Sale of a company and retirement: How can you benefit from reduced taxation on the sale of your shares?
The advice of Mr Arnaud Langlais, Lawyer, mergers and acquisitions specialist at theDS Avocats Law Firm, partner of CFK Finance
Many company founders and/or executives approaching retirement age want to transfer or sell their company. Obviously, the profit therefrom is subject to taxation. What is the general system?
The taxation applicable to the sale of rights in a company may be broadly summarised as follows: capital gains tax of 16% to which is added social security contributions (CSG, CRDS) at a rate of 11% of the capital gain achieved, i.e., in total, more than a quarter of the capital gain.
Is there a way of avoiding this tax burden?
Eager to encourage the transfer of SMEs at a time when many SME executives are approaching retirement age, the government recently modified the tax system for capital gains from the sale of rights in a company by introducing a rebate for duration of ownership applicable to the gain achieved. This rebate may result in a total exemption from the capital gains tax in the event of the retirement of the executive/seller in the year that precedes or follows the sale date. Only social security contributions then apply.
However, to take advantage of this benefit, it is necessary to meet a certain number of conditions relating to the shares sold, the seller and, finally, the company transferred.
Firstly, the seller must sell all the rights in the company that he owns and must have owned them for more than eight years and acquired them before 1st January 2006.
Furthermore, the seller must have conducted executive responsibilities continuously for 5 years preceding the sale, these responsibilities having generated a normal salary. Moreover, the seller must have owned (directly or via a third party) at least 25% of the shares of the company for 5 years preceding the sale. The seller must also fulfil a certain number of obligations for the future, namely: he must cease to hold any position in the company, whether as an executive or an employee, and exercise his rights to retirement in the year following or preceding that of the sale; and he must not hold a participatory interest in the sold company for three years after the sale.
Finally, the company sold must be subject to corporation tax and have its registered office in a state of the European Union. It must have a real operational activity, which excludes pure holding companies from this arrangement. Finally, in order to be designated an SME, the company sold must have fewer than 250 employees, a turnover of less than 50 million Euros or a balance sheet total of less than 43 million Euros at the end of one of the last three financial years that preceded the year of the sale. Moreover, in the year preceding the sale, 25% or more of the company must not have been owned by one or more companies that do not meet the above criteria.
Can the seller stay in the company sold in order to support the buyer?
Yes, there is a tolerance subject to the rules that apply to the combination of employment and retirement. After the sale of his shares or rights, the executive seller may carry out a non-salaried activity for the company whose shares or rights are sold (for example, consultant or tutor) or, where applicable, carry out a professional activity in another company.
And for those sellers who do not want to take their retirement, is there another arrangement that enables them to reduce the tax bill?
Yes, but it isn’t as favourable. In effect, the amended finance law of 2005 provides for a general rebate for duration of ownership. This rebate is equal to a third per year of ownership of the shares that the seller possesses from the end of the 6th year of ownership and results in a total exemption from the capital gain achieved on the sale of shares owned for more than eight years. The duration of ownership of the shares is counted from 1st January of the year of acquisition or subscription of the shares or rights and from 1st January 2006 for shares or rights acquired or subscribed before this date. In other words, this means that as of 1st January 2014, shares owned for at least eight years on this date shall be totally exempt from capital gains tax. Only social security contributions at the rate of 11% shall continue to be applicable.