According to France's Les Echos, transfer tax is one of the primary challenges associated with transferring family businesses to heirs in that country. In fact, taxes associated with transferring ownership of a family business, either through transfer or donation taxes, can be up to 45 percent of the value of the assets – much higher than equivalent taxes in other European countries like the United Kingdom, Belgium and Germany.
While we're often reluctant to think or talk about it, estate planning – or the process of arranging how our assets will be disposed of in the event of our incapacitation or death – is the mature and responsible way to ensure the legacy of the family business is preserved and our loved ones are taken care of when we’re gone.
Without due consideration and proper planning, transferring the capital of an enterprise to your heirs may result in them being burdened with an onerous tax bill. This means family members are left digging deep into their wallets, perhaps even being forced to sell the family business just to service that bill! And rather than your family benefitting from the years of hard work you put into building up a successful business, it’s the State which will receive a generous chunk of your estate.
1. Using the 'Dutreil Pact' – This allows for a significant reduction in the tax required to be paid on donations, gifts and successions made inter vivos (i.e. during one's lifetime). The downside? It's complicated to manage.
In order to benefit from the pact, it's necessary to operate within a rigid, tightly defined system which may not suit every company, particularly given the dynamic nature of today's marketplace. For example, both donors and donees need to commit to retaining their shares for a specified length of time – two years collectively and four years individually – and there may be challenges related to bringing on board new shareholders or partners without comprising the pact (and therefore any advantages it engenders).
2. 'Dismemberment of Securities' – By breaking up or 'dismembering' an estate into two components, a nuepropriété (ownership without usufruct) and a usufruct, a family business owner can pass on the nuepropriété part of the company shares and retain the usufruct part themselves. This approach has a distinct advantage, namely the sooner it's done, the less it costs the donor since the value of the nuepropriété is inversely correlated to the donor's age.
While voting rights of the usufructor may be limited, he or she will still enjoy the financial benefits of dividends from the company’s business enterprises. Usufruct is a so-called ‘right of enjoyment’. In other words, the holder of a usufruct can benefit from property titled to another person or held in common ownership, so long as the property is neither damaged nor destroyed.
3. Making Use of a Common Law Tax Allowance – This option is open to all – even company CEOs. In terms of this allowance, every parent can make a duty-free transfer of €100,000 to each of their children every fifteen years. Suffice to say even family businesses are able to benefit from this – another argument in favour of anticipatory succession planning.
Remember that making use of any one of these tools – or a combination of all three – may or may not be a good idea for your particular personal and business circumstances. Do speak to your legal and tax consultants about which approach minimises the tax obligations of you and/or your heirs.
"Des solutions pour alléger les droits de mutation des entreprises familiales" was originally published on Les Echos on 11 December 2013.