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This chapter is not exhaustive and is limited to broadly outline the tax consequences of the main events occurring when doing business in France. It does not constitute a tax advice or a client - attorney relationship. Materials are not suitable for tax analysis. Visitors are invited to consult a tax lawyer before taking any decision.
 Road map
Abuse of law and abnormal business decision.
Ruling
Tax free capital gain on sale of shares - SME
Management under lease
Pre-reorganization restructuring
Post- reorganization restructuring
Partnership
 Road map
- Understand clearly the goals and the tax situation of both the vendor and the seller.
- Structure a win-win deal to secure the agreement of all the parties to the deal.
- Buyer must perform due diligences to check the value of the assets and liabilities he plans to acquire.
- Acquirer should request a valid guarantee to protect him against any unidentified/undisclosed tax exposure which may have a material effect on the purchase price if knew before signing the deal.
- Acquirer must check that the net operating losses and the carry-back receivable he will acquire will survive the change of control.
- Acquirer and vendor must agree on the purchase price, on the scheduling of the payment of the acquisition price i.e. up-front payment and/or earn-out i.e. several installments over the time, each one calculated according to the performance of the acquired business after the acquisition. Agree whether the price will be paid in shares or/and in cash and on the collateral necessary to secure the guarantee.
- Check how the buyer will secure the tax deductibility of the interest generated by the acquisition debt. The location of the debt must be carefully reviewed as well because many restrictions apply to the tax deductibility of this interest.
- Check the tax deductibility of the acquisition cost e.g. fees of the external advisers hired to make the acquisition (Bankers fees may be very sizeable) .
- Check up front if a tax consolidation is advisable. In some cases it is difficult and/or costly to implement a tax consolidation afterward
"Tax consolidation".
- Anticipate the consequences of the transaction on VAT, salary tax and business tax.
- Propose long term incentive plan if the buyer want to retain key managers of the target (check "Executives").
- Anticipate the tax side effects of the transaction on Wealth Tax of both the seller and the buyer (check "Wealth tax").
- Consider carefully the registration duties which may vary significantly depending the acquisition structure e.g. shares of a corporation or shares of a partnership, shares of a "real estate" company, securities listed or not, agreement signed in France or abroad (check "Facts and figures").
- Transfer pricing rules must be carefully reviewed in case of cross border acquisition (check "Transfer pricing").
Abuse of law and abnormal business decision
Abuse of law may apply to legal structure and deeds/agreements complying with the form of the law but having the unique purpose to avoid or mitigate the tax charge normally due, would these documents not exist. The abuse of law is not used on a regular basis by the French tax authorities.
It triggers a 80% tax penalty. It is possible to prevent the use "Ruling" of the abuse of law procedure by disclosing the anticipated acquisition structure to the French tax authorities.
Abnormal business decision applies to enterprises accepting a cost or declining a profit with no sound business reason. The use of the abnormal business decision by the French tax authorities is restricted by the principle of non interference in the management of the enterprises. If relevant, no specific penalties apply.
Ruling
French ruling procedure applies to about 20 specific situations subject to tax holidays or tax incentives. Rulings are granted by the French tax authorities upon prior request "Ruling" .
It is also possible to request in written form the French tax authorities to indicate before any implementation if a transaction complies or not with the anti-abuse rules. This procedure is called "Rescrit" and is binding for the tax authorities.
Last, it is possible to ask the French tax authorities to validate in advance the tax treatment applicable to complex business reorganizations.
French tax authorities recently open a web site "Décisions de rescrit" publishing in French on a no name basis the private ruling granted.
Tax free capital gain on sale of shares - SME
If the proceed of the sale of shares is reinvested, by the end of the tax year following this sale, in shares of a non listed company subject to corporate income tax, the related capital gain tax on the sale of the shares is differed as long as the new shares are owned by the investor.
The deferral is subject to several restrictive conditions and must be specifically requested by the taxpayer.
NEW: As of January 1st, 2006 full capital gains tax exemption applies when specific conditions are met. Businesses must be a SME according to EU definition and disposal must occur when the executive retire.
