Tax residency and crypto-assets
In a purely digital and global environment, tax residency and crypto-assets present critical challenges that, if not anticipated, can lead to significant tax disputes.
The determination of tax residency dictates which State holds the taxing rights over profits and capital gains, including those derived from crypto-assets. Under domestic law, taxpayers are subject to French tax jurisdiction based on various criteria: for individuals, these include the permanent home (foyer), professional activity, or the center of economic interests; for corporations, residency is typically established by the place of business (lieu d’exploitation).
These internal rules are further governed by double tax treaties (DTTs), which aim to allocate taxing rights between States and prevent double taxation.
International tax considerations for individuals and corporations
The implications of international taxation vary significantly between individual investors and corporate entities.
Tax residency and crypto-assets for individuals
For individuals, the State of residence generally holds exclusive taxing rights over crypto-asset capital gains. Key considerations include:
- Determination of the State of residence: Identifying the primary jurisdiction for tax purposes based on domestic and treaty criteria.
- Securing the effective transfer of residency: Ensuring the validity of the relocation to a foreign jurisdiction to mitigate the risk of dual residency or tax reassessment.
- Application of exit tax provisions: Determining the specific filing requirements and valuation methods for crypto-asset portfolios under the exit tax regime.
- Tax consequences of expatriation: Assessing the ongoing liability for French-source income, which remains taxable in France notwithstanding the transfer of tax domicile abroad.
Tax residency and crypto-assets for corporations
For corporate entities, the central issue lies in the risk of a Permanent Establishment (PE), which may trigger French taxation on profits generated by a foreign entity.
Once the State of residence is firmly established, intercompany flows between entities of the same group must comply with the arm’s length principle. Furthermore, specific anti-avoidance measures may apply if an entity is domiciled in a non-cooperative jurisdiction (often referred to as a “tax haven”).
Why consult a tax attorney for crypto tax residency matters?
Tax residency rules take on a specialized dimension when applied to crypto-assets. Their application requires a sophisticated understanding of international taxation, combined with a deep grasp of digital asset mechanisms and their treatment by tax authorities.
Our assistance is built upon several core competencies:
- Technical and tax expertise in crypto-assets: Comprehensive mastery of the tax regimes applicable to capital gains, DeFi-generated income, undisclosed foreign crypto accounts, and exit tax liabilities.
- International tax proficiency: Proactive identification of tax risks, ensuring the accuracy of tax filings, and providing strategic advice on the structuring of income and wealth in accordance with applicable double tax treaties (DTTs).
- Global partner network: Access to a network of local lawyers, chartered accountants, and tax specialists to coordinate procedures in cases of expatriation, international establishment, or cross-border tax disputes.
This integrated approach ensures the legal certainty of both individual relocation projects and the international operations of corporate entities.
Our methodology in tax residency and crypto-assets
Our approach is tailored to the specific nature of each mandate.
Assisting individuals with tax residency transfers
We support investors and executives planning an expatriation or a change of tax residency. Our services include:
- Analysis of residency criteria: Evaluating residency status under Article 4 B of the French Tax Code and applicable double tax treaties (DTTs); providing operational recommendations to ensure the intended transfer of tax domicile is legally effective.
- Impact assessment of expatriation: Analyzing the potential application of the exit tax on unrealized capital gains from crypto-assets and securities, and determining the tax treatment of French-source income following the relocation.
- Preparation of tax filings: Managing exit tax returns, reporting foreign crypto accounts (Form 3916-bis), rectifying prior non-compliance (voluntary disclosure), and preparing the “year of departure” tax return.
- International coordination: Liaising with our network of foreign partners (lawyers, tax specialists, and chartered accountants) to secure the client’s standing within the new jurisdiction of residence.
Audit and de-risking for corporations: Permanent Establishment (PE)
We assist foreign crypto players operating in France, as well as French entities expanding abroad, to manage risks related to permanent establishment and the unlawful shifting of profits. Our services include:
- Activity audit: Reviewing operations conducted within France to determine the existence of a permanent establishment under domestic and treaty law.
- Treaty analysis: Leveraging applicable tax treaties to mitigate double taxation risks.
- Structural implementation: Designing appropriate corporate structures (subsidiaries, distribution or service agreements, intercompany agreements) to secure cross-border flows.
- Tax controversy and defense: Providing assistance during tax audits and representing clients in litigation concerning the characterization of a permanent establishment.