October 15, 2020
Each year, 75,000 entrepreneurs decide to sell their business, at which point they face capital gains tax on the sale.
Often at a rate of 30%, this taxation can easily be prohibitive. However, there is a tax optimization mechanism, the contribution-sale reinvestment (apport-cession) under Article 150-0 B ter of the French Tax Code (CGI), a legal provision to defer capital gains on a business sale through the creation of a holding company. Nevertheless, certain formalities must be observed to avoid the risk of a tax reassessment.
When can the contribution-sale reinvestment (Article 150-0 B ter) be considered?
The tax regime for contribution-sale is governed by Article 150-0 B ter of the CGI, as amended by Article 115 of the 2019 Finance Act. To avoid the excessive taxation imposed on a business owner when selling their company, a special exemption regime, known as contribution-sale, has been implemented.
To do this, the seller must create a holding company that will hold financial interests in other companies, including their own. This holding company will therefore hold the shares of the company to be sold. It is then the holding company that will sell its subsidiary and, as a holding company, benefit from a tax deferral regime.
This is a solution for any business owner wishing to protect their wealth, especially since there are solutions that combine this tax optimization with an attractive return.
However, this tax deferral ceases in at least three situations:
-if the taxpayer decides to transfer their tax domicile outside of France.
-in the event of a sale for consideration, reimbursement, repurchase, or cancellation of the shares contributed to the beneficiary company, all within three years from the contribution, unless the proceeds of the sale are reinvested
-in the event of a sale for consideration, reimbursement, repurchase, or cancellation of the shares received in consideration for the contribution.
What are the conditions for benefiting from the contribution-sale tax regime?
Article 150-0 B ter of the French Tax Code sets out two main conditions, related to the beneficiary and the structure established.
Who are the beneficiaries of this scheme?
This tax optimization regime concerns entrepreneurs who directly own their operating company. They must first make a contribution of shares to a holding company, which they will have specifically created for this purpose.
To benefit from the tax deferral as provided for by Article 150-0 B ter of the French Tax Code, this beneficiary holding company must then be managed by the contributor of the shares: it takes the form of a capital company or equivalent, subject to corporate income tax and domiciled in France.
What are the rules for the holding company?
To benefit from this tax scheme, the established structure must retain the shares for at least three years. If it decides to sell them, it must reinvest at least 60% of the sale proceeds into economic activities. This reinvestment of capital gains under the contribution-sale scheme must be carried out within 24 months, at the risk of losing the tax benefit: the tax deferral is then cancelled, and the capital gains tax automatically becomes due.
What solutions are eligible for the contribution-sale reinvestment?
It's important to be familiar with the ways to reinvest capital gains, especially since they were modified and expanded by the 2019 Finance Act (Article 115).
Solution 1, direct investment
The entrepreneur decides to reinvest their capital gains in an economic activity by directly purchasing permanent assets intended for this future operation. This investment can be in a liberal profession, commercial, artisanal, agricultural, industrial, or financial activity.
Solution 2, acquisition of external securities
The business owner decides to invest by purchasing shares in another company, which itself is eligible for the capital gains reinvestment scheme.
To be eligible for the tax deferral provided for in Article 150-0 B ter of the CGI, however, this company must not have been controlled by the investor previously.
The acquisition of shares is made through the holding company into an operating company, which may have a liberal, commercial, industrial activity, etc.
This purchase allows the holding company to control this operating company, either through external decision-making power or by holding a majority voting right. This investment can now also be made through private wealth management club deals.
Solution 3, the simplest: acquisition of fund units
The simplest solution is to entrust the sums to be invested to a fund specializing in investments in eligible SMEs. Since January 2019, it has indeed been possible to subscribe through Private Equity funds, by subscribing for units or shares in FCRP, FCPI, SLP, or SCR.
Besides a simpler and legally more secure system, subscribing to a private equity fund offers two major advantages:
-this investment offers strong sectoral and territorial diversification, with activities such as real estate development, budget hotels, serviced residences, wine trading, etc.
-the potential for attractive returns
The assets of these funds must contain at least 75% of units or shares in operating companies subject to corporate income tax and whose head office is located in a European Economic Area (EEA) state. Furthermore, two-thirds of these companies must be unlisted or potentially listed on a market where financial instruments are predominantly issued by SMEs.
