“Exit Tax” for French immigrants when moving to Israel

“Exit Tax” for French immigrants when moving to Israel

April 26, 2017

The Israeli legislation encourages Jews to relocate to Israel (or "make Aliya" as it is named in Israel).  One of the tolls used is tax incentives.  A person who receive a status of an "Oleh" or a returning resident is entitled to reductions points entitling for reduction of the Israeli income tax in the three and a half years following the "Alyah" and to full tax exemption on income created outside of Israel.  An "Oleh" and a "veteran returning resident" (following ten years of foreign residency) is entitled to tax exemption for the first ten years from immigrating into Israel while a "returning resident" is entitled to exemption only on passive income and for the first five years.  This is alongside many other accumulative benefits available to Israeli residents, such as income tax reduction points for parents of young children, working mothers, discharged soldiers etc.  But other tax issues, such as the French "Exit Tax" should be considered before relocating.

Both France and Israel tax on a personal base, i.e. regardless of the location in which the income was created (inside the country or out of it). Determining the tax residency constitutes therefore a necessary prerequisite for any tax consideration.  Under the tax treaty signed by Israel and France on July 31st, 1995, in order to prevent double taxation, a French or an Israeli resident is a person whose ‘center of life’ is either in France or in Israel.  Additionally, both Israeli and French law create a rebuttable presumption that any individual who has been present in a country 183 days or more in any given tax year has the center of life in such country (and consequently be an Israeli or French tax resident) in such tax year.  The treaty sets casting rules in case of dual tax residency (where each country claims residency).  Note that any new immigrant or veteran returning resident is entitled to a one-year acclimation period from the date of arrival, during which one may request not to be considered a resident of Israel for tax purposes

When a French tax resident transfers tax residence outside France, as of 2011 an "Exit Tax" applies if the person was a French resident for 6 out of the 10 years prior to relocation and will be applicable in any case if the total value of assets held by a French taxpayer exceeds €800,000. including unit in trusts or mutual funds. The tax also applies to all shareholdings in excess of 50% with the exception of real estate predominant companies. The objective is to tax the unrealized gains (valued as at the day of departure from French residency) under applicable progressive income tax rate plus social taxes (15.5%). The tax is due at the time of leaving the French residency, unless the relocation is to another European country (or with specific approval) in which case the payment would be due only at the time of the real disposal of the assets.

Thus, while Israel incetifies new immigrants in different manners, the French tax regime creates an incumbency upon immigration outside Europe. It is therefore essential for new immigrants to consult a tax specialist who will advise them on the different aspects, such as whether it is advisable to sell the assets while still in France, according to their particular situation.