Reduce taxes on your business transfer with the Pacte Dutreil

As a manager, the question of transferring your business or company can be difficult to understand. Indeed, this question takes on a significant psychological dimension, particularly because it is not easy to accept that one’s business or company is managed by other people, even when it concerns one’s heirs.

However, anticipating this transmission makes it possible to drastically reduce the tax cost of the operation, thanks to advantageous tax measures such as the Dutreil Pact.

What is the Dutreil Pact?

The Dutreil Pact system allows, under certain conditions, to benefit from a free exemption from transfer taxes up to 75% of the value of company securities (article 787 B of the CGI) or of a sole proprietorship (article 787 C of the CGI), transmitted by donation or inheritance.

Thus, gift or inheritance taxes are calculated solely on the basis of 25% of the value of the securities or the individual company.

When the donor is under the age of 70 and transfers full ownership of the securities of his company, the donee(s) also benefit from a 50% reduction in gift tax.

Let’s take the example of a 63-year-old manager, who owns 100% of the capital of a company worth 500,000 euros and who wishes to transfer this company in full ownership to his only child, by donation – it being specified that he has not made any donation over the previous 15 years.

In this case, the Pacte Dutreil system thus allows a tax saving of €76,597.

How to benefit from the Dutreil Pact?

As advantageous as the Dutreil Pact is, it is imperative to scrupulously verify that we meet the conditions of this regime; otherwise, a challenge to exemption rights by the tax administration can be expensive…

First step: check the eligibility of your company or individual business.

To benefit from the Dutreil Pact, businesses and companies must carry out an operational activity, namely an industrial, commercial, artisanal, agricultural or liberal activity. Activities of a heritage nature such as the rental of bare premises and furnished premises for residential use are thus excluded.

Second step: respect the commitments specific to the Dutreil Pact.

The implementation of the Dutreil Pact requires respecting three conditions, marked by a specific duration (2-4-3) :

• A collective commitment to retain securities or a holding of the individual company for a period of 2 years

If it is a sole proprietorship, the donor or the deceased must have owned it for at least two years, unless they acquired it free of charge or created it.

If it is a company, the donor or the deceased must make a commitment, for him and his successors, with other partners, to retain at least 17% of the financial rights (or dividend rights attached to the securities) and 34% of the voting rights in the case of an unlisted company; and at least 10% of the financial rights (or dividend rights attached to the securities) and 20% of the voting rights when it is a listed company. We then speak of a collective conservation commitment.

It should be noted that since the 2019 finance law, it is accepted that a partner, who alone meets the conditions, can engage alone in a unilateral collective commitment. Thus, single-member companies can also benefit from the Dutreil Pact.

• An individual commitment to retain the titles or property necessary for the operation of the individual business during 4 years

Each donee or heir must undertake, individually, in the declaration of succession or the deed of donation, to retain the securities of the company or the assets necessary for the operation of the sole proprietorship, for a minimum period of 4 years, from the end of the collective commitment, or from the transfer in the case of the sole proprietorship.

• The exercise of a management function or its main activity during 3 years

One of the partners signing the collective conservation commitment or one of the donees, heirs or legatees must exercise in the company, for the duration of the collective commitment and for 3 years following the date of transfer, a management function, or their main professional activity, if they are partnerships (article 787 B of the CGI), or the operation of the sole proprietorship (article 787 C of the CGI).

Frequently Asked Questions

Does the donation have to relate to full ownership of my company’s shares to benefit from the system?

No, it is also possible to transfer bare ownership of the company’s shares while benefiting from the Dutreil exemption. We then speak of a donation with usufruct reserve. On the death of the donor, the bare-owner children regain full ownership of the securities, tax-free.

However, in the event of a donation with reservation of usufruct, the Dutreil reduction applies to the value of the usufruct transferred. Furthermore, the 50% duty reduction does not apply.

Finally, it is necessary to provide in the company’s statutes that the voting rights of the usufructuary will be limited to decisions concerning the allocation of profits.

I hold the securities of my operating company via a holding company whose sole activity is the holding of my securities portfolio. Can I still benefit from the Dutreil Pact?

Yes, the Dutreil system may be applicable if the so-called “passive” holding company holds directly or indirectly, through a so-called “interposed” company (within the limit of two levels of interposition), a participation in an operational company whose shares or shares are the subject of the retention commitment.

Where applicable, the conservation commitment is subscribed by the company which directly holds the stake in the operational company

This plan is, however, less favorable in terms of base and more restrictive.

In what cases can I benefit from the “deemed acquired” commitment?

The collective commitment can be deemed acquired when the following conditions are met:

• The deceased or the donor has held the required quota of securities for at least two years;
• He exercises the required management function or his main activity within the company whose shares have been sold for at least two years.

If these conditions are met, the Dutreil pact begins directly with the individual commitment for a period of four years.

It should be noted that in the presence of a commitment deemed acquired, the condition of exercising management functions cannot be considered fulfilled when these functions are exercised by the donor since he has not formally made a commitment to the administration.

Can I still continue to exercise management functions after the donation?

Yes, the tax administration clarified during an update of its doctrine on December 21, 2021 that the condition of exercising management functions does not prevent the donor or any other partner from also exercising another management function in the company.

What happens if the company changes activities during the conservation commitments?

Article 8 of the amending finance law for 2022 specifies that, for transfers made since July 18, 2022 (and, in certain cases, for transfers made before this date), the condition of exercising an eligible activity must be satisfied from the conclusion of the collective commitment and until the end of the individual conservation commitment (CGI art. 787 B, c bis new). Otherwise, the company risks losing the benefit of the Dutreil exemption.

What must be declared to the tax authorities to benefit from the Dutreil Pact?

Until December 31, 2018, the company (during the collective commitment), then the beneficiaries of the transfer (during the individual commitments) were required to file, with the competent tax service, no later than March 31 of each year, a certificate justifying compliance with the conditions of the partial exemption.

The finance law for 2019 reduced reporting obligations, so in particular there is no longer an annual reporting obligation.

Conclusion

The Pacte Dutreil system is a particularly effective tool for tax optimization of business or company transfers. It can be coupled with other transmission mechanisms, such as bare ownership donation, in order to further optimize the transmission of titles. Do not hesitate to contact us so that we can study your transmission project with you and offer you the legal and tax optimization plan best suited to your situation.

By Master Yanna CABARRUS