Background
Members of a family held in equal shares a distribution company received from their parents, valued at €12m. One of them, living abroad, wished to realise their stake, i.e. €3m.
The business premises, let to the company, had remained in joint ownership between them since the estate of their father, from which their mother had received other assets. Their mother also directly owned a rental building, managed by a property manager, worth €9m.
The remaining shareholders wished to keep control of the company, not to sell the premises, and to prevent the same deadlock from arising over their mother’s building.
Our approach
- 01
Buying out the exiting shareholder through a family holding company
The remaining shareholders set up a holding company and contributed their shares to it, i.e. 75% of the share capital. The gain on the contribution was placed under tax deferral (article 150-0 B ter of the French Tax Code), control of the holding company being assessed together with the family group. The holding company then bought the remaining 25% for €3m.
The price was based on an independent valuation, so that it could be challenged neither by the tax authorities nor between heirs. The position of the exiting shareholder, resident abroad, had been analysed in light of article 244 bis B of the French Tax Code and of the applicable tax treaty.
- 02
Financing the buyout out of the company’s profits
The €3m had been financed by a €2.4m bank loan and €600,000 of shareholder loans. As the holding company now owns 100% of the company, dividends are upstreamed under the parent-subsidiary regime. From the financial year following the buyout, tax consolidation allows the interest on the loan to be set against the subsidiary’s profits, within the limits on interest deductibility.
Key point. An OBO is financed out of the company’s future profits. We documented its business rationale, namely the exit of a shareholder and the preservation of family control, and reviewed the “Charasse amendment”, which may restrict the deduction of interest where the shares are bought from the persons who control the group. - 03
Ending joint ownership of the premises without selling them
The remaining shareholders bought from the exiting shareholder their undivided rights in the premises, valued at €2.4m, i.e. €600,000. As these were rights in an undivided estate transferred between original co-owners, the transaction was subject to the 2.5% duty (article 750 II of the French Tax Code), charged only on the rights acquired, i.e. €15,000, instead of transfer duties of around 6.3%, i.e. nearly €38,000.
The remaining shareholders then contributed the premises to a property company (SCI), after the costs and the capital gain on the contribution had been assessed. Its articles of association organise the management, the approval of new partners and the exit conditions. The commercial lease with the company was set at a market rent.
- 04
Passing on the rental building without recreating joint ownership
The mother’s building, owned for more than thirty years, was contributed to a property company (SCI) set up with her children, after the costs and the capital gain had been assessed. Its articles of association contain the same approval and exit rules as those of the company holding the premises. The mother then made a gift-partition (donation-partage) of the bare ownership of the shares to her children, retaining the usufruct, and therefore the rents, as well as the management.
Given the mother’s age, bare ownership is valued at 80% of full ownership (article 669 of the French Tax Code). On shares valued at €9m, the taxable base had been reduced to €7.2m, before the €100,000 allowance per child. On the death of the usufructuary, the merger of the usufruct with the bare ownership will give rise to no duty (article 1133 of the French Tax Code).
Key point. The mother remains liable to real estate wealth tax (IFI) on the full ownership of the shares (article 968 of the French Tax Code). - 05
Coordinating and securing the whole
We set the order of the transactions, from the valuation to the gift-partition, and worked with the notary, the bank, the chartered accountant and the building’s property manager. In due course, the holding company may serve as the basis for a Dutreil pact for the transmission to the next generation.
Outcome
The exiting shareholder received the price of their stake, without a third party entering the share capital and without the premises being sold. The remaining shareholders control the company through their holding company, which repays the loan out of the company’s profits. The family’s real estate is now held through companies, with written exit rules, and the transmission of the rental building is under way.
This case is inspired by a case handled by the firm, in light of the law and case law in force at the time of the engagement, and in the light of circumstances specific to it. It is presented for illustration purposes only: it does not constitute advice and does not predetermine the treatment that might be adopted in another matter.