Exit tax: payment deferral and filing duties on departure

I. The exit tax mechanism and the payment deferral

A. Scope and basis of the tax

The exit tax (exit tax) of article 167 bis of the French General Tax Code (CGI) strikes taxpayers who transfer their tax residence out of France after having been resident there for at least six of the ten years preceding that transfer. The tax is, however, triggered only above asset thresholds: the taxpayer must hold, at the departure date, a participation representing at least 50 % of a company's profits, or the overall value of their corporate rights, securities and rights must reach at least 800,000 euros. Below these thresholds, departure does not entail application of the device. This threshold condition, combined with the residence-duration condition, confines the exit tax to significant wealth situations, but it is reached faster than one imagines, given the valuation of companies and portfolios.

A tax on latent gains and deferred gains. The basis of the exit tax covers three categories of gains. First, latent capital gains, that is, the difference between the value of the securities at the departure date and their acquisition price, taxed as if the disposal occurred on that date. Second, claims arising from an earn-out clause, frequent in business sales. Third, capital gains previously placed under a deferral regime, whose payability departure may precipitate. The tax bears both on income tax, at the flat-tax rate or, on election, the progressive scale, and on social levies, which makes it a potentially heavy charge even though no cash is collected at the time of departure.

B. Payment deferral: automatic to the EU, on guarantees elsewhere

Because taxing a taxpayer who has collected no price would clash with freedom of movement, the legislature attached to the exit tax a payment deferral whose terms depend on the destination of departure. Where the taxpayer transfers their residence to another European Union State, or to a European Economic Area State that has concluded with France a convention on administrative assistance for recovery and the fight against fraud, the payment deferral is granted automatically, without any step or guarantee. The taxpayer then has nothing to disburse, the tax simply being suspended pending a future event.

Departure to a third State. Where the destination is another State, the deferral is no longer automatic: it is a mere option, subject to an express request by the taxpayer, the appointment of a tax representative established in France and the provision of guarantees apt to secure recovery of the Treasury's claim, such as a bank guarantee or a mortgage. This guarantee requirement can represent a significant cost and constraint, which must be anticipated well ahead of departure. The distinction between an intra-European destination and a third-State destination is therefore structuring, and the choice of country of settlement cannot be settled without having measured its consequences as regards the exit tax.

II. Filing obligations, the condition for the deferral's survival

A. The departure return and the annual follow-up

The benefit of the deferral and, more broadly, the favourable treatment of the exit tax are inseparable from a precise filing formalism, whose rigour often surprises taxpayers. In the year of departure, the individual must declare the latent gains and the gains concerned by means of the dedicated form and, where the deferral is not automatic, expressly request the deferral. In the following years, they must file an annual follow-up return, which updates their situation and confirms that the securities remain in their estate. This annual monitoring is not a mere administrative formality: it conditions the maintenance of the deferral and, accordingly, the postponement of the tax's payability.

The logic of the device is that of monitoring over time. As long as the taxpayer declares and the events terminating the deferral do not occur, the tax remains suspended. Certain events, foremost among them the disposal of the securities, terminate the deferral and render the tax payable in proportion to the securities concerned. Conversely, the passage of time, subject to retention, leads to the extinction of the tax on latent gains, as we shall see. Everything therefore rests on the continuity and accuracy of the returns, the slightest interruption of which can be heavy with consequences.

B. Forfeiture of the deferral and immediate payability

The sanction of a filing breach is formidable. The failure to file the annual follow-up return entails the forfeiture of the payment deferral and renders the tax immediately payable, increased by late-payment interest and, where applicable, the surcharges applicable in the event of deliberate breach. Likewise, where the deferral is not automatic, the absence of a request or a late request entails immediate payability without any possibility of later regularisation. The taxpayer then finds themselves in the paradoxical position of having to pay tax on a gain they never realised, for want of having complied with a purely formal obligation.

A sanction held compatible with freedom of establishment. Recent administrative case law has confirmed the severity of this device. The forfeiture of the deferral for failure to file has been held proportionate and compatible with the freedom of establishment (liberté d'établissement) guaranteed by EU law, including towards a taxpayer who left for another Member State. The judges set aside arguments based on the incompatibility of the tax with tax treaties, noting that the gain is deemed realised the day before the transfer, hence outside the treaty's scope, as well as those based on the right to peaceful enjoyment of possessions, article 167 bis being regarded as sufficiently accessible and foreseeable. This firmness confirms that there is no margin of tolerance on the filing front.

III. Extinction of the tax and the pitfalls of filing default

A. Relief after the retention period

The most favourable, and least known, feature of the exit tax lies in the extinction of the tax on latent gains at the end of a securities-retention period. Where the taxpayer retains their securities beyond a period of two years from the transfer, the income tax relating to the latent gains is relieved automatically. This period is extended to five years where the overall value of the securities exceeds 2.57 million euros at the departure date. The taxpayer's return to France before a taxable event occurs likewise extinguishes the tax. In other words, the taxpayer who leaves durably without disposing of their securities may see the taxation of latent gains extinguished, which turns the exit tax into a mere interlude, provided its formalism is observed to the end.

This extinction mechanism explains why the filing follow-up is so decisive. In many cases, the tax is never truly owed; but one must cross the finish line having declared each year. The taxpayer who interrupts their follow-up, through negligence or ignorance, runs the risk of turning a tax destined to lapse into an immediately payable debt. Vigilance over time is therefore the keystone of a fiscally successful expatriation.

B. One cannot rely on one's own default

A constant lesson of the case law deserves emphasis: the taxpayer cannot take advantage of their own filing breach to escape the tax. Those who stop declaring in the hope that the tax will be lost in the maze of limitation are mistaken. The texts organise the conditions of payability and recovery in such a way that filing default, far from protecting the taxpayer, exposes them on the contrary to immediate payability and the maintenance of the Treasury's claim. The courts have thus refused taxpayers the benefit of their own filing inertia, including under earlier versions of the device applicable to old departures. The lesson holds for every generation of exit tax: the formalism protects those who observe it and crushes those who neglect it.

C. Practical recommendations: anticipate and monitor over time

Audit your situation before departure. The first step is to determine, even before fixing the transfer date, whether the exit tax thresholds are met and what the taxable basis would be. This audit allows the potential cost to be assessed, the need to provide guarantees in the event of departure outside the European Union to be anticipated, and, where appropriate, the timing and destination to be arbitrated. The choice of country of settlement has a direct effect on the deferral regime, and this parameter must be integrated from the very design of the expatriation project.

Secure the filing calendar over the entire period. Because the extinction of the tax presupposes flawless annual monitoring, it is essential to set up a system of reminders and production of follow-up returns, year after year, until the retention period expires or the determining event occurs. Entrusting this monitoring to an adviser, rather than relying on one's own memory several years later and from abroad, is the simplest and most effective precaution against forfeiture of the deferral.

Anticipate events affecting the deferral. Any transaction on the securities, whether disposal, gift, redemption or restructuring, must be analysed in the light of its effects on the exit tax before being carried out. A gift of the securities before departure, for instance, can substantially alter the applicable treatment and warrants a dedicated study. We assist our clients in planning their departure and in the filing follow-up that secures it, so that the exit tax remains a mastered interlude and not an unpleasant surprise.