The Pacte Dutreil is a tax scheme providing partial exemption from transfer duties on gratuitous transfers of companies or sole proprietorships.
In practical terms, its aim is to facilitate the transfer of businesses without the sale of shares.
This is a tax advantage for business owners wishing to transfer company shares free of charge, whether they are self-employed or in a company. It also applies in the event of death.
Let's take a look at all the conditions to be met to benefit from the Pacte Dutreil and its advantages.
Created in 2003, the Pacte Dutreil is an advantageous tax measure enabling anyone wishing to sell their shares in a business (individual or company) to benefit from a gift tax exemption of up to 75% of the value of the shares sold.
This measure also applies in the event of death. In this case, the heir is exempt from the same amount of inheritance tax on the securities he is about to receive following the death.
The Pacte Dutreil reduces the tax cost of family business transfers
In the absence of a Pacte Dutreil, the transfer tax levied depends on previous gifts, and can reach substantial sums (40% and more). The direct consequence of this was the sale of the family business...to finance the payment of the transfer duties! This is precisely why the French government has decided to reduce the tax base by 75%.
If the transfer concerns a company, the Pacte Dutreil applies to the value of the shares transferred. If it concerns a sole proprietorship, the Pacte Dutreil applies to the tangible and intangible assets allocated to the business.
In the case of joint ownership, it is possible to combine the Dutreil tax advantage with an additional reduction in the tax base for the usufructuary. The €100,000 allowance for direct descendants can also be combined. Finally, if the company is transferred in full ownership (and if the donor is not yet 70), an additional 50% reduction in tax is granted.
The number of companies eligible for the Pacte Dutreil is vast: commercial, craft, industrial, agricultural and liberal businesses are all eligible.
Lastly, the donor was required to own all or part of a company in which he or she held a management position, or which was his or her principal activity.
To benefit from the Pacte Dutreil, the deceased or transferor must have owned the shares for at least 2 years. In turn, the person inheriting or receiving the shares undertakes to hold them for a minimum of 4 years.
If there is more than one heir or beneficiary, each must undertake to comply with this condition. If the shares in the company were acquired free of charge by the donor (or the deceased), then no minimum holding period is required.
In addition, the business must be taken over for at least 3 years by one of the beneficiaries.
All transfers (whether during a person's lifetime or following his or her death) must be the subject of a deed of gift, or a declaration of inheritance.
You should inform the tax authorities of this by providing a copy of the signed Pacte Dutreil (collective commitment) and a copy of the individual commitment made by each of the beneficiaries. Finally, a specific attestation certifies that you meet all the conditions to benefit from the tax advantage.
The 2019 Finance Bill introduces several changes to the Pacte Dutreil in order to simplify the conditions of access and its execution.
Firstly, if a beneficiary decides to sell all or part of his or her shares to another beneficiary, the partial exemption from which he or she benefited will no longer apply to the extent of the shares sold or donated.
Until now, the company concerned by the Dutreil pact and each beneficiary had to draw up an annual document stating that all the conditions of the collective undertaking remained met on December 31 of the year concerned. This requirement has now been abolished.
It will simply be compulsory to provide this certificate at the beginning and end of the agreement.
The Dutreil pact therefore concerns a large number of companies, since it potentially applies to all family businesses.
In practice, it is used relatively little, as its implementation remains relatively complex. Obtaining the agreement of all beneficiaries and ensuring that they comply with all the conditions is no easy task, with the result that collective agreements are often broken in midstream.
On the other hand, if you comply with the formalities and conditions, you can enjoy substantial tax benefits as part of a strategy to optimize your assets.
Written by our expert Paul LASBARRERES-CANDAU
November 26, 2018
