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Tax Residence – Evaluating the rules of the game

The growth of its professional activities can lead the entrepreneur to exercise all or part of its activity outside France.

Such an activity is not neutral with regard to its overall social and tax burden, which will weigh as much on its income as on its assets.

This will allow the contractor to consider a change of residence. He will become a non-resident of France and if his tax burden should decrease in France, his new country of residence will take over and will, in principle, have the privilege of taxing the entrepreneur on a worldwide basis.

It should be noted that various recent arrangements have the consequence of maintaining, in certain cases, a tax obligation in France even after a departure from France.

While the conditions to be fulfilled to leave the French tax territory are known and remain adapted to modern living conditions, a careful examination of the various criteria is necessary in particular when the professional activity and assets are shared between several territories.

French tax residence, within the meaning of Article 4B of the French General Tax Code, is the key point for assessing the extent of a French taxpayer’s tax liability under our tax system. This assessment is valid not only for income tax but also for wealth tax or inheritance and gift tax. Similarly, these criteria are applicable to each spouse taken separately so that one may be domiciled in France and the other not.

Thus, under the terms of this article, are considered as having their fiscal domicile in France, persons who have in France their home or the place of their main stay those who exercise a professional activity in France or those who have in France the centre of their economic interests.

These criteria are alternative and it is enough to fill only one of them to be domiciled in France. It is not useless to quickly clarify these various concepts.

Thus, the home means the place where the taxpayer normally resides and has the centre of his family interests, without regard to stays made temporarily elsewhere because of the needs of the profession or exceptional circumstances.

It should be noted that the main place of residence criterion will only be used for single persons. The latter do not have a home in France or outside France. This criterion is met when the time spent in France is significantly higher than that spent in any other territory. For the Conseil d’Etat, the notion of home can extend to cohabitants or even singles.

With regard to the professional activity, predominance must be given to the place of exercise of the professional activity whether it is salaried or not.

Where different professions are exercised simultaneously or activities are shared on the territory of several States, reference should be made to the main activity. It is defined as the one to which the most time is devoted even if it does not generate the bulk of income. Where this determination is not possible, the main activity will be that which generates the largest share of world income.

Finally, persons who have the centre of their economic interests in France may also be considered to be domiciled in France. This criterion, in the presence of significant assets, is obviously important.

It is thus the place where the main investments are made, the place where the business is conducted or the place from which the assets are administered. It can also be the place where the person has the centre of his professional activities, from which he derives most of his income.

In the case of multiple activities or multiple sources of income, the centre of economic interests will be located in the country where the person concerned derives the majority of his income.

Non income-producing property which the taxpayer reserves for himself does not have to be taken into account for the location of the centre of economic interests.

Where the individual is resident in two States under domestic law and there is thus a conflict over the determination of a taxpayer’s State of residence, tax treaties must be used and take precedence over the domestic law of the States concerned. At this stage, the rules of the game change.

Thus, tax treaties based on the OECD model provide, in such a situation, that the criteria are to be examined successively in order to determine from which State the person concerned must be the tax resident.

These criteria are similar to those of our domestic law but differ in their content and the analysis that must be carried out.

These criteria are thus, the permanent home of dwelling, this concept refers to the place of dwelling having a certain stability. If such a place exists in both States or in neither of them, the centre of vital interests, i.e. the location of personal and economic ties should be considered. If the conflict is not settled, the principal residence, nationality and, failing that, the agreement of the competent authorities of the two States shall be the following alternative criteria to be used.

Leaving France, while it may be simple in the absence of links with our country, may be more difficult in the case of prior transactions or significant assets located in France. It also requires reconciling family and property situations.

In this context, the choice of the future country of residence is also important not only to meet easily and without personal constraints the requirements of the various tax residence legislations but also to assess and manage the tax and social burden that will be linked to this new destination.

Finally, it is worth recalling that certain income considered to be from a French source will remain taxable in France, even after leaving France. The Conseil d’Etat and the legislator have also established this principle with regard to certain employee share ownership plans when part of the gain is linked to a French activity.

The “exit tax” on movable assets as well as the rules relating to the exemption of capital gains on condition of re-use also require careful examination.

Finally, while tax parameters can easily be considered as the existence of a wealth tax, the consequences of an expatriation in terms of inheritance or gift tax can be heavy for an entrepreneur whose family and assets are located in different territories and must also be anticipated.

In this respect, it should be recalled that French territoriality rules do not necessarily favour beneficiaries who remain in France. Indeed, heirs or donataires who have resided in our territory for at least six years at the date of death or donation remain taxable in France in the absence of a tax convention (subject to deduction of the tax paid abroad and within certain limits).

Georges Morisson-Couderc

Associate at the Court

Transfer of an article published in Options Finances