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The transfer or closure of a business marks an important stage in the life of an entrepreneur. Whether it's a sale, retirement, donation, transfer to a company or, unfortunately, a transfer of ownership, it's an important stage in the life of an entrepreneur. outright cessationThese events often have significant and immediate tax consequences. The basic principle is that all accumulated profits and capital gains that have not yet been taxed are rapidly taxed. Fortunately, aware of the potentially crippling impact of this rule, the legislator has introduced a number of measures which, subject to certain conditions, allow this taxation to be reduced, deferred or even waived. Anticipating these aspects is therefore essential if you are to prepare for the transition in the best possible way.
The principle: immediate taxation of profits and capital gains
When a company ceases trading or is transferred, tax law considers that all unrealised profits must be realised and taxed without waiting for the normal end of the financial year. This is known as immediate taxation, and is set out in articles 201 and 221 of the General Tax Code (CGI).
What events trigger immediate taxation?
There are a number of situations in which accelerated taxation is required:
- Total sale of the company : Sale of the business, transfer of the sole proprietorship to a company, merger or demerger of companies.
- Total cessation of activity : Definitive closure of the business, dissolution of a company (even if liquidation takes time), including the various resulting from this procedureparticularly for sole traders.
- The death of the sole trader : Transfer by succession is treated as a cessation for the deceased farmer.
- Change of business activity or corporate purpose : If a company radically changes the nature of its business, this can be considered as a cessation of the old activity and the creation of a new one.
- The transformation of a company : If it results in the creation of a new legal entity (rare) or, more frequently, a change in tax regime (for example, a family limited liability company subject to corporate income tax which reverts to corporate income tax).
It should be noted that a simple temporary cessation of business or the leasing out of a business are not generally considered as cessations requiring immediate taxation.
What is the tax base?
Immediate taxation applies to all items that would have been taxed if the company had continued to trade until the normal closing date, but which have not yet been taxed:
- Operating profits from the end of the last tax year to the date of the event (sale, cessation, etc.).
- Tax deferred profits : These are mainly provisions that had been deducted in previous years but which, as a result of the cessation of operations, are no longer required (for example, a provision for litigation that will not ultimately take place as a result of the cessation of operations). These provisions must be added back to taxable income.
- Unrealised gains on fixed assets : This is often the largest item. All assets (machinery, equipment, buildings, goodwill, patents, etc.) are considered to have been sold at their real value on the date of the event. The difference between this actual value and their net book value (original value less depreciation) constitutes a capital gain (or capital loss) which becomes immediately taxable depending on the tax regime (short-term or long-term). Imagine the potential taxation on a business set up a long time ago or a building that has been heavily depreciated and whose value has increased...
Reporting obligations
In the event of transfer or cessation, the company (or its beneficiaries in the event of death) must take out an insurance policy. income tax return in a short space of time : 60 days from the date of the event. This period is extended to 6 months in the event of the death of the sole trader. The corresponding tax is payable immediately.
Mitigating tax: exemption and deferral schemes
Fortunately, to ensure that immediate taxation does not hold up business transfers, there are a number of special schemes that allow you to escape all or part of this taxation, mainly in the case of business capital gains. The choice of scheme will depend on the specific situation of the business and the transaction envisaged.
Exemption based on revenue (Art. 151 septies CGI)
As we mentioned in a previous article, this system, which applies to companies subject to income tax (sole proprietorships or partnerships), exempts all or part of business capital gains (short- and long-term) if the business has been run for at least 5 years and if the average annual revenue excluding VAT of the previous two years does not exceed certain thresholds (for 2023-2025: €250,000 for total exemption / €350,000 for partial exemption for sales; €90,000 / €126,000 for services). This scheme applies both to sales during the course of the business and to capital gains realised on the sale or total cessation of the business.
