The fact that a company or its shareholders are located outside France sometimes makes people forget that French tax law imposes duties on gratuitous transfers in many cases, even though the deceased (or donor) is domiciled abroad. The surprise will be bitter for the heirs of an unprepared succession. It is true that the ‘extensive’ scope of the French tax law on gratuitous transfers is limited by certain double taxation agreements (“DTAs”), but these are relatively old and few in number (35 for inheritance tax and 8 for gift tax). On 7 February 2023, the French Minister of Economy pointed out that “France, like many other countries, no longer wishes to enter into DTAs” (Answer published in the JORF on 7 February 2023, p. 1133).
Company transfers subject to gift an inheritance tax in France
Subject to any provisions to the contrary contained in rare DTAs relating to inheritance and/or gifts, free transfer duties are applicable in France on the transfer of companies (Art. 750 ter of the French General Tax Code (“CGI”) :
- when a company director resident outside France holds shares in a company in France,
- when a company director resident outside France holds shares in a company that is not located in France, but in which one or more of his heirs, legatees or donees are resident in France,
- when a company director resident in France holds shares in one or more companies abroad.
In all these situations, the application of the “Dutreil” scheme provided for in Article 787 B of the CGI can be a useful, even indispensable, tool for reducing the tax cost of a free transfer, the maximum rate of which is 45% in a direct line (parents-children)!
Subscribing to a “Dutreil” pact and its beneficial effects on inheritance and/or gift tax
The “Dutreil-transmission” scheme allows a 75% allowance to be applied to the value of shares in eligible companies (industrial, commercial, craft, agricultural, liberal) when calculating gift or inheritance tax.
The maximum tax cost will be reduced to 11.25% in the event of death, and to 5.63% in the event of a gift of full ownership during the lifetime of the company director (if he or she is under the age of seventy). A gift of bare ownership alone will reduce the tax bill even more drastically.
Business owners will be required to sign a “Dutreil” pact for themselves and their successors free of charge, alone or with several partners, for a minimum period of two years, under which they undertake to retain the shares of a company carrying out an eligible business, representing at least 17% of the financial rights and 34% of the voting rights for unlisted companies (10% and 20% for listed companies).
The “Dutreil” system applies to shares in both French companies and companies established outside France. We would point out, however, that the formal conditions laid down by the French legislator are sometimes complex to satisfy and often require a comparative analysis to ensure that the mechanisms provided for by the legislation of the State in which the company is located (outside France) comply with those governing the “Dutreil” scheme.
The beneficiaries of the transfer will undertake to hold the shares individually for a period of four years from the expiry of the pact, which must be in force at the time of the transfer. One of the signatories of the pact or one of the beneficiaries must hold an eligible management position in the company or must carry out its main business activity, as the case may be, for the duration of the agreement and for three years following the transfer.
Obviously, it will be necessary to check beforehand whether a gift benefiting from the “Dutreil” scheme is appropriate under the local law applicable to the donor and the donee(s).
In conclusion, anticipating the tax costs in France of a gift or an inheritance should not only be a concern for French residents in a “hexagonal” environment, but also for those who reside outside France and whose personal, family or asset situation constitutes a connecting factor for taxation in France. Even if a DTA had been concluded between France and the State of residence of the deceased and/or the donee, we would point out, on the one hand, that it very rarely covers gifts and, on the other hand, that it does not systematically (far from it) exclude the right of the French tax authorities to levy tax.
Therefore, even if no gift is envisaged in the short or medium term, entering into a “Dutreil pact” will prove to be a very useful precaution and will make it possible, all other conditions being met, to opportunely reduce (and sometimes eliminate!) inheritance tax in the event of premature death. This measure helps to protect heirs should the worst happen.
