Assessment of the conditions for the application of a Pacte Dutreil transfer regime in the case of a joint commercial and real estate rental activity.
In its decision of 25 January 2023, the French Court of Cassation (Cass. Com., 25 January 2023, n°20-23.137) illustrated the principle laid down in 2020 by the French Council of State (CE, 8th and 3rd ch., 23 Jan. 2020, n° 435562) that it then adopted (Cass. Com., 14 October 2020, n°18-17.955), according to which, within the framework of the application of a Pacte Dutreil, the assessment of the company’s predominant activity is not just based on its turnover and the value of its assets but also on a number of other indicators.
As a reminder, article 787 B of the French General Tax Code (CGI) stipulates that a 75% exemption on gift duties based on the implementation of a Pacte Dutreil requires that the activity of the company in question is either commercial, industrial, handicrafts, agricultural or a profession libérale. Yet, it is possible to benefit from this favourable tax regime even if the company whose shares are being transferred performs a mixed commercial and civil activity when the commercial activity is predominant.
So far, case law relative to the assessment of this condition has dealt with the case of leading holdings (“holding animatrices“) of groups but is susceptible to arise in situations other than holdings as this decision shows.
To the case at hand, a taxpayer inherited shares from a company which has two commercial activities and a real estate rental activity. When the inheritance was implemented, the heir exercised his right to a 75% tax rebate as set forth in article 787 B of the CGI. The French tax authorities disputed the application of the Pacte Dutreil regime, as it considered that the company’s activity was predominantly civil. Trial courts agreed with the French tax authorities on the grounds that during the tax years preceding the death, turnover from the company’s real estate activity represented the main share of total turnover and that the assets assigned to that activity also represented the main share of the company’s revalued assets.
Relying solely on these two criteria, turnover and asset value, the French tax authorities and the courts applied the old administrative guidelines (1) that specified that the activity’s preponderant nature was assessed on the basis of two cumulative conditions (BOI-ENR-DMTG-10-20-40-10, of 12 September 2012, n°20):
– turnover from the eligible activity must represent at least 50 % of total turnover; and
– gross fixed assets must represent, in actual present value, at least 50 % of the total of these gross assets.
By cancelling this decision for error of law, the French Court of Cassation recalls that the French tax authorities must assess all of the facts in order to prove the preponderant nature of the civil activity and not just the two criteria mentioned above. Thus, on top of the two criteria relative to assets and turnover, contextual elements specific to each situation could be taken into consideration to assess the activity’s preponderance. These elements could be, for example, the use of man hours (work time allocated to each activity with time monitoring or labour costs) or operational links between the different activities.
It is interesting to note that although the French tax authorities have taken these evolutions into account and ensured their guideline’s compliance in order to maintain an approach based on a range of indicators (BOI-ENR-DMTG-10-20-40-10, 21 December 2021, § 20), it is agreed, for the sake of practicality, that a company whose commercial activity only respects turnover and gross assets criteria may consider that activity as preponderant.
(1) Cancelled by the French Council of State after an appeal for misuse of authority (CE, 8th and 3rd ch., 23 Jan. 2020, n° 435562).
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