Declaration of Income for Exit Tax Purposes

France introduced, an exit tax on 9 September 1998 under which individual taxpayers, who are resident in France for at least 6 years during the 10 preceding years and who move their fiscal residence outside France, are deemed to have realised the latent capital gains on substantial shareholdings in French or foreign companies at the time of emigration. In addition, capital gains, which benefit from a deferral or roll-over relief, are taxable on emigration. Under certain conditions, however, a deferral of tax may be obtained. Capital losses incurred at the date of emigration may also be set off against capital gains (deemed to be) realised at the same date.

The French tax administration has now published a Guideline clarifying the reporting obligations to be fulfilled by taxpayers before leaving the French fiscal territory.

According to the Guideline, the taxpayers concerned must declared taxable capital gains on a specific form, which may either be obtained from the competent tax centre, or down-loaded from the Ministry of Finance's Internet site (www.finances.gouv.fr). These forms must be filed within a period of 30 days preceding emigration. The same time limit applies to ordinary income subject to French individual income tax.

In a recently published decision, the Administrative Tribunal of Strasbourg ruled that French residents receiving interest on Belgian and Italian bonds are entitled to a tax credit in France, under the France-Belgium and the France-Italy tax treaties, but only on that part of the tax paid in the source state which corresponds to the period for which the taxpayer held the bonds.

Under the France-Belgium treaty and the France-Italy treaty, interest arising in one of the contracting states may be taxed in the source state, in accordance with its domestic legislation, up to a maximum rate of 15%. Provided certain conditions apply, the tax so withheld in the source state gives rise to a credit in the state of residence against the resident taxpayer's final income tax liability.

However, the application of these rules to the interest related to Italian and Belgian bonds received by French residents gave rise to certain difficulties due to the difference in the domestic laws of these states. Whereas in France tax is levied on interest paid during the tax year regardless of the holding period, Belgium and Italy levy tax only on the interest due during the period in which the taxpayer held the bonds.

On the application of the domestic tax rules in both countries, the Tribunal of Strasbourg held that, for both Belgian and Italian bonds, double taxation, and therefore treaty relief, was limited to that part of the interest received by the French taxpayer that corresponds to the period in which the bonds were held. The amount of tax paid by the French taxpayer, as the last holder of the bonds, on the interest yield normally due to the previous holder(s) of the bonds may not be credited in France, as it is normally deducted from the acquisition price of the bonds.

It should be noticed that, in a previous decision, the Tribunal of Nantes gave a contrary decision. In a similar case concerning Italian bonds, the Nantes Tribunal held that the credit to which the French resident was entitled corresponded to the total amount of tax withheld in Italy and, therefore, additionally granted the taxpayer a credit on that part of the interest which, economically, had not been subject to double taxation.

Despite these divergent decisions, it is most likely that the French tax administration will continue to apply the decision reached by the Tribunal of Strasbourg to similar cases.