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Family businesses: it's the right time for a new beginning

This article was originally published by Johan Gaulin, on the 1st, sept, 2020.

While the Covid-19 crisis is putting a large number of companies out of business, this could be a good time for family transmissions.

A decisive phase in the life of a family business that wishes to perpetuate its history and values, a succession is normally built over time by bringing together the vision of the manager, the unique history of the company and the existing systems. However, this is often postponed for the sake of operational urgency.

However, certain events can accelerate this process. The crisis of Covid-19, by its novelty and its extent, obliges everyone - and a fortiori a company manager - to think about the future a little differently, to envision his company in the long term.

In France, the handing down of a company gives rise to rights of donation/succession which can amount to more than 45% if it has not been anticipated. However, with the sharp drop in sales and profitability, the handing down of a business is currently more attractive because it is less costly, due to a reduction in the base of rights to be paid. In concrete terms, if a company's valuation is halved, inheritance tax will be reduced by the same amount.

So, despite the difficult context, there is currently a window of opportunity to pass on one's assets and thus ensure that the vision of a family, of a manager, is maintained by relying on the available mechanisms.

The Dutreil Pact: a system designed for family businesses

Introduced in 2003, amended on numerous occasions and most recently by the 2019 Finance Act, the so-called "Dutreil Pact" was designed to offer a preferential regime that reduces the value of the company used as the basis for calculating entitlements to 25% if the conditions set forth in the pact are met. In addition, the 75% reduction can be combined with the 50% reduction in donation duties if the donor is under 70 years of age, provided that the donation is made in full ownership.

In this light, the purpose of these provisions is to ensure the continuity of a company at the time of its transfer and, in particular, to prevent the heirs of a business owner from being forced to slow down investments or even sell the business to pay inheritance tax. They have been designed to promote the continuity of the French economic structure and therefore apply particularly to family shareholders.

In the current context, the "Dutreil Pact" thus creates a particularly favorable opportunity for the handing down of the company and its sustainability. Let's hope, however, that this window of opportunity closes quickly so that our companies can get back on the road to growth as quickly as possible.

What are the conditions of the Dutreil Pact?

  • The company must have a commercial, industrial, liberal, agricultural or artisanal activity, or be a holding company for its group.

  • The head of the company must undertake to keep alone or collectively at least 17% of the financial rights and 34% of the voting rights of the company for a minimum period of 2 years. If the company is listed, these thresholds are lowered to 10% of the financial rights and 20% of the voting rights.

  • When the shares are handed down, the heirs/donors must undertake to retain them for a minimum period of 4 years.

  • One of the signatory partners must hold a management position within the company for the entire duration of the collective commitment and for the 3 years following the transfer.

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