Today, the combination of provisions that result from different financial laws, TEPA law (law concerning work, employment, and purchasing power) and the “Dutreil” pact, allow employers of PME’s (Small and Medium Businesses) to transfer their businesses to their children while still minimizing tax charges.
Because of these laws and helpful advice from experienced tax lawyers, transfers can be made simpler, whether they are performed during the life or after the death of a business owner.
In the past, after the death of a business owner, the business often constituted the majority of the heritage, allowing inheritance tax to easily reach up to 30% of a business’s value.
With a tax burden this heavy the surviving spouse or other inheritors were often forced to sell the company, it having been the object of succession, in order to raise funds to pay these fees.
From this point forward, in more than 95% of cases, the transfer of a family business should be done under the best tax conditions, if not virtually tax free, as unfortunately most PME’s are undercapitalized.
The Transfer from a living business owner: the donation
Today, each parent can transfer each child 100,000 euros every 15 years, without paying transfer taxes. One couple for example, could transfer each child 200,000 euros every 15 years, by each parent giving 100,000 euros to each respective child.
In this case a partial or total transfer of business, by a living business owner, would be considered an exempted transfer where part of the value of the company is transferred every 15 years.
Also tax exempt donations made between brothers and sisters are limited to 15,932 euros per person per share. The donations between spouses and those made between PACS partners are also limited to 80,724 euros, and between nieces and nephews 7,967 euros.
The transfer after the death of the business owner: succession
If the deceased had the desire to transfer his/her business to his/her spouse, or his/her PACS partner, they are now completely exempt from inheritance tax on all goods transferred to the surviving spouse or PACS partner.
Thus, the surviving spouse or PACS partner, totally exempt from inheritance tax, will not be forced to sell the family business to pay for the portion or all of the business received. It may conserve, at least somewhat, the family business and thus the resources that come along with it.
For children, the modifications brought along with the “Dutreil” pact soften the transfer of family business to children, upon succession.
The tax base of a business transfers, which is to say the value of the transferred social rights, can be reduced by three quarters, given a collective commitment to the conservation of securities among shareholders for at least 2 years.
The heirs individually maintain to keep social rights for at least four years (compared to the previous 6 years) and to exercise the function of management within the company for no less than 3 years.
The obligation to pursue a leadership position will start from the conclusion of the collective engagement, and not from the transfer.
All else equal, if the heir of the deceased does not have the time to transfer his/her securities, he/she can now finalize, with other partners, a collective engagement of conservation within six months of the death.
Consequently, in combining all of the laws seen above, the basis of taxation of social rights transferred to children will be reduced by 25% of their value in succession.
The additional application of different exemptions and allowances, can result in a total or partial exemption from transfer fees, depending on the importance of the capital of the PME being transferred.
