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Selling your start-up in France: how to limit your exit tax

Selling your start-up in France: how to limit your exit tax
Valérie Montel - Wealth planning expert

Valérie Montel

Wealth planning expert

Founders of start-ups in France have several tax options when they decide to leave the business and sell their shares. A number of factors will determine whether the “flat tax”, the regime for “SMEs less than ten years old” or the “contribution-cession” system (also known as 150-0 B Ter) is best – but in order to create the most efficient sale structure, founders must also consider their future personal and professional plans. Interview with Valérie Montel, an expert in wealth engineering at our Paris office.

 

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

The current tax regime for business transfers in France was put in place by Emmanuel Macron in 2018. Under this flat-rate tax, all capital gains – including those realised on the sale of a company – are taxed at 30% (made up of income tax of 12.8% and social security contributions of 17.2%). There is also an exceptional contribution of 3% to 4% payable on incomes that go over certain thresholds, which is usually the case for business transfers. Where a start-up is sold by its founder the capital gains will usually be calculated on the basis of a cost price of near zero, which means this 34% rate (including the exceptional contribution) will apply to the entire sale price.

Start-up founders have several tax options when they decided to sell their shares: a flat-rate tax, the regime for “SME’s less than ten years old,” or the “apport-cession” regime

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

There is, but only for start-ups created before 1 January 2018. These can take advantage of an old tax regime created following the famous Pigeon Movement under François Hollande’s presidency. Under this system, known as the regime for SMEs less than ten years old, capital gains are taxed as a professional income in line with income tax bands, i.e. up to 45% in the highest bracket. However, a rebate is subsequently applied to the basic rate of tax depending on how long the seller has held the company shares. For this route to be more attractive than the flat tax sellers need to have held their shares for at least eight years, at which point they benefit from the maximum rebate of 85%. This is because the rebate only applies in relation to the income tax and not the social security contributions, which are based on the full amount of capital gains. Thus, we can aim for a rate of 27.95%.

 

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

Yes, but only in specific circumstances. When a founder plans to reinvest all or part of their anticipated capital gains then one option is for them to transfer their shares into a specially created holding company prior to the share sale. It’s then the holding company that sells the shares in the start-up. As a capital contribution and subsequent share transfer this lets the entrepreneur defer the payment of capital gains tax – almost ad infinitum – maximising the amount available to reinvest. There are constraints though. At least 60% of the capital must be reinvested within two years of the sale, or capital gains tax will be triggered on the full amount that was transferred to the holding company.

We see many founders who miscalculate their contribution because they don’t plan their reinvestments or anticipate their future needs

Should I set up a holding company before selling my start-up?

In theory the shares can be transferred to a holding company just before the sale, but in practice it’s essential to be organised well in advance. When making a capital contribution and subsequent share transfer the required 60% minimum reinvestment must be made within two years. This isn’t always easy because reinvestments only qualify if they constitute either a capital increase or the acquisition of a majority stake, though it’s recently become possible to invest in certain specific funds as well. We see many founders who miscalculate their transfer to the holding company because they don’t plan their reinvestments or anticipate their future needs. This is why, rather than looking for a quick tax saving, it’s so important to plan ahead and consult specialists, so founders can make the best decision for their specific circumstances.

Read also: Lombard Odier invests in leading Swiss Fintech, Taurus

 

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

The capital gains that are not reinvested, i.e. 40% of the amount contributed, stay in the holding company. But it’s a very different position to holding capital directly or via a holding company in the normal course of events. If you decide to withdraw the funds you have to pay tax on them. That’s why, as the seller, you should have a plan to reinvest these funds as well, keeping in mind that by being held in a company in this way they will be difficult to use to buy property, such as a primary or secondary residence.

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

Is it possible to avoid this reinvestment constraint?

If shares are transferred to a holding company more than three years before the sale then the reinvestment requirement can be avoided, while at the same time taking advantage of very low capital gains tax. This isn’t necessarily easy to achieve though, because you need to have a good idea of your future plans at the time you transfer the shares. If the sale happens sooner than expected then a portion of the capital gains may well be taxed.

Read also: The CLIC® Chronicles: Meet Ÿnsect, the French start-up raising beetles to tackle growing food demand

 

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

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

Important information

This document is issued by Bank Lombard Odier & Co Ltd or an entity of the Group (hereinafter “Lombard Odier”). It is not intended for distribution, publication, or use in any jurisdiction where such distribution, publication, or use would be unlawful, nor is it aimed at any person or entity to whom it would be unlawful to address such a document. This document was not prepared by the Financial Research Department of Lombard Odier.

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