Focus on Wealth Planning #3: The Dutreil Pact
THE DUTREIL PACT
The challenges of transferring your business
The transfer of a company raises many questions: how to identify potential buyers and what transfer plan? What governance? What legal route? How to control taxation? In this respect, the Dutreil Pact offers a solution. However, it is essential to understand the details and to respect the conditions.
Reduce inheritance taxes with the Dutreil Pact
The transfer of his business, like any asset, is taxed according to the scale of donation or inheritance tax. In the case of direct line transmission, the tax can thus reach 45% at marginal rate.
The Dutreil Pact makes it possible, subject to conditions, to limit the tax base by exempting 75% of the value of the company transferred, regardless of the relationship between the donor and the donee. This tax advantage is subject to compliance with a number of conditions.
The conditions to be eligible for the Dutreil Pact
Not all companies whose shares are intended to be transferred can claim the benefit of the Dutreil Pact: this advantage is reserved only for companies mainly carrying out an operational activity or for the securities of companies known as host holding companies. The tax advantage sought involves keeping the securities that are intended to be transferred over time. This obligation materializes by the conclusion of a Collective or Unilateral custody commitment for a minimum period of 2 years covering 17% of the financial rights and 34% of the voting rights in the case of an unlisted company. Once the transfer has been completed, the donee must then make an individual commitment to keep the securities received for a period of 4 years.
Finally, the donor must exercise a management function within the company during the collective custody commitment phase and for three years following the date of transmission of the securities.
Application of the Dutreil Pact to your situation?
Shares can be donated in full ownership, if the donor is under the age of 70, a 50% duty reduction will apply to the amount of duties calculated on a tax base discounted by 75%, i.e. a final tax rate of less than 6%.
Shares may also be donated as bare-ownership, the amount of entitlements will be calculated on a reduced basis according to a scale defined according to the age of the donor. This base will also benefit from the 75% discount.
In the presence of child buyers and other non-buyers, it is possible to transfer only the shares of the company to the child buyers. The latter are charged with compensating their non-successor brothers or sisters for a payment: a sum of money to compensate for the inequality.
In certain situations, it will be possible to reduce the retention period of the shares to individual commitments only. In this case, we are talking about a collective commitment deemed to have been acquired.
Moreover, in the event that the shareholder director did not anticipate the transfer during his lifetime, his heirs may request a reminder in the form of a posthumous Dutreil Pact.
The Dutreil Pact, a virtuous mechanism
This highly effective mechanism for limiting donation or inheritance rights is the subject of particular attention by the tax administration. Strict compliance with the rules is therefore imperative, otherwise the tax advantage unduly obtained when the securities are transferred will be withdrawn.
The Dutreil Pact has existed in the legal and fiscal landscape for more than 20 years. This spectacular fiscal longevity must not make us lose sight of the possible changes that could impact this system.
Our support
Keep in mind that a successful transmission is a prepared transmission. So the time factor is key.
Societe Generale Private Banking’s wealth planners are at your side and those of your advisors to discuss your transfer project.
Would you like to discuss this subject further with us?
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