Exit tax explained

A form of income tax may apply to some well-off people who leave France to live abroad - the so-called ‘exit tax’ which is applied to company shares. It applies to people who have been resident in France for at least six out of the last 10 years and who then transfer their residency abroad. It is based on unrealised capital gains on the day before departure. 

The tax - a 30% ‘flat tax’ charged on investment income (12.8% income tax, 17.2% social charges) - arises the day before departure and is levied on gains accrued while a French resident. It applies even if the shares are not sold and so no actual gain realised. It applies if the net value of their shares and other (mainly, business) holdings, or those of their tax household, exceeds €800,000 or represents more than 50% of the shares of a company. 

The rules on the exit tax do not explicitly state that a lower rate of social charges applies in this case to S1 form holders as applies to ordinary investment and property incomes, so this appears to be a grey area. We note also that it has not been confirmed yet if a 1.4% rise in the CSG portion of the social charges, which now applies to many forms of investment income (bringing total charges to 18.6%), will be applied to the exit tax.

An exception for shares in property-holding companies does not apply if they are subject to French corporation tax but it is possible to obtain a refund, if applicable, in cases where a future sale is subject to ordinary French capital gains tax as a non-resident. 

There is an option to pay tax under the ordinary income tax bands if this is in the declarant’s interest (in which case normal rules on capital gains, including allowances for length of ownership apply). If the taxpayer is moving to another EU/EEA state (excluding Liechtenstein) or another country that has signed agreements with France to combat tax avoidance and evasion and for mutual tax recovery then the exit tax is automatically ‘set aside’ until the shares are actually sold.

In this case the tax is not payable if the shares are not sold within a period of two or, for those with relevant share holdings worth more than €2,570,000, five years after moving abroad. After the same periods, any tax that was paid on departure (eg. when going to a non-EU state without an eligible agreement) may be paid back if the investments have not been sold. Automatic setting aside remains applicable to people moving to the UK and also applies to the US. Those moving to non-qualifying states can apply for the same between 90 and 120 days before leaving on form 2074-ETD, if they offer a form of guarantee. 

The tax is not payable if you move back to France, and is generally not payable if you give the shares away but if you are living in a country not seen as cooperative, you may be asked for evidence that this was not done with the sole aim of avoiding the tax. Declarations must be made on form 2074-ETD in the year after leaving France, by the usual income tax deadline, noting the value of the latent capital gains. 

Form 2074-ETS or 2074-ETSL may need completing in subsequent years. ‘Set aside’ exit tax should also be entered in box 8TN of the 2042C. 

It is advisable to check with the non-residents’ tax service at least a month before leaving for any conditions relating to the setting aside. Information can also be found in the notes to the forms. 

If you move again to a different country at a future date it may affect your tax situation: you should inform the non-residents’ service within two months.

In general, if you may be affected by this tax, careful planning is important and you may wish to seek professional advice specific to your situation in advance of your move away from France. 

The tax can in some cases be large and the administrative burden complex, especially as it involves valuation of shares which will often be unlisted.