Focus on the DUTREIL Pact

When you create a company, it's a bit like a child. It is our creation, our baby that we want to see evolve, grow and prosper. It is therefore only natural that when the time comes to pass on the business, questions arise. And what could be more reassuring than letting a family member take over?

This is the purpose of the Dutreil Pact that we are going to discuss today.

A French scheme to support and encourage family businesses.

What is the Dutreil Pact?

The Pacte Dutreil is a French mechanism that aims to facilitate the transfer of family businesses. It was introduced by law n° 2003-721 of August 1, 2003. This pact is a measure intended to encourage the durability of family businesses by reducing the tax burden associated with the transfer and by allowing new managers to benefit from tax advantages.

This applies to both companies and sole proprietorships.

The Pacte Dutreil can be applied in the context of a donation or an inheritance.

Reduce inheritance tax with the Dutreil Pact

One of the main advantages of the Dutreil Pact is the reduction of inheritance taxes. Indeed, when the heirs of a family business sign a collective commitment to keep the shares of this business, they can benefit from a 75% deduction on the value of the shares transmitted. This means that only 25% of the value of the shares is taken into account for the calculation of the inheritance tax, which considerably reduces the tax burden associated with the transfer of the company.

In the case of a donation in full ownership where the donor is over 70 years old, the duties calculated on this already reduced basis are further reduced by 50%.

Conditions to be met to benefit from the Dutreil Pact

To benefit from the advantages of the Dutreil Pact, certain conditions must be met. 

1. The company must be a family business, i.e. a company where at least 34% of the share capital and 20% of the voting rights have been held by the same family for at least two years. 
2. A collective undertaking to retain shares must be signed by at least two partners or shareholders who together hold more than 50% of the voting rights and rights in the company's profits. 
3. This commitment must be for a minimum of two years and must be registered with the tax authorities within two months of its signature.

The tax advantages of the Dutreil Pact

In addition to the reduction of inheritance tax, the Dutreil Pact offers other tax advantages to family entrepreneurs. 

Heirs who are beneficiaries of the collective retention undertaking may benefit from a partial exemption from capital gains tax in the event of the sale of the company's shares within three years of the transfer. 

This exemption can reach 75% of the realized capital gain, under certain conditions. 

The limits of the Dutreil Pact

As with any tax scheme, the Dutreil Pact also has certain limits. The minimum duration of the collective undertaking to retain the shares is two years, which means that the heirs must retain the shares of the company during this period in order to benefit fully from the tax advantages of the Dutreil Pact.

In case of non-compliance with the commitment, in particular by a sale or a donation of the securities before the end of the commitment period, the tax benefits granted may be called into question and lead to a reminder of the inheritance tax or the tax on the exempted capital gains.

The Pacte Dutreil is an interesting tax measure for entrepreneurs who wish to prepare the transfer of their company while benefiting from tax advantages. As chartered accountants, we must accompany them in their project by advising them on the solutions best suited to their needs and profiles.

Come on, a little gift for the most motivated: a little reading! Find here the official sources of the Pacte Dutreil.

1. Official website of the Public Service: Le Pacte Dutreil - https://www.service-public.fr/professionnels-entreprises/vosdroits/F31364
2. General Tax Code: Article 787 B et seq. for tax provisions relating to the Dutreil Pact - https://www.legifrance.gouv.fr/codes/section_lc/LEGITEXT000006069577/LEGISCTA000006152499/
3. Civil Code: Article 1840 G ter for the provisions relating to the undertaking to retain securities - https://www.legifrance.gouv.fr/codes/section_lc/LEGITEXT000006070721/LEGISCTA000006141623/
4. Bulletin Officiel des Finances Publiques-Impôts : BOI-ENR-DMTG-10-20 for tax instructions on the Dutreil Pact - https://bofip.impots.gouv.fr/bofip/1762-PGP

Want to know more about this program? Do you need personalized and human support?

Contact our team for an assessment of your situation.