The Paris Court of Appeal highlights the central role of assessing whether an activity is eligible for the ‘Dutreil’ scheme by reference to the balance sheet analysis criterion. This position within the French legal framework will, in our view, have repercussions in cross-border situations between France and Switzerland.
Background and procedure
The case concerns the partial exemption from the former ISF (French wealth tax) applicable to the securities of a company operating in the audiovisual sector and holding substantial cash reserves. The taxpayer challenged the tax authorities’ refusal to grant this exemption. The Paris Judicial Court dismissed the claim, and the Paris Court of Appeal upheld the judgment in all respects. On appeal, the Court of Cassation overturned the Paris Court of Appeal’s ruling, finding that the Court had not provided a legal basis for its ruling and criticising it for failing to examine ‘all the evidence relied upon by the taxpayer to demonstrate the primarily commercial nature of the company’ (Com., 13 March 2024, No. 22-15.300). The case was then referred back to a differently composed panel of the Paris Court of Appeal, which once again confirmed the initial judgment in its entirety (CA Paris, 13 January 2025, div. 5, ch. 10, no. 22/07624).
Reminder : The ‘Dutreil’ scheme
Although issued in relation to the now abolished ‘Dutreil-ISF’ scheme, this ruling is entirely transposable to the ‘Dutreil-transmission’ scheme. It should be noted that this second scheme is undeniably attractive in that it reduces the tax burden associated with the transfer of a business via inheritance or donation by up to 75% (and sometimes even more).
Provided for under Article 787 B of the French General Tax Code (CGI), the scheme is applicable, subject to several conditions, in particular the requirement that the company carry out an eligible activity. The company in question must therefore be primarily engaged in an industrial, commercial, craft, agricultural or liberal activity, which does not exclude the exercise of a civil and asset management activity as long as it is not predominant. It has been ruled on several occasions that preponderance must be assessed in the light of ‘a set of indicators determined by the nature of the activity and the conditions under which it is carried out’.
Analysis of the 13 January 2025 ruling
The Court of Appeal noted that, in this case, the company’s income derived mainly from its commercial activities. However, an examination of the company’s assets revealed that more than 90% of its gross assets consisted of cash and marketable securities. The Court noted that the investments made ‘did not constitute assets necessary for the exercise of the business’ and that the available funds ‘were therefore not intended to cover, even in the future, any treasury requirements’. It therefore considered that although these assets originated from the company’s professional activity, they effectively constituted a genuine autonomous asset management activity. It is therefore on the basis of the balance sheet analysis as a determining factor that the judges confirmed the exclusion from the exemption.
French-Swiss perspective: It should be noted that even where a company and its shareholders are located in Switzerland, inheritance and gift taxes may still apply in France in the following three situations:
- A business owner residing in Switzerland transfers a French company.
- A business owner residing in Switzerland transfers a Swiss company, while at least one or more heirs, legatees or donees reside in France.
- A business owner residing in France transfers a Swiss company.
The ruling serves as a reminder that, for entrepreneurs, including those operating in a French-Swiss context, capitalising cash beyond the needs of operational activities or short-to medium-term investments in working capital may disqualify the company from benefiting from the exemption. This encourages entrepreneurs to plan any transfer operations ‘upstream’ to ensure that the conditions are met, in particular that of conducting an eligible activity as the company’s main activity. It follows that so-called ‘excess liquidity’ and all other assets of the company not allocated to professional activities must, throughout the holding period (six years in total), be less than the market value of the operational assets. The balance sheet value index is therefore a decisive factor within the overall set of indicators that may qualify or disqualify the company for the partial exemption.
Jérôme Bissardon
Partner, Paris
