A new tax treaty between France and Belgium: Transfer of tax residence and sale of shares

The currently applicable double tax treaty between France and Belgium was concluded in 1964 and then amended many times until 2009. After several years of negotiations, Belgium and France finally signed a new double tax treaty (hereafter, the “new Treaty”). The 1964 Treaty remains applicable until the new Treaty has been ratified by the French and Belgian parliaments. Assuming the ratification occurs in 2022, the new Treaty will be fully applicable from 1 January 2023.

In this blog post, tax experts from Mazars in France and Cazimir in Belgium have analysed the potential impacts of the changes in the new Treaty for their clients.

We focus here on the situation of individuals, French tax residents, and shareholders of a French company, who consider transferring their personal tax residence to Belgium.

We are with Mr. and Mrs. Dupont. They are French nationals. They have lived in France their entire life, where they developed a successful French company. Their 100% shareholding is worth around €5M. They intend to move permanently to Belgium, an important market for the company, but also where their daughter Camille lives. They are close to retirement and are contemplating selling their shares in the company in the near future.

Transfer of tax residence from France to Belgium: What are the consequences of the taxation of the future sale of shares?

When Mr. and Mrs. Dupont left France, the transfer of their tax residence out of France triggered the taxation (individual income tax and social surcharges of around 30%) of the latent capital gain on the shares upon departure. However, for transfers within the EU, an automatic deferral of payment applies.

If the couple sells their shares whilst being tax residents of Belgium, timing will be of the essence:

According to French domestic law, France is entitled to tax the sale of shares realised by the Duponts as a result of the application of two different mechanisms.

1.  In application of article 244 bis B of the French tax code: the capital gain realised upon the sale of shares of a French company is fully taxable in France (the whole capital gain) in the event that the sellers hold a substantial shareholding (>25% );
2. Subject to the deferral available for transfers within the EU, the application of the French exit tax mechanism: the latent capital gain at the date of exit becomes taxable if the shares are effectively sold within a 5-year period following the transfer of the tax residence. After this period, the exit tax is waived.

In Belgium, on the other hand, the tax treatment is significantly more favourable: capital gains on shares realised within the scope of the normal management of one’s private estate (and that do not qualify as professional income) are not taxable. 

Since this is not merely a French (or Belgian) domestic situation but a cross-border one, the tax regime applicable to the sale of Mr. and Mrs. Dupont’s shares of their French company after they became Belgian tax residents, is subject to the provisions of the double tax treaty concluded between France and Belgium.

The current Treaty does not contain a specific provision that deals with capital gains in general and/or on substantial shareholdings. Article 18 of this Treaty specifies that types of income that are not explicitly covered in the earlier provisions are solely taxable in the residence state.

Combining both the internal law and the current Treaty to the case at hand, this would imply for Mr. and Mrs. Dupont that a sale:

• Within the 5 first years following the transfer of tax residence will trigger the payment of the French exit tax. The taxable basis only includes the capital gain accrued until the move out of France. The applicable tax will be around 30% (income tax and social surcharges included). The capital gain related to the period after the move out of France is neither taxable in France as the current Treaty prevents France from applying its taxes according to article 244 bis B mentioned above, nor in Belgium (assuming that the capital gain falls within the scope of the normal management of one’s a private estate).
• After the 5 first years following the transfer of tax residence, the sale cannot be taxed in France at all as the French exit tax is waived after 5 years and the current Treaty prevents France from taxing the gain realised since the transfer of residence. In Belgium, in principle, no tax is due (assuming that the capital gain falls within the scope of the normal management of one’s a private estate).

The new Treaty contains a specific “substantial shareholding clause”. Therefore, France will not only be allowed to tax a higher portion of the gain but also for a longer period of time:

• Within the 5 first years following the transfer of residence, a sale will not only trigger the payment of the French exit tax at around 30% of the gain accrued until the emigration out of France but also any gain accrued whilst the Dupont’s are Belgian tax residents, the tax is reduced to around 12.8% of income tax on this portion of the gain. According to the new Treaty, Belgium is obliged to grant an exemption.

• After the 5th year and before the end of the 7th year following the transfer of tax residence, a sale triggers taxes on the entire capital gain in France at 12.8%. Hence, even if, according to French domestic law, the exit tax is waived after 5 years, there are two additional years during which France remains entitled to tax the entire capital gain. According to the new Treaty, Belgium again is obliged to grant an exemption.

• It is only after the 7th year, as a consequence of the new Treaty, that a sale of the shares should not trigger any taxation of the gain in France. Again, in principle, in Belgium, no taxes are due (assuming that the capital gain falls within the scope of the normal management of one’s private estate).

This being said, if Belgium will not tax the capital gain, one may wonder if the taxpayer can still benefit from the new Treaty provisions. Indeed, according to the preambular paragraph of the new Treaty, the new Treaty was concluded to avoid double taxation without creating the possibility of non-taxation. But according to the same paragraph, such non-taxation must be the result of “tax evasion or avoidance”. Hence, we strongly recommend to Mr. and Mrs. Dupont that the transfer of their tax residence to Belgium should not be contemplated for tax purposes only. This being said, considering the issue arises mainly after 7 years of tax residence in Belgium, the risk that the French tax administration challenges the double non-taxation should, in our view, be limited.