Selling a start-up in France: how to limit the tax impact

corporate

Selling a start-up in France: how to limit the tax impact

Joëlle Pacteau - Head of Europe Francophone market

Joëlle Pacteau

Head of Europe Francophone market
Valérie Montel - Wealth planning expert

Valérie Montel

Wealth planning expert

Interview with Valérie Montel, wealth planning expert in the French branch of Lombard Odier (Europe) S.A1, and Joëlle Pacteau, Head of Europe Francophone market, Lombard Odier Group.

There are several options available to start-up founders when they decide to sell their shares: a flat-rate tax, a special regime applicable to SMEs created less than ten years ago or the “apport-cession” regime (capital contribution and subsequent share transfer). Which of these to apply in an individual case will depend on certain conditions. However, the founder’s future plans, on both a personal and professional level, should be taken into account in order to set up the most suitable tax structure.


What tax regime would a founder selling his start-up currently be subject to?

The current tax regime applicable to business transfers in France is in place thanks to Emmanuel Macron, who created a flat-rate tax in 2018. Under this flat tax, all capital gains – including those realised on the sale of a company – are taxed at a rate of 30% (income tax of 12.8% and social security contributions of 17.2%). There is also an exceptional contribution of 3% to 4% on incomes above certain thresholds, which are generally reached in the case of business transfers. For a start-up sold by its founder, this 34% rate (including the exceptional contribution) will apply to the entire sale price, since the capital gains are generally calculated on the basis of a cost price of virtually zero.

There are several options available to start-up founders when they decide to sell their shares: a flat-rate tax, a special regime applicable to SMEs created less than ten years ago or the “apport-cession” regime.

So there is no specific regime from which start-ups can benefit?

Yes, but only for those created before 1 January 2018. These can potentially benefit from an old tax regime created under the presidency of François Hollande following the famous Pigeon Movement: the regime for SMEs “younger” than ten years. Under this system, capital gains are taxed as professional income, using the progressive scale of income tax, i.e. up to 45% in the highest bracket. However, a rebate applies to the tax base depending on how long the seller has held the company shares. In practice, sellers need to have held their shares for at least eight years and thus benefit from the maximum rebate of 85% for this tax regime to be more attractive than the flat tax – especially since the rebate applies only for the calculation of income tax and not for the calculation of social security contributions. These continue to be based on the full amount of capital gains realised, so a rate of 27.95% may be achievable.

Can the “apport-cession” system reduce this tax burden?

Under certain conditions, yes. When an entrepreneur plans to reinvest part of the capital gains made on the sale of their shares in new companies, they can set up a holding company before the sale, in which they place the start-up’s shares . It is then the holding company that sells the shares of the start-up. This capital contribution and subsequent share transfer enables the entrepreneur to defer the payment of tax on their capital gains – almost ad infinitum – and thus maximise the amount available to reinvest. This solution comes with certain constraints, however. The holding company must reinvest at least 60% of this capital in operating companies within two years of the sale, otherwise it will trigger capital gains tax on the full amount that has been contributed to the holding company. 

We see many entrepreneurs who have miscalibrated their contribution or contributed too much to the holding company because they did not anticipate their reinvestments and future needs.

When should the transaction be set up?

Formally, the transfer of shares to a holding company can be made just before the sale. However, in practice it is essential to do this well in advance. First of all, when making a capital contribution and subsequent share transfer, the required 60% reinvestment must be made within the two-year period, which is not always easy. Not all reinvestments in companies are eligible, as they must constitute either a capital increase or the acquisition of a majority stake. The option of reinvesting in certain specific funds has also recently been introduced. We see many entrepreneurs who have miscalibrated their contribution or contributed too much to the holding company because they did not anticipate their reinvestments and future needs. This is why planning ahead and consulting specialists allows entrepreneurs to make the most appropriate decisions for each situation, rather than seeking immediate tax savings.


And what happens to the capital gains not reinvested? Can they be recouped?

The capital gains that are not reinvested, i.e. 40% of the amount contributed to the holding company, will remain within the holding company. However, this is very different to holding capital directly or via a holding company. If you want to withdraw funds from the holding company, you will have to pay tax on them. As the entrepreneur in this scenario, you should therefore have a plan to reinvest these funds, too, bearing in mind that held in a company in this way, they are difficult to use for the purpose of buying property, such as a primary or secondary residence.

The founder’s future plans, on both a personal and professional level, should be taken into account in order to set up the most suitable tax structure.

Is it possible to avoid this reinvestment constraint?

If a contribution is made to a holding company well in advance of the sale, i.e. more than three years, the reinvestment condition can be avoided while taking advantage of a very low capital gains tax. This approach is not always easy, though, as you have to have a good idea of future plans at the time you make the contribution. If the sale ultimately happens sooner than expected, a portion of the capital gains may well be taxed.


Official sources specifying the legal texts mentioned 

Fonctionnement du prélèvement forfaitaire unique (PFU)

Article 28 de la LOI n° 2017-1837 du 30 décembre 2017

Article 150-0 B Ter du code général des impôts

Article 150-0 A du code général des impôts

1 Lombard Odier (Europe) S.A. Succursale en France does not provide tax advice. Clients requiring tax advice should consult an independent tax advisor.

Important information

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