The law on the economic initiative of 1 August 2003 (Law No. 2003-721) led to the creation of Articles 787 B and 787 C in the CGI (General Tax Code). These new articles are intended to simplify and lower the cost of the transfer of a family business.
This scheme called the “Dutreil Pact”, with reference to Renaud Dutreil has evolved since 2003 and is subject to significant changes, including the 2019 Finance Act (Article 40), dated 28 December 2018 (Law No. 2018- 1317).
First of all, it is worth understanding how this pact works. Article 787 B of the General Tax Code allows an exemption of the transfer duties of up to 75% of the value of the transferred stocks or shares of a company transferred by death or inter vivos.
There are of course many conditions attached to this scheme, starting with the fact that the stocks or shares of the company transferred must concern a company having an industrial, commercial, craft-based, agricultural or self-employed business. Family-run SCIs (Société Civile Immobilière) are therefore expressly excluded from benefiting from this scheme.
This criterion regarding activity is paramount, since the company will have to maintain an industrial, commercial, craft-based, agricultural or self-employed activity for the entire duration of the collective commitment to the conservation of securities (see below).
It is not obligatory that all activities carried out are industrial, commercial, craft-based, agricultural or self-employed activities, but these will have to be predominant (therefore more than 50%).
This scheme does not only apply to French companies, it can also benefit foreign companies, as stated in a ministerial response dated 28 December 2004 (No. 46956) and reiterated by the administrative doctrine (BOFIP BOI- ENR-DMTG-10-20-40-10-20140519 §30).
Among the other conditions to be fulfilled, it should be noted that the conclusion of a collective commitment to the conservation of securities transferred will have to be made and that for a minimum period of 2 years. This commitment must in principle be in progress on the date the business is transferred.
This collective commitment may be : “undertaken without the requirement of a minimum individual ownership threshold by the deceased or the donor and at least one other partner of the company, whether the latter is a natural person or a legal person” , as recalled by the BOFIP above.
Formal requirements are, however, necessary (private deed, registered with the competent registration authority or by legal deed). These formal requirements are justified because they allow the verification of the actual date from which the conservation period begins (date of registration for the deed signed under private seal and date of the legal deed).
Previously, the collective commitment to the conservation of securities had to involve at least 20% of the financial rights and voting rights attached to the securities issued by the company if they were a listed company.
Since the 2019 Finance Act, these thresholds have been lowered.
Article 787 B of the General Tax Code states that:
“The collective conservation commitment covers at least 10% of the financial rights and 20% of the voting rights attached to the securities issued by listed companies and at least 17% of the financial rights and 34% of the voting rights, including the stocks or shares transferred for non-listed companies. »
These thresholds must be respected for the duration of the conservation commitment.
It will also be necessary for one of the holders of the securities to have, for more than two years at the date of the transfer, its main professional activity (for partnerships) or a management role in the company (for companies subject to corporation tax) of the transferred securities and shall perform this role for three years following the transfer date.
In addition to collective commitments, individual commitments can be made, and these for a minimum of 4 years.
To benefit from the partial exemption of transfer duties on the securities transferred, the beneficiary of the securities (heir, donee) must make the commitment in the declaration of succession or in the deed of gift that it and its successors will keep the securities transferred for a period of four years.
This 4-year period will start from the end of the collective commitment, if one has been made.
For your information, in the case of a collective commitment prior to an individual commitment, the individual commitment will not begin until the end of the collective commitment, and the minimum total duration will be 6 years.
As with the collective commitment, one of the members of the individual commitment will have a management role.
The Dutreil pact is really interesting because it reduces transfer duties by three quarters and there is no ceiling to that.
Concerning the declarative obligations: the declaration of gift or succession, as well as the copy of the conservation of securities commitment and an attestation of the company whose titles are the object of a conservation commitment will have to be sent to the tax authorities.
The latter may make a request for the company to draw up a certificate certifying that all the conditions enabling the scheme to be implemented are met, and the company’s response time shall be within 3 months.
In the case of an individual commitment, at the end thereof and within 3 months (from the said term) the heirs or donees must send to the tax authorities a certificate from the company stating that the conditions of the scheme have been respected until the end of the commitment made.
