Transferring a business: Optimizing and achieving wealth objectives

When an entrepreneur decides to sell their company, the tax authorities offer several tax options. Although the tax rate may seem high, there are ways to optimize this sale while achieving one’s wealth management objectives.

I. Taxation of the sale

When a company is sold for valuable consideration, the resulting capital gain is subject to the capital gains tax regime applicable to the sale of securities. The seller has several options regarding the choice of taxation:

Option A: Single flat Tax (PFU)

The capital gain (CG), determined by the difference between the sale price and the cost price, will be subject to the Unique Flat Tax (PFU) or “flat tax” of 30%, which consists of 12.8% for income tax (IT) and 17.2% for social security contributions (SC).

The CG may also be subject to the exceptional contribution on high incomes (CEHR) of 3% or 4%, depending on the reference tax income.

The maximum tax can therefore be calculated as follows:

CG x (12.8% + 17.2% + 4%) = CG x 34%.

Option B: Retirement allowance for small business owners

This €500,000 allowance applies equally to income tax and flat tax. Two conditions must be met: the seller must have held, directly or through an intermediary, at least 25% of the capital or voting rights of the company being sold over the past 5 years, and the seller must cease to hold any position in the company and retire within the 3 years preceding the sale.

Example:

• • Capital gain of €600,000
  • Taxable base = €600,000 – €500,000 = €100,000
  • 100,000€ subject to income tax or flat tax, whichever is more advantageous.

Option C: Progressive income tax scale

However, for securities acquired before January 1, 2018, it is possible to opt for global taxation on the progressive income tax scale, with the capital gain taxed as indicated in the table below. Note that it is possible to deduct a portion of the general social contribution (CSG) from the from the following year’s income tax. CSG supplements the CRDS (social debt repayment contribution) and finances the social security system, and it is deducted to avoid double taxation.

• Progressive income tax scale, with a deduction based on the length of time the shares have been held.
• Social security contributions at a rate of 17.2%. The amount of CSG deductible in N+1 is raised to 6.8% for income from assets and business and assumes that you have sufficient income that year to deduct it.
• The CEHR is equal to 3% of the fraction of reference tax income between €500,000 and €1,000,000 for taxpayers subject to joint taxation, and to 4% of the fraction of reference tax income in excess of €1,000,000.

Let’s take the following example: 

• • Sale of shares of a SAS (simplified joint-stock company)
  • Acquisition cost of €300,000
  • Sale price of €6,000,000
  • Hence, a capital gain of €5,700,000
  • Conditions met for the enhanced relief for holding shares in SMEs for more than 8 years.

Option A: Share transfer and sale

There are several mechanisms to optimize the sale, including the transfer and sale mechanism, Article 150-0-B Ter of the French General Tax Code (CGI).

1.Contribution of shares to a controlled company

The first step is to contribute the shares held directly to a controlled company subject to corporate tax. This tax is deferred if the contributor controls the Holding.

2. Sale of the contributed shares

The second step is the sale of the shares contributed by the controlled company.

When selling the contributed shares, two options must be distinguished based on the date of the sale:

• If the sale takes place more than 3 years after the contribution: the deferral does not end. The deferral will only come to an end when the holding company’s shares are sold for valuable consideration.
• If the sale takes place less than 3 years after the contribution: the deferral ends unless the holding reinvests 60% of the net proceeds from the sale within two years following the sale.

3. Reinvestment of a portion of the proceeds from the sale.

The range of eligible activities is broad but has certain limitations. In summary, the reinvestment of 60% of the proceeds from the sale must be made, directly or indirectly, in an operational economic activity and not in a patrimonial activity.

Option B: Donation and sale

The donation-sale mechanism allows you to purge part of the capital gain realized, while anticipating your succession.

When shares are donated before being sold, the price of the shares transferred to the beneficiary is revalued at their value on the day of the donation. Thus, in the case of a donation made in full ownership, the capital gain is fully eliminated if the donation is made shortly before the sale, with the acquisition and sale prices for the recipient being identical or close.

The donation must be made before the shares are sold. If there are multiple recipients, it is preferable to carry out this act in the form of a shared donation. In the case of a donation of shares to children, the common law allowance of €100,000 per child will apply, renewable every 15 years, and any additional donation tax may be covered by the donor.

It is possible to implement this scheme in bare ownership, but this entails additional obligations. Moreover, it is essential to pay close attention to the timing of all these schemes.

Culture Patrimoine : your contact

For the past 20 years, Culture Patrimoine has been advising its clients, young entrepreneurs, start-up employees, business owners, senior executives, retirees, in the definition, application and support of their wealth management strategies. We also teach wealth management in several top universities. These years of work have allowed us to develop an expertise in all wealth management topics.

Culture Patrimoine is an independent company among the leaders in its market:
• Customer satisfaction rate of 95% (August 2021)
• ISO 22222 by AFNOR (4 companies out of 5800 in November 2013)
• Speaker at Francis Lefebvre Formation and the groupe Revue Fiduciaire since 2006
• +300 million euros of financial assets under management (November 2021)

The family office services provided by Culture Patrimoine are a true 360° view of all related themes (protection, finance, taxation, real estate and legal).
This support comes in the long run and starts with a consulting period, followed by implementation when appropriate.