What are the risks of the capital gains reinvestment scheme?
Under Article 150-0 B Ter of the General Tax Code, it is possible to benefit from a deferral of taxation on capital gains that would have been realized in the event of a standard sale. However, the business owner has a maximum of two years to reinvest at least 60% of these amounts in a solution fiscally eligible for the capital gains reinvestment scheme.
If the entrepreneur decides to continue a professional activity, the solution is quickly found. But in other cases, investing in external securities quickly becomes a headache, to make both an authorized investment and one that safeguards their assets.
Financial uncertainties
This investment requires thorough analysis, where it is necessary to quickly define a set of specifications, in which will be defined:
-the business sector
-the territorial location
-the accepted risk level
-the amount to be allocated
Once needs are defined, the next step is to identify target companies that meet all criteria, in order to conduct a financial and competitive analysis within the timeframe set by the tax authorities. This is a complex task, requiring the involvement of specialists, often within increasingly tight deadlines. Even after a choice is made, the process is far from over, involving a letter of intent, legal oversight, verification of the deed, and finally its signature. Each step carries its share of uncertainties, hence the need to engage professionals trained in these procedures.
Another, less complex, question arises: the law requires the holding company to invest at least 60% of the capital gain that would have been realized. Conversely, this leaves 40% available, for which the allocation must be determined, whether for optional investment, cash flow, or reinvestment in assets.
This entire time-consuming process is absolutely necessary to optimize one's investment, without solely focusing on simple tax optimization.
Tax uncertainties
Despite the amendment of Article 150-0 B ter of the CGI and its broadening since 2019, certain elements may raise questions, and thus lead to disputes with the tax authorities. It is therefore important to pay close attention to these areas of concern.
- The issue of financing the activity
Article 150-0 B ter specifically refers to the financing of an activity, but its nature still needs to be clearly defined. Can, for example, financing the activity of a third-party subsidiary of the holding company be considered to fall under this tax definition? This is an element that could lead to debate, by distinguishing between the strict financing of an activity and capital subscription.
- The issue of the holding period
For income tax (IR), Article 150-0 D of the CGI endorses a 50% reduction on realized capital gains for rights held between two and eight years, and 65% thereafter. However, the tax deferral regime (sursis d'imposition) and the tax rollover regime (report d'imposition) do not operate identically, such that a subsequent transfer of securities received during a contribution under the tax rollover regime could generate two distinct types of capital gains: one from the contribution (date of acquisition of the securities) and one from the transfer.
Seeking advice is therefore often necessary to avoid pitfalls, as the exchange of securities could be considered a reset counter by the tax authorities.
- The issue of combining deferral and rollover
After contributing securities under the tax deferral regime, some entrepreneurs may re-contribute them under the tax rollover regime. The whole question then is whether this second acquisition operation maintains the initial operation's tax deferral. Placing the capital gain, whose tax deferral is cancelled by the re-contribution, under the tax rollover regime perfectly aligns with the spirit of Article 150-0 B of the CGI.
But will the tax authorities only adhere to the spirit of the law?
- The issue of potential holding company restructurings
If the contribution-transfer holding company were to absorb the subsidiary from which it received the securities within 3 years, how would the tax authorities analyze this merger, by modifying or not modifying its tax rollover? Again, the merger operation does not deviate from the spirit of the article, as the securities are maintained without any particular tax advantage for the entrepreneur or the holding company. However, there is no guarantee that the tax authorities would confirm the interim nature of such a merger, risking the loss of the tax rollover.
It is in this spirit that the 2019 law was enacted, to allow for the expansion to funds that are simpler to access, more legally and fiscally secure, with tailor-made solutions. This is what Mata Capital offers, for example, with investment solutions eligible for the contribution-transfer reinvestment product, particularly through real estate club deals, offering attractive returns.
Tax treatment depends on individual circumstances. No information contained on the Mata Capital website constitutes legal, tax, or any other form of advice.
Sapians, a subsidiary of Mata Capital, is the first digital Multi-Family Office that combines the pragmatism of an investment platform with the expertise of leading family office iVESTA. With its "Just Focus" offering, its mission is to streamline investment opportunities to support its clients' success.