The Dutreil Pact is a scheme that enables a business, usually a family business, to be passed on with partial exemption from up to 75% of the transfer tax.
The tax base for the transfer tax will therefore be calculated on 25% of the value of the shares sold.
The result is a substantial tax break designed to make it easier for entrepreneurs to pass on their businesses to their heirs, thus encouraging the development of family capitalism, which is less developed in France than in other European countries such as Italy and Germany.
This mechanism is provided for in article 787 B of the CGI and is subject to several (cumulative) conditions and formalities.
When the pact was created
- The transferred company must have an operational activity, i.e. an industrial, commercial, craft, agricultural or liberal activity. The administration therefore excludes activities of a civil nature (BOI-ENR-DMTG-10-20-40-10 n°15). The Dutreil agreement cannot be used to transfer a SCI, for example. Holding companies are eligible under certain conditions (animating holding companies) which we will not go into in this article.
- This activity must be maintained throughout the duration of the individual and collective undertakings to retain the shares.
- If the company has several activities, the practical rule will be applied on the basis of all the activities and the preponderance of some of them.
In order to benefit from the Dutreil Act’s exemption mechanism, prior to the transfer, the shareholders must enter into a collective undertaking to retain the shares for a minimum period of 2 years. The thresholds vary depending on whether or not the company is listed.
The collective undertaking must cover at least 17% of financial rights and 34% of voting rights for unlisted companiesand 10% of financial rights and 20% of voting rights for listed companies.
However, if no commitment has been made, it is still possible to benefit from the Dutreil pact. The collective commitment will be “deemed acquired” after 2 years if the donor :
– has held a shareholding equal to or greater than the above-mentioned thresholds for more than 2 years.
– has held a management position in the company for more than 2 years, or has carried out its main activity via the company.
The formalities of the Dutreil pact
The company whose shares have been directly or indirectly transferred must produce several certificates to the beneficiaries of the agreement:
- On the day the shares are transferredThe shareholder must certify that the collective undertaking has been complied with up to that date;
- At the end of the lock-up periodThis can be done either at the request of the tax authorities (the beneficiary has 3 months to respond), or spontaneously. The same applies to certificates concerning individual undertakings to retain shares.
The obligation for the company to produce annual certificates certifying the commitment to retain shares was abolished by the reform of 1er January 2019 (and applies to current agreements).
Questioning the exemption
The partial exemption provided by a Dutreil pact may be called into question if the individual or collective undertaking to retain shares is not complied with.
This may be due to :
- A sale for valuable consideration after a transfer free of charge during the collective undertaking to retain the shares ;
- Non-compliance with shareholding thresholds;
- Non-compliance by one of the beneficiaries of the agreement with his or her management commitment within the company.
In the event of non-compliance with these commitments, it is still possible to make a request for compliance to the tax authorities, in which case the beneficiaries of the allowance will have to pay additional duties and interest on arrears.
In conclusion, the transfer of a family business can be a complex process, requiring careful attention to ensure that you benefit from all possible tax advantages. The Dutreil pact can be an interesting solution for entrepreneurs wishing to pass on their company to their heirs while benefiting from a partial exemption from transfer duties. However, it is important to comply with all the conditions and formalities required to qualify. In this context, calling on the services of a tax lawyer like Altertax Avocats can prove invaluable in guiding entrepreneurs through the transfer process and ensuring compliance with current tax regulations.