Introduction
When the time comes to pass on their professional assets, business leaders find themselves faced with a major problem and not the least important, in fact, the cost of this transfer can prove to be particularly expensive.
In this case, how can we transmit the work of a lifetime at a lower cost?
Only one answer: THE PACTE DUTREIL, a multi-faceted and essential tool for optimizing the transfer of businesses.
The Dutreil Pact:
What is it?
The “Dutreil Pact” is a system established by law n°2003-721 of 1st August 2003 known as the “Dutreil Law”, with the aim of reducing the tax cost of business transfer, following a death or donation.
Indeed, the imposition of free transfer taxes depends on a progressive scale in installments, the applicable rate of which is determined taking into account previous donations.
In practice, the value of these donations and the value of the business to be transferred are often significant, easily reaching the highest rates on the scale (40% and 45%).
As the bill could turn out to be very high, the heirs or donees were sometimes required to sell the family business to finance the payment of transfer taxes.
The transfer of a business can then prove to be a real obstacle course for the entrepreneur, particularly when the time comes to pay the related taxes.
Hence the need to anticipate and prepare for the transmission of this professional heritage or risk seeing the fruit of a lifetime’s work reduced to nothing.
In order to avoid such situations, the “Dutreil” system allows you to benefit, under certain conditions, from a free exemption from transfer taxes up to 75% of the value of the securities or shares transferred and to considerably reduce the tax base.[1]
Let us then see in figures to what extent the “Dutreil” system makes it possible to reduce the cost of this transmission:
Encrypted Example:
Mr. X is 65 years old and wishes to transfer his entire company to his son Y.
The company is valued at 950,000 euros, here, Mr. X gives full ownership of all of his shares to his son.
ESTIMATION OF RIGHTS | |||
DESCRIPTION | WITHOUT DUTREIL PACT | WITH DUTREIL PACT | |
Taxable base before Dutreil (Per child) | 950 000 | 950 000 | |
Dutreil reduction 75% | – | 750 000 | |
Taxable base after Dutreil | 950 000 | 200 000 | |
Direct line reduction (per child) | 100 000 | 100 000 | |
Taxable base after direct line deduction | 850 000 | 100 000 | |
Gross gift tax | 232 678,00 | 18 194,30 | |
Fee reduction of 50% (Donor under 70 years old) | – | 9 097,15 | |
| Savings made thanks to the Dutreil system | 223 580,85 | ||
Please note
The “Dutreil” system can be combined with other tax reductions, namely:
- The 50% reduction in gift taxes, if the donee is under 70 years old[2].
- The direct line reduction of 100,000 euros for each child with the possibility of deferring or splitting the payment of the duties payable [3].
- The reduction of 300,000 euros in the event of a donation of full ownership to employees on permanent contracts or to apprentices who have had a contract for at least 2 years.[4]
The Dutreil Pact: For whom?
The scope of the Dutreil Pact is quite extensive.
For the Dutreil system to apply, the company must have a so-called “operational” activity.
Companies with commercial, industrial, artisanal, agricultural or liberal activities are therefore automatically concerned.
Conversely, are excluded from the system, companies having a purely civil activity such as the management of real estate assets.
On the other hand, the tax administration has specified that certain activities of a civil nature may be eligible for the Dutreil pact, such as construction-sale activities of buildings, or even the activities of property dealers.[5]
A company with a mixed activity can benefit from the Dutreil pact. However, the operational activities (industrial, commercial, artisanal, agricultural or liberal) of the company must be predominant.
Group holding companies, intermediary holding companies as well as individual companies can also benefit from the favorable tax regime offered by the system.
No distinction is made according to the tax regime of the company, whether it is subject to income tax (IR) or corporate tax (IS).
The Dutreil Pact in practice
In order to benefit from the “Dutreil” system, it is necessary to respect 3 cumulative conditions necessary for exemption:
A collective commitment to retain securities
A commitment must have been made by the deceased or by the donor, as well as his successors and the other partners of the company, to keep the securities for a minimum period of 2 years.
This commitment must be in progress on the day of transmission. It may take the form of a private deed or an authentic deed.
For it to be enforceable against the tax administration, once signed the act must then be registered with the tax service.
The securities concerned by this commitment must represent 17% of the financial rights and 34% of the voting rights for unlisted companies. For listed companies, the securities must represent at least 10% of the financial rights and 20% of the voting rights.
However, this collective commitment is deemed acquired if two conditions are met:
- Holding by the deceased alone (or the donor) or with their spouse or civil partner, for at least 2 years, of securities representing the thresholds required in terms of financial rights and voting rights.
- Exercise in the company, by the deceased (or the donor), or his spouse, his civil partner for more than 2 years at the date of transfer, of his main professional activity if the company comes under the IR or of one of the management functions referred to in article 975 III-1 of the CGI if the company is subject to the IS.
An individual commitment to retain securities
At the expiration of the collective commitment or the transfer when the collective commitment is deemed acquired, each heir or each donee must make in the declaration of succession, or the deed of donation, an individual commitment to keep the securities received for 4 years.
Carrying out an activity within the company
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 the three years following the date of transmission:
- Its main professional activity if it is a partnership[6]
- A management function for companies subject to corporate tax[7]
Conclusion
If the Dutreil Pact allows for the transfer of a business with the benefit of a favorable regime both in terms of donations and inheritance, it is appropriate to be particularly careful with its implementation and drafting.
Indeed, non-compliance with the conditions of the Dutreil pact could lead to a request for compliance by the tax administration or even a challenge by the latter to the exemption system.
Do you want to transfer your business while minimizing your tax liability?
THINK OPTIMIZATION AND ANTICIPATION! THINK PACTE DUTREIL!
The LEGALPROTECH-AVOCATS firm will be happy to support you on all the legal aspects of this system, do not hesitate to contact us.
- [1] Article 787 B of the CGI
- [2] Article 790 of the CGI
- [3] Article 790 A bis of the CGI
- [4] Article 790 A of the CGI
- [5] BOI-ENR-DMTG-10-20-40-10.
- [6] Articles 8 and 8 TER of the CGI
- [7] 1° of 1 of III of article 975 of the CGI
Article published on January 23, 2024. Its content reflects the context of its publication.
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