IMPORTANT: Between June 16, 2004 and December 31, 2005, capital gains on the sale of businesses, professional activities and independent branch of activity are temporarily tax exempt when the tax basis for registration duties is not higher than 300 000 € and, since January 1st, 2005, when the seller and the buyer are third parties.
With this respect, French revenue issued guidance stating that the tax exemption only applies to taxpayers having a business activity. As a consequence the following activities would not benefit of the exemption:
- Business lease.
- Individuals leasing, through a managing company, railroad cars or containers.
- Leasing of equipped industrial or business spaces.
- Sale of shares of look through entities. (1 exception).
Management under lease
In specific cases the management under lease may facilitate the sale or the transfer of a business. A management under lease in not a sale of a business.
Therefore it does not trigger specific tax consequences.
The rent is tax deductible from the taxable result of the leaseholder and taxable at the grantor of the lease. Rent as subject to VAT.
Management under lease allows the owner or the operator of a business to transfer the management of a business to a leaseholder who operates the business under his name, at his benefit and own risk. The leaseholder pays a rent to the owner or to the operator.
Pre-reorganization restructuring
Quite often it is necessary to restructure the target before the acquisition to accommodate the tax treatment of all the parties involved. For example it may be necessary to divide a company, to transfer assets to a new business entity and/or change the form of doing business.
If properly managed, the pre-restructuring may also significantly reduce both the future tax charge of the target and the tax cost of the acquisition for all parties involved, while strictly complying with the applicable tax rules.
Post-reorganization restructuring
Most of the time, it is necessary to restructure the target after the acquisition in order to reach the anticipated level of the after tax profitability.
It is easy to select the necessary restructuring through a careful review of the actual tax charge of the target. The necessary tax defensible planning will be developed in a second step. Savings generated by post-reorganization restructuring may be very significant.
Partnership
Partners must include in their taxable result their share in the result of the partnership (Profit or loss).
Partnerships are therefore a valid option, under certain conditions, to tax consolidation especially when the restrictive rules of the tax consolidation may prohibit its implementation. "Tax consolidation"
The decision to use partnerships instead of tax consolidation rules to tax consolidate a group of French companies must be carefully reviewed. Pros (Tax consolidation bellow minimum holding threshold of 95%, no interest stripping rules called "Tax consolidation" are not always sufficient to balance the cons (No tax free restructuring, loss making industrial activity.)
Under certain restrictions (Transformation is not treated as the incorporation of a new entity and future result of the general partnership "SNC" taxable according to corporate tax rules) and if properly anticipated (Net operation losses and distributable earnings), it is most of the time possible to incorporate an SNC at no cost except a lump registration tax of 230 euros (As of February 1st, 2003).
Most common partnership structures are Société en Nom Collectif "SNC" very similar to general partnership in common law jurisdictions, Economic Interest Group "GIE", limited liability enterprise with one single shareholder "EURL" and limited liability company carrying out a family business "SARL de famille". These forms of business organizations are treated for tax purpose as look through entities if they make the election to calculate their taxable result according to personal income tax rules.
Capital gain on the sale of shares of look through entities
The result of the look through entities is directly taxable at the level of the partners, the same fiscal year it is made. (Example: Loss (Profit) made in 2002 is tax deductible (taxable) in the hands of the partners in 2002) However the related dividends are only paid the year after or later. Similarly the equity infusions necessary to offset losses are made only the year after of later. If shares are sold while the entity has not distributed yet all its profit or while the partners have not offset yet the losses, although these profits or losses were already included in their own taxable basis, it is necessary to adjust the value of the shares with the value of the deferred taxes.
As a result the net value of the shares of look through entities is computed as follows:
Acquisition price
- Tax losses already tax deducted by the partners but not reimbursed in cash to the look through entity
+ Tax losses already reimbursed by the partners to the look through entity
- Benefit already dividended to the partners by the look through entity
+ Benefit already taxed at the partners level and not dividended yet by the look through entity
= Net tax value of the shares
French Supreme Court recently ruled that, contrarily to the position of the French Authorities, this principle applies also to capital gain of individuals on the sale of shares of Société Civile Immobilières (Non commercial entity holding exclusively buildings). The only exception relates to legal tax shelters (e.g. tax exemption for investment in overseas French districts and territories).
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