to income tax and social charges, (prélèvements sociaux) as if they had sold their shares on the date of departure. The total tax charge is 30%. Certain types of special investment schemes are exempt, eg PEA, assurance vie.
The taxable gain is on the difference between the value of the shares at the time of departure and the value at which they were acquired (after deduction of allowances for the period of holding or for retirement, if applicable).
In the 90 days preceding the transfer of their tax residence outside France, a declaration must be filed which is used to determine the unrealised capital gains above. The declaration is made to the non-residents tax office in near to Paris.
Provided that they have filed the above return before their departure, there is a deferral of taxation of the tax due in respect of the unrealised capital gains.
In the event that the new tax residence is either to another EU country, or to a State outside the EU but which has concluded agreements with France to assist in the fight against fraud and tax evasion, the tax deferral is automatically granted.
If, on the other hand, the transfer of tax residence is to take place in a state considered to be non-cooperative, or in a State or territory outside the EU that has not concluded an agreement with France to assist in the fight against fraud and tax evasion, the deferral is only granted upon request, and subject to the payment of a guarantee equal to 12.8% of the taxable unrealised capital gain.
Exemption
Provided the individual continues to own the shares, if the total value of taxable capital gain does not exceed €2.57m full relief is granted automatically at the end of a period of two years following the transfer of tax residence outside France, or 5 years if the latent capital gain exceeds €2.57m. Prior to a change in the law in 2018 the period was 15 years.
During this period (2 years or 5 years depending on the case), tax is due immediately in the event of the transfer, donation, redemption, reimbursement or cancellation of the shares for which capital gains have been recorded, or in the event of the liquidation of the company (or in the event of failure to report these events).
Reporting Obligations
In order to benefit from the relief, the individual must submit a declaration to the tax authority 90 days prior to transfer of their residence outside of France and to submit an annual declaration thereafter for 2 years or 5 years, depending on the size of the shareholding. The appointment of a fiscal representative is normally necessary.
Budget 2025
There are no proposals by the current French government to change the tax although an alliance of parties in the French Parliament have tabled a proposal to reinstate the 15-year period required to obtain exemption, and to increase the trigger point for liability to €1.3m. The government do not support the proposal. In the absence of a parliamentary majority, there is every indication the government will use its constitutional power to pass the budget without a vote.
If you seek professional advice concerning anything in this article contact our Property/Tax Clinic and one of our advisors will get back to you.
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