Exit Tax Payment Deferral: Automatic or Upon Election

Deferral: the operational pivot of the regime

Payment deferral is the mechanism that makes the exit tax workable in practice. Without it, the taxpayer would be forced to dispose of all or part of his portfolio to immediately pay the tax — a result at odds with the very purpose of the deemed-disposal fiction. The deferral allows payment to be postponed until a lapse event occurs or until the tax is ultimately relieved.

Automatic deferral (IV): strict conditions

Paragraph IV of article 167 bis CGI provides for a deferral granted as of right, by operation of law, where the transfer is made:

• To a Member State of the European Union; OR
• To another State or territory that has concluded with France a convention on administrative assistance to combat tax fraud and evasion as well as a convention on mutual assistance in the recovery of tax claims with a scope similar to Council Directive 2010/24/EU of 16 March 2010; AND
• The destination State is not on the list of non-cooperative States and territories (ETNC) referred to in article 238-0 A CGI.

For transfers occurring up to 31 December 2018, the automatic deferral was limited to departures to an EU Member State, Norway or Iceland; Law no. 2018-1317 of 28 December 2018 (art. 112) broadened the scope of paragraph IV as from 1 January 2019.

Under the automatic deferral, no guarantee is required and no fiscal representative is needed. The applicable reporting obligations (Form 2074-ETS) were streamlined by the 2019 reform.

Optional deferral (V): for destinations outside the EU/EEA

Paragraph V of article 167 bis CGI provides that, where the transfer falls outside the scope of paragraph IV, the taxpayer may elect for a deferral. The election is exercised with the French tax authority and is subject to the following cumulative conditions:

1. The declaration of the gains and claims taxable upon the transfer and the express request for deferral, made on Form 2074-ETD filed with the non-residents' tax office no later than 90 days before the transfer (Article 41 tervicies A of Annex III to the CGI, introduced by Decree No. 2019-868 of 21 August 2019).
2. The filing, within the same time limit, of a guarantee proposal sufficient to secure recovery of the Treasury's claim: for transfers occurring since 2018, the amount is set at 12.8% of the gross amount of the gains and claims, before allowances (Article 167 bis, V-1 of the CGI; specific rate of Article 200 A, 2 ter of the CGI for gains in deferral under Article 150-0 B ter).
3. The appointment of a fiscal representative established in France, authorised to receive communications relating to the assessment, collection and litigation of the tax, who accepts the engagement on the return (Article 167 bis, V-1 of the CGI).

The taxpayer also remains subject to the follow-up reporting obligations (Forms 2074-ETS), subject, for transfers occurring since 2019, to the exemption from annual filing where the deferral covers only unrealised gains.

Comparative table of the two regimes

Lapse events that terminate the deferral

The deferral ends and the tax becomes immediately due upon the occurrence of any of the following events:

• Disposal of the securities for valuable consideration (in whole or in part, with proportional lapse).
• Gift of the securities: its effect on the deferral and relief depends on the category of gain, the donor's State of residence and the conditions in section VII of article 167 bis, including proof that the gift was not made for principally tax reasons where the statute requires it. Case law on earlier versions of the regime must be used with caution.
• Redemption, repayment or cancellation of the securities by the issuing company (liquidation of the company entailing cancellation of the securities).
• Failure to comply with the reporting obligations, where the situation is not regularised within 30 days of a formal notice (Article 41 tervicies E of Annex III to the CGI).

The death of the taxpayer is, by contrast, not an enforceability event for unrealised gains and earn-out claims: it triggers relief of the deferred tax or its refund (Article 167 bis, VII of the CGI), only certain gains placed in deferral under former regimes becoming due.

Deferral and the limitation period for recovery

The payment deferral has the statutory effect of suspending the limitation period for the recovery action until the date of the event terminating it. For as long as the deferral runs, the four-year period of Article L. 274 of the LPF does not elapse: the Treasury's claim remains recoverable, sometimes many years after departure.

Above all, a mere reporting failure does not, by itself, start the limitation period running. Under the current regime, the immediate enforceability triggered by a breach is restored only after a formal notice to regularise has remained unanswered for thirty days (Article 41 tervicies E of Annex III to the CGI, for the application of paragraph IX of Article 167 bis). A taxpayer therefore cannot rely on his own reporting default to escape payment of the exit tax.

Strategy: choosing between the two regimes

For a departure to Dubai, there is no choice: only paragraph V applies. The strategy then consists in structuring the deferral so that it ultimately benefits from tax relief at expiration (2 or 5 years depending on the portfolio value) rather than being triggered by an actual disposal. That is the entire purpose of the wealth-planning work that must accompany the transfer.