Update on the “Dutreil Pact”: Make the most out of the latest business transfer opportunities
Article up to date at 24 February 2021, drafted in accordance with French legislation in force, and applicable to individuals whose tax residence is in France.
While the 2021 Finance Act in France does not bring anything particularly new from a wealth management perspective, there were a number of legal precedents in 2020 linked to France’s emblematic scheme for transferring businesses: the Dutreil Pact (Article 787 B of the French General Tax Code).
A highly advantageous scheme
As a reminder, the Dutreil Pact provides for a 75% exemption of transfer duties when transferring a business, whether as a gift or an inheritance. An additional 50% exemption of gift tax may be awarded if full ownership of shares is gifted before the donor’s 70th birthday. Essentially, the Dutreil Pact can reduce a transfer’s marginal tax bracket from 45% to 11.25% or even 5.6%, depending on the case. Several conditions must be met, including collective and individual conservation commitments for a period of two and four years respectively. Businesses eligible for this favourable scheme are those with industrial, commercial, craft-based, agricultural or self-employed activities, as well as the coordinating holding companies that hold the businesses.
Provisions were relaxed in 2019...
In keeping with measures of the PACTE act to simplify transfer procedures, several aspects of the Dutreil scheme were relaxed under the finance act for 2019 in order to iron out the difficulties in using it to transfer businesses:
- Minimum ownership thresholds (now 10% of capital and 20% of voting rights for listed companies, and 17% of capital and 34% of voting rights for unlisted companies) were reviewed to take into account multiple voting rights, and partial disposals of shares between signatories during the collective commitment phrase were made easier.
- Reporting requirements were simplified.
- Shares can now also be transferred to a holding company during the collective conservation commitment phase. Subject to conditions, the holding company receiving the shares can pursue its external growth and open up to 25% of its capital to non-signatories, such as investment funds.
...and new legal precedents were established in 2020
While the Dutreil scheme is only intended for operating companies, companies with mixed activities — i.e., companies that have both civil and eligible activities, including holdings — may also benefit from partial exemption, provided that their eligible activity is the predominant activity.
In 2020, the French Council of State(1) and the Cour de Cassation(2) — France’s highest court of appeal — approved the revision of how this predominance is determined. Before the Council of State’s judgement of 23 January 2020, the administration doctrine set out two conditions: a company’s operating activities must make up both 50% of total revenue and 50% of its gross fixed assets. The Council of State annulled these criteria for excess of jurisdiction, and ruled that the preponderance of the eligible activity could only be ascertained against “a range of facts established on the basis of the nature of the [company’s] activity and the conditions under which it is carried out.” It is stipulated that the true nature of a company’s activity can mostly be based on whether or not the market value of the subsidiaries carrying out an eligible activity account for over half of total assets. Although objective criteria can ensure that the scheme is predictable and legally sound, the new and more subjective approach is better adapted to the diversity of operating activities. This is the case of estate agents, as outlined by the judgement of 23 January 2020, whose buildings are recognised under current assets rather than fixed assets.
It should be noted that the position of the reporting judge, who distinguished between the scope of application of the Dutreil Pact and that of the exemption, was not included in the recent judgements. As it stands, once the eligible activity is established as the predominant activity, a 75% exemption is applied to all the company assets, irrespective of whether or not they are connected to the operating activity. For how long?
Example: a coordinating holding company with a securities portfolio worth €1 million and a 100% stake in an operating company valued at €3 million is eligible for a partial exemption of 75% for an amount of €4 million.
In its leading case of 14 October 2020, the Cour de Cassation concurred with the position of the Council of State with respect to establishing whether the eligible activity is predominant, and applied this principle of the predominance of the eligible activity to the coordinating holding company. It further stated that the coordinating holding company would not simply be an administrative concession insofar as its coordination activity must be considered as a commercial activity. The result is that coordinating holding companies are now systematically included in the scope of application of Article 787 B of the General Tax Code.
And finally, in September 2020, further precisions were made with regards to share transfers to holding companies. According to the “Patriat” ministerial reply(3) , a donor’s children are not obligated to transfer their shares to a common holding company in order to benefit from the favourable scheme. Instead, they can transfer their shares to their own holding company, provided that the conditions of each are met. This accommodation allows each child to set up their own wealth management structure and strategy.
Act now
By addressing the key challenges of ensuring business longevity, shareholder stability, and therefore ongoing employment, the Dutreil Pact is an opportunity for business owners to prepare the transfer of their company in favourable conditions.
During talks on the finance act for 2020 last year, there was some debate between those who proposed reducing the benefits of the Dutreil Pact, and those seeking total exemption for business transfers, as part of broader discussions on the taxation of gifts and estates.
Short of predicting the reforms that could be introduced under a new presidency, business owners would do well to start thinking about their wealth objectives, and act upon them if necessary, to avoid the burden of an ill-prepared transfer.
Our experts at Societe Generale Private Banking work alongside your wealth advisors to help you find the best solution.
(1) CE, 23 janv. 2020, n° 435562
(2) Cass. com., 14 oct. 2020, n° 18-17.955
(3) Rép. min. n° 6410 : JO Sénat 3 sept. 2020, p. 3895
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