Do you want to pass on your business? Alternatives exist to obtain tax benefits. The Dutreil covenant allows the transfer of a family business. This French peculiarity is an incentive tax mechanism, that enables the possibility to ensure the stability and the permanence of the company in the case of a transfer of business. The Dutreil covenant introduces numerous benefits, although this is quite restrictive. Picovschi Lawyers presents advantages and inconveniences of the Dutreil covenant.
Passing on your business while guaranteeing its continuity
The Dutreil covenant offers a gift of shares to heirs and beneficiaries and is completed with an exemption of the transfer rights up to 75% of the value of the transferred shares.
Since December 30th, 2017, this provision is no longer available as a waiver for the wealth tax (ISF/IFI), as it used to be.
In order to benefit from this tax mechanism, several conditions need to be met. Article 787 B of the Tax General Code provides that to benefit from the Dutreil Covenant, the transfer will require:
- A collective commitment to retain company shares, by which the donor has undertaken, with his partners, to retain a percentage of shares for a minimum of 2 years. This commitment must cover at least 34% of shares for unlisted companies and 20% if the company is listed. Furthermore, “when the units or shares transferred by death have not been subject to a collective commitment, one of the heirs or legatee may enter into a commitment among them or with partners , within the following six months after the transfer, , as indicated in the first subparagraph”.
- An individual commitment, by each of the heirs, legatee or donee, to retain shares transferred for a minimum of 4 years;
- A commitment from one of the signatory parties, to exercise a management position (or as his main work activity for some kind of corporations) until the end of the collective commitment for a minimum period of 3 years after the date of transmission.
Finally, the company is required to draw up an annual certificate that attests that the validity conditions have been met and the commitments have been respected. The non-compliance with the collective commitment should, lead to reconsider the partial waiver towards all signatories, unless the minimum percentage is maintained by other signatories.
Thus, selling shares that are under this kind of commitment between committed partners is possible. Moreover, bringing new partners in an existing covenant is allowed, only if the collective commitment is renewed for a minimum period of 2 years.
It is important to be attentive to the respect of the commitments. If one of the conditions is not fulfilled anymore, tax exemption will no longer be available. If the collective commitment is broken, usually, only the signatory who broke the commitment will have to pay the remaining transfer rights.
How to implement the Dutreil Covenant?
The Dutreil covenant is fiscally profitable and refers to the donor’s intent, who is concerned about the perpetuity of the company.
A skilled lawyer in tax law and inheritance law will be able to advise you usefully to this end in drafting this kind of agreement, thus allowing you to benefit from a significant tax advantage, while organizing the destiny of the company.
Picovschi Lawyers, proficient in the field of inheritance law and tax engineering, will be able to assist you in optimizing taxation and the transfer of your professional and personal assets. Our team of skilled lawyers will inform you about your options, rights and duties. For more information, do not hesitate to contact us on +33 1 56 79 11 00.