Whether an individual operator, or a manager of a PME or large business, the decision to sell a company constitutes in principal, apart from a few exceptions, the result of a personal and strategic plan.
It is necessary to respect all legal, administrative, social, and other types of formalities involved in the tax system. Yet, while these constantly shifting rules may be inherent to the system, adapting to them can sometimes prove quite difficult.
Because the moment of transfer is so crucial to the business transfer, it is recommended to avoid the fire of the tax administration, while still ensuring all of their interests are not lost.
Without disregarding the impact of the VAT, business tax, and registration fees, this study simply refers to the most characteristic tax consequences resulting from business transfers, the level of income tax and corporate income tax.
Legislation has taken care to give all power to the tax administration to guarantee the collection of taxes owed by the former owner.
In a more concrete manor, article 201 of general tax code states an immediate taxation of benefits (even those who have tax remission) and the unrealized capital gains in situations involving business transfers.
This taxation immediately concerns both those businesses under income tax and those subject to corporate tax as well.
Businesses should sign their statement of results within a 60-day time frame which includes the definitive date of the transfer.
It is these benefits of taxation, which had been achieved between the end of the last tax period and the date of the transfer, to which are attached the credits and the post debts of the transfer.
Charging of capital gains and losses
According to article 38 of C.G.I., capital gains achieved and losses suffered during the transfer of converted assets should be retained until the end of the operation mainly for the determination of tax results.
However, the taxation of capital gains concerned differs somewhat depending on whether the business is subject to income tax or corporate tax.
In regard to income tax, the capital gains system resulting from the sale of fixed assets is a function of the company’s turnover.
It is thus the actual capital gains by small businesses who have practiced their business for at least 5 years that are totally or partially exempt, on the condition that their turnover does not exceed the date of the transfer, as stated by the elements in article 151 vii of C.G.I.
Otherwise, in the following situations, various prepositions attenuate the effects of taxation on capital gains:
- Free transfer of an individual business: The donation to the individual business, despite the character of the free transfer, brings with it all the tax consequences attached to business transfers. However, in regard to the taxation of capital gains, the business can benefit from deferring taxation of all of capital gains related to tangible and intangible elements of transfer funds, if the recipient continues operating. The benefits of this scheme are dependent on the transfer being free. Thus, the donation of business capital, free of charge, by payment of a capital sum or annuity, does not constitute a transfer free of charge.
- Contributions of the individual business: The contributions of an individual business are subject, in principal, to all of the tax consequences involved in the business transfer. However, a specific plan allows, under certain conditions, a deferral of taxation of capital gains recorded at the rate of intake:
- Report of taxation of capital gains: taxation of capital gains relating to non-depreciable assets is postponed, until the considered date of the transfer or the redemption of social rights received in consideration of contribution, or until the disposal of assets by the business if it happens at a later date.
- Conditions of the application: Company contribution should of course be consented upon by one physical legal person exercising professional employment. Therefore, it should be done in full ownership and covering all the elements of fixed assets used in the practice of professional activity.
Regarding corporate tax, capital gains achieved by businesses are of the taxable nature whatever their turnover at the time of the transfer.
However, the scope of the regime of capital gains or losses in the long term is limited to securities that correspond to the meaning of article 219-I-a of C.G.I, and of certain mutual funds at risk or venture capital firms of more than 5 years.
Benefits of tax deferral
The benefits from tax deferral, which mainly consist of provisions previously established by the company and no longer required by virtue of the sale, should be applied to the taxable income of the last fiscal year.
On the other hand, this rule does not block the constitution of new provisions in this last fiscal year, if general conditions for the deduction are met.
On a similar note, the profits (notably capital gains) of which taxation had previously been deferred or for those who received a reprieve terminating the transfer, must be reintegrated into the system of taxable income.
Taxable income and deficit report
When the result of the financial year concerned by the transfer is beneficial, it is subject to immediate taxation.
The net capital gains in the long term redeemed at the occasion of the transfer, if it has not been exempt, are taxed 16% separately increasing social security.
It is specified in regard to income tax, that the owner having transferred his business can impute the subsisting deficit on his overall net revenue after eventually being compensated by long term net capital-gains.
Tax responsibility of the transferor
To confirm if desired, the overriding right which allows the tax administration to guarantee the collection of taxes owed by the former operator, article 1684 of C.G.I. mentions expressly the tax responsibility of the transferor.
The transferee’s business is, in effect, jointly responsible for a period of 3 months with the transferring business, for the tax payments relating to the profits of the latter.
This responsibility is applicable in case of transfer with or without payment.