There are various consequences if the conditions for the application of the Dutreil Pact are not respected, as outlined in the table below.
|Conditions not met||Consequences||Changes to be made|
|Non-compliance with the collective commitment to the conservation of securities||All heirs or donees will have to pay the additional inheritance duties plus late payment interest||If the breach of this condition results from the assignment of the securities, only the assignors will be affected by this issue and not the heirs or donees if they keep their securities
Note that the other conditions must continue to be fulfilled (conservation thresholds, management role etc.)
|Non-compliance with the condition related to the exercise of a principal activity or a management role||All heirs or donees will have to pay the additional inheritance duties plus late payment interest|
|Non-compliance with the individual conservation commitment by an heir||The latter will have to pay the additional inheritance duties plus late payment interest|
A point on the transfer of sole proprietorship provided for in Article 787 C of the General Tax Code, which states that:
“They are exempt from inheritance duties up to 75% of their value, for a total or an undivided share of all movable and immovable, tangible or intangible assets allocated to the operation of a sole proprietorship having an industrial, commercial, craft-based, agricultural or self-employed activity transferred by death or inter vivos if the following conditions are met:
a.The sole proprietorship mentioned above has been owned for more than two years by the deceased or the donor when it was acquired for valuable consideration;
- Each heir, donee or legatee undertakes in the declaration of succession or the deed of gift, on its own behalf and for its legal successors, to keep all the property allocated to the operation of the company for four years from the transfer date.
(c) One of the heirs, donees or legatees mentioned in paragraph (b) actually continues the operation of the company for three years after the transfer date.
(d) In the event of failure to comply with the condition laid down in paragraph (b) following a donation, the partial exemption granted in respect of the inheritance is not challenged provided that the donee(s) are the donor’s descendant(s) and that the donee(s) continue the commitment provided for in (b) for its duration. »
Therefore, a sole proprietorship with an industrial, commercial, craft-based, agricultural or self-employed activity and inherited (donation or death) can also benefit from the 75% reduction in transfer duties.
This exemption applies to all movable and immovable property, whether tangible or intangible, used for the operation of a sole proprietorship.
For this it will be necessary that this company was owned by the deceased or donor for at least for 2 years and that it was acquired for valuable consideration.
That it is therefore an industrial, commercial, craft-based, agricultural or self-employed business.
That the heirs or donees make for themselves and for their legal successors the commitment for the conservation of the securities for 4 years as from the company transfer and that one of them continues to operate the company for at least 3 years.
As previously if the conditions are not respected, this may give rise to reconsideration of this scheme, as outlined in the table below:
|Conditions not met||Consequences||Changes to be made|
|Non-compliance with the commitment to the conservation of property by one of the heirs or donees||The latter will have to pay the additional inheritance duties plus late payment interest.|
|Failure to meet the condition for continued operation||All heirs or donees will have to pay the additional inheritance duties with late payment interest. If on top of that the taxpayers’ integrity is in doubt, a surcharge of 40% will be applied such as provided for in a) of Article 1729 of the General Tax Code (wilful breach)|
In this case, declarative obligations must also be made. When filing the deed of succession or gift to the relevant tax authority, the heirs or donees must make the commitment to keep all the property required for the company’s operation for a period of 4 years.
The administrative doctrine (BOI-ENR-DMTG-10-20-40-40-20140519) specifies that:
“In addition, each of the heirs, legatees or donees referred to in Article 787 C of the General Tax Code must send an individual certificate to the tax office of the deceased’s domicile or the place where the deed of gift or declaration of gift by hand is lodged, certifying that:
– the individual commitment to the conservation of the property is respected during the whole year;
– one of the above-mentioned persons actually continues to operate the business for the three years after the transfer date.
This certificate must be sent within three months of 31 December of each year:
– from the starting point of the individual commitment to the conservation of the property which has had its transfer partially exempted;
– and until its expiry.
Finally, in the case provided for in Article 787 C of the General Tax Code, the donee or the donor is required to provide the year of the donation, and together with the individual certificate mentioned above, a copy of the registered deed attesting the donation. »