Tax residency: the pitfalls of years “between two countries”

Tax residency is assessed year by year, and each state applies its own criteria. Nothing therefore prevents two states from considering, in the same year, that a person is resident with them.

In France, Article 4 B of the General Tax Code (code général des impôts) sets out four alternative criteria: the household, the main place of stay, professional activity and the centre of economic interests. Any one of them is enough to establish domicile.

The alternative nature of these criteria is the first pitfall. Many people planning to leave count their days and conclude that they have left France; but a family household that has remained in the country is enough, on its own, to keep them domiciled there.

Host states, for their part, use varying thresholds: more than 183 days¹ in Portugal, more than 183 days² in Spain, 180 days³ in Thailand, and only 90 days⁴ in Switzerland for a stay without gainful activity.

A further difficulty lies in the filing calendar. Tax years do not coincide with the calendar year everywhere, and filing deadlines differ from one state to another. A person who left during the year may therefore have to file, in the same year, two returns governed by unrelated rules and dates.

When two states claim the same person, the tax treaty between them settles the matter using a series of criteria applied in order.

The first is the permanent home. If the person has one in both states, the centre of vital interests is used, that is, the closest personal and economic ties.

If that centre cannot be determined, habitual abode is used, then nationality, and as a last resort a mutual agreement between the tax administrations.

These criteria are ranked, and one only moves on to the next if the previous one is not decisive. A taxpayer who kept a home available all year round in France and had only a temporary one abroad loses at the very first criterion.

Some tax treaties also provide for a split year, which allows the tax year to be divided into two periods of residence. Not all of them do, and this is a point to check in the applicable text.

Departure is not just a change of address: it triggers specific obligations. The exit tax applies to unrealised gains on shares when their total value reaches more than €800,000⁵, or when they represent at least more than 50%⁶ of a company's profits.

It applies to people who have been French tax residents for at least from 6 years⁷ during the ten years preceding the transfer.

Deferral of payment is automatic for moves to the European Union and the European Economic Area. Elsewhere, it requires guarantees and a tax representative, with a request filed at least from 90 days⁸ before the transfer.

Relief is granted after 2 years⁹ or 5 years¹⁰ of holding, depending on whether the value of the shares is below or above €2,570,000¹¹.

1. Document the severing of ties: housing, family, activity, accounts, subscriptions, address registered with institutions.
2. Check whether the applicable tax treaty provides for a split year in the year of departure.
3. File the departure return with the tax office and provide the new address.
4. Prepare for the exit tax, including the deferral request at least from 90 days⁸ before the transfer if the destination is outside the European Economic Area.
5. Obtain a certificate of tax residency in the host state: without it, no tax treaty can be invoked.

The last point is the one most often discovered too late. A residence permit, even a ten-year one, is not a certificate of tax residency, and the French tax authorities are entitled to require this document before recognising the transfer.

The year of return calls for the same vigilance in reverse. Taking up housing, work or schooling in France again can re-establish domicile from the start of the year, with consequences for income already taxed elsewhere.