The effects of Brexit on the transfer of shares in English companies held by French tax residents
On 31 January 2020, the United Kingdom will leave the European Union, and a transition period should therefore begin, and continue on until the end of the year (2020).
By leaving the European Union, the United Kingdom will de facto leave the EEA (European Economic Area), since this country is a member of the EEA by virtue of its EU membership, and for the moment we still don’t know whether or not the United Kingdom wishes to join the EFTA (European Free Trade Association) in order to be able to join the EEA, like Norway or Liechtenstein.
Therefore if French tax residents own equity stakes or shares in English companies (e.g. private limited company or LTD) and wish to sell these company shares, it would be useful to complete this type of formalities before the end of the transition period in order to benefit from the various allowances and exemptions.
It should be pointed out that, when a natural person transfers securities or corporate rights, a capital gain (see below) may result from this transfer, and this will be subject to income tax.
These capital gains will either be subject, at the taxpayer’s discretion, to the progressive scale of income tax, or to the PFU (Prélèvement Forfaitaire Unique – “Single Fixed Levy”), whose overall rate is 30%, corresponding to a tax rate of 12.8%, to which must be added a rate of 17.2% corresponding to the payment of social security contributions.
Taxable individuals are individuals who occasionally sell their securities or company shares (excluding companies investing predominantly in properties, e.g. property investment company (SCI) shares subject to income tax, where the applicable tax regime is different), in the context of the management of their private wealth.
These concern, for example
(Not exhaustive, and useful in the context of writing this article): transfers of French and foreign securities or transfers of corporate rights for a fee. Again this is not exhaustive since it may also concern other hypotheses which are not relevant here, although our legal counsel would be happy to outline these for you if necessary.
It should be noted that taxable individuals, if they are French tax residents (within the meaning of Article 4 B of the General Tax Code (CGI)) will be taxable on the basis of all the transfers of shares carried out which generate a capital gain, even if this concerns shares of foreign companies.
However, there is a safeguard since, in view of the tax conventions signed between France and foreign countries, this right to impose tax may be taken away from France; where applicable, our analysis concerns English companies, therefore the shares of English companies.
It will therefore be necessary to verify the applicability of the Anglo-French tax convention signed in London on 19 June 2008, which provides in paragraph 5 of its Article 14 entitled “Capital Gain” that:
Gains from the alienation of any property, other than that referred to in paragraphs 1, 2, 3 and 4, will only be taxable in the Contracting State of which the transferor is a resident.
Consequently, a French tax resident transferring his or her company shares held in an English company will be taxed in France, albeit that the United Kingdom retains a right of seizure under the tax treaty, as set out in point 6 of Article 14, subject to fulfilling the provisions mentioned in point 6 of said Article 14.
Therefore, if a capital gain is obtained on the transfer of the shares of an English company owned by a French tax resident, the latter will be taxed in France.
However, it is still necessary to obtain a capital gain, which, as a reminder, is the (positive) balance resulting from the difference between the transfer price and the acquisition price.
It should be noted that the transfer price and the acquisition price are determined according to specific rules, which are not mentioned in this summary. However, please feel free to send an email to the following address if you would like further information on this subject: info@attorney-counsel.com
Allowances for the period held may be authorised on these realised capital gains.
With regard to the allowances for the period held, these are applicable if you opt irrevocably (paragraph 2 of Article 200 A of the CGI) for the progressive scale general option.
With regard to the so-called classic common law allowance, this is:
- – 50% of the amount of the capital gain obtained, or of the distribution received, if the shares, units, rights or securities have been held for at least 2 years and less than 8 years on the date of the transfer or distribution;
- – 65% of the amount of the capital gain obtained, or of the distribution received, if the shares, units, rights or securities have been held for at least 8 years on the date of the transfer or the distribution.
This allowance is under common law, and is not subject to geographical restrictions.
However, if you wish to opt for an enhanced allowance for the period held, such cases may become more complicated by 20121 thanks to Brexit.
Why?
Because the criteria for being able to benefit from this increased allowance are as follows (these criteria are cumulative and not alternative!):
- That this relates to a SME (Small and Medium-sized Enterprise) within the meaning of EU Law;
- That this SME must have been created within the last ten years, and does not result from a concentration, restructuring, extension or resumption of pre-existing activities. This condition will be assessed on the date of subscription to or acquisition of the transferred shares or rights.
- That this SME only grants subscribers the rights resulting from their status as partners or shareholders, to the exclusion of any other advantage or capital guarantee;
- That this SME is subject to Corporate Tax (CT);
- That this SME has its registered office within an EEA state;
- That this SME carries out a commercial, industrial, craft, liberal or agricultural activity. Wealth management or other civil activities are not allowed.
In the event of exit from the EU on the part of the United Kingdom and therefore de facto from the EEA, French tax residents (résidents fiscaux français – RFF) with shares in English companies could lose the benefit of this increased allowance, which is in fact particularly advantageous as it allows:
– A 50% allowance, if the shares or rights have been held for at least 1 year and less than 4 years on the date of the transfer;
– A 65% allowance if the shares or rights have been held for at least 4 years and less than 8 years;
– 85% if the shares or rights have been held for at least 8 years.
It is therefore very important for all individuals (RFF) with shares in an English company to anticipate the UK’s exit from the EU and therefore from the EEA.
As mentioned above, an agreement has been reached, which should be ratified on 29 January, and an exit with the agreement of the United Kingdom should take place on 31 January.
The following day, a transition period should begin, which will last until the end of 2020.
During this transitional period, European law will therefore continue to apply, and it is imperative that the necessary measures be taken during the year in order to envisage future transfers of shares held in English companies by RFFs as, unfortunately, it is not yet certain whether agreements could be reached between the United Kingdom and the EU by the end of 2020, or even whether an extension of the transition period could be granted.
Therefore, perhaps anticipating this point, and in order to take advantage of said allowance, one should give serious consideration to this.
With regard to the allowance applicable to executives who are retiring, this is applicable regardless of the option chosen (PFU or option for the application of the progressive scale), subject however to fulfilling certain conditions.
Among the conditions to be fulfilled (conditions which are cumulative):
- That this relates to a SME (Small and Medium-sized Enterprise) within the meaning of EU Law;
- That this SME is subject to Corporate Tax (CT);
- That this SME has its registered office within an EEA state;
- That this SME carries out a commercial, industrial, craft, liberal or agricultural activity. Wealth management or other civil activities are not allowed.
In addition, the transferor must:
- Have exercised a managerial activity within this company;
- Hold at least 25% of the voting rights or financial rights of the transferred company;
- Have held these shares for at least one year before the date of the transfer;
The transferor must cease all management functions and/or any salaried function within the company and must exercise his or her retirement rights in the two years following or before the transfer and, in addition, the transferor must not hold, directly or indirectly, on the date of the transfer and for the following three years, voting rights or rights in the corporate profits of this company.As mentioned above, with Brexit, the United Kingdom will no longer be part of the EU and therefore the EEA, so it is important, if you are close to retirement, to transfer your shares between now and the end of the transition period, because from thereafter you may not be able to benefit from this allowance, which, as a reminder, is a fixed allowance of 500,000 euros.
It is therefore very important to review your current situation, and above all to anticipate Brexit and its future consequences for your shares in English companies, if you are a French tax resident.