Recommendations and jurisprudential reconsiderations in support of business transfers in France
In a recent report, the Business Delegation of the French Senate outlines the findings of a follow-up review of company transfers:
as many as 700,000 businesses will need to be transferred over the next 10 years;
25% of business owners are over 60 years of age;
the number of disposals has decreased, despite the modernisation of the legal framework.
Handing over ownership in the event of retirement or as an inheritance, is a crucial step in the life of a company, as knowledge, patents, jobs, competitiveness, and even economic self-sufficiency are at stake.
This is especially so in France where there is a lack of intermediate-sized enterprises (ISE), despite their importance to innovation, exports, and employment. It takes an average of 21 years for a small business to become an ISE, which is why it must be set on a path of long-term growth that factors in a transfer in its life cycle.
The Business Delegation of the Senate has drawn up 11 recommendations around two priorities: to secure the current framework; and to simplify business transfer formalities.
Two of these recommendations stand out. The first is to better inform business owners to give them greater confidence in what is a sound public policy requiring urgent implementation; the second is to “sanctify the Pacte Dutreil” — a legal mechanism providing for the free transfer of businesses. Subject to conditions (agreeing to a lock-up period of four to six years for the transferred shares(1), and occupying a suitable leadership position), the tax base on gift or inheritance duties can be reduced by 75% or more. For direct heirs — parent to child — the marginal tax rate of 45% can go down to 11.25%, and even 5.6% in some cases.
Despite extensive revisions in December 2021 to clarify the Dutreil administrative notes, business transfers were still a feature in the law and the courts in 2022.
1. In principle, and under certain conditions, only operating companies and active holding companies — known as holdings animatrices — are eligible for the tax exemption on gift and inheritance duties afforded by the Dutreil scheme. Passive holding companies are excluded as they do not run an operational activity.
That said, the Dutreil scheme can apply indirectly if the shares of a passive holding company that holds shares in an operating company are transferred. The precautions set out by the tax authorities should be observed:
While the tax authorities do not prevent a company from unilaterally concluding a share lock-up arrangement, for practical reasons and in the interest of caution, they recommend that the business owner have full ownership of at least one direct share in the operating company.
There should be no more than two layers of separation between the holding company and the operating company.
In principle, the Dutreil scheme applies to the value of the passive holding company shares, proportional to the value of its gross assets. This value comprises the stake in the operating subsidiary, the shares of which are subject to a collective or unilateral lock-up arrangement. In its ruling of 19 January 2022 (no. 19-19309), France’s highest court of appeal, the Cour de cassation, stated that the book value of gross assets must include unrealised capital gains as well as unrealised capital losses.
2. Under the 1st Amending Finance Law for 2022, the condition that requires the transferred company to have an operational activity must be met when the collective lock-up arrangement is concluded, up until the end of the individual lock-up arrangement.
The same applies to active holding companies, which fall into the same category as operating companies.
The law runs counter to a Cour de cassation ruling of 25 May 2022: in the absence of deliberate clarification in the law, the condition that requires the target company to have an eligible activity need only be met on the date the taxable base is generated, and not over the entire duration of the lock-up arrangements.
3. The transfer of mixed holding company shares is also eligible for the favourable Dutreil scheme, so long as it is first and foremost an active holding company.
In its ruling no. 435562 of 23 January 2020, the Council of State and the administrative doctrine determines this preponderance according to a list of criteria as well as the market value of the operating companies managed by the active holding company which should be over 50% of its total asset value.
In its ruling of 24 October 2022(2), the Paris Cour d’appel agreed to include a real estate complex belonging to a holding company in the numerator used to determine its predominant quality, and assigned the company operating subsidiaries under its active management.
Note, however, that for the tax authorities a real estate subsidiary of an active holding company that leases its assets to the actively-managed subsidiaries remains a capital asset that would not be included in the “Dutreil” numerator.
Together with your advisor, our experts are on hand to assist help you as you consider your options.
(1) A collective or unilateral two-year lock-up arrangement concluded by the signatory/signatories of the pact; the arrangement may be subject to certain conditions as well as to an individual lock-up arrangement of four years concluded by the beneficiaries of the shares.
(2) no. 21/00555
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