Exemption based on the value of the business (Art. 238 quindecies CGI)
This scheme is specifically aimed at the transfer of a sole proprietorship (BIC, BNC or BA) or a a complete and autonomous branch of activity. It applies whether the company is subject to income tax or corporation tax (if it meets the European SME criteria).
- Terms and conditions:
- The activity must have been carried out for at least 5 years.
- The transfer must involve the entire business or a complete division (including the assets and liabilities necessary for it to operate independently).
- La value of information transmitted (excluding property) must not exceed certain thresholds:
- Less than 500 000 € : Exemption total capital gains (short and long term).
- Between 500,000 and €1,000,000 : Exemption partial and degressive. The exempt fraction is calculated using a formula (e.g. for a value of €700,000, the exemption rate is (1,000,000 - 700,000) / 500,000 = 60%).
- The transferor must not hold, directly or indirectly, more than 50% of the voting rights or rights to profits in the transferee company during the 3 years following the transfer (beware of LBO-type schemes or intra-family transfers where the transferor retains control).
- Advantage : This scheme is very attractive for transfers of small and medium-sized businesses, whether by sale, gift or contribution.
Exemption on retirement (Art. 151 septies A CGI)
This scheme is designed to facilitate the transfer of a business when its director retires. It applies to sole traders (BIC, BNC, BA) and partners in partnerships subject to personal income tax who carry on their professional activity in the partnership.
- Terms and conditions:
- The transfer must be for valuable consideration (sale) and relate to thein full sole proprietorship or all shares held by the partner in the partnership.
- The activity must have been carried out for at least 5 years.
- The seller must cease all functions in the business being sold (management or salaried activity).
- The seller must assert his pension rights within two years (before or after) the transfer date. This is an essential point: the sale must coincide with the actual retirement date within this 4-year window.
- The business sold must meet the European definition of a SMES (fewer than 250 employees and sales < €50m or balance sheet total < €43m).
- The transferor must not hold (directly or indirectly) more than 50% of rights in the transferee company during the 3 years following the transfer.
- Advantage : Total exemption for business capital gains made at the time of disposal, whether short- or long-term. Please note: this exemption does not cover capital gains on propertyThese are still taxable under their own regime (PV pro or private if the property was privately owned).
Transfer of a sole proprietorship to a company (Art. 151 octies CGI)
When a sole trader transfers his business to a company (whether it is subject to income tax or corporation tax), article 151 octies allows, by option, to avoid immediate taxation of the capital gains arising on the transfer.
- Mechanism:
- The capital gains on non-depreciable items (business goodwill, land, etc.) are invested in deferred taxation. They will not be taxed until later.
- The capital gains on depreciable items (equipment, buildings, etc.) are not taxed in the hands of the contributor but are reintegrated on a staggered basis (over 5 years, or 15 years for buildings) in the profits of the company receiving the contribution. The company will be able to calculate its depreciation on the contribution value.
- Terms and conditions:
- The contribution must relate to complete sole proprietorship or a complete branch of activity.
- In return, the contributor must receive exclusively securities of the receiving company. The assumption of a liability by the company or the recording of a sum in a shareholder's current account may call into question the scheme if they release cash ("balance") for the contributor.
- End of deferral (for PV on non-depreciable assets) : The deferral ends and the capital gain becomes taxable in the hands of the contributor (or his heirs) if :
- The contributor sells the shares received as consideration for the contribution.
- The company disposes of the non-depreciable assets transferred to it.
- Deferral maintained : The deferral may be maintained, particularly in the event of a gratuitous transfer (gift, inheritance) of the securities received by the contributor, if the beneficiary undertakes to pay the tax on the subsequent occurrence of an event putting an end to the deferral.
Free transfer of a sole proprietorship (Art. 41 CGI)
This scheme is specifically designed for gifts or inheritances of sole proprietorships (BIC, BNC, BA).
- Mechanism: Capital gains arising on a free transfer are taxed as follows deferralprovided that the beneficiary(ies) (heirs, donees) continue to run the business.
- Conversion to permanent exemption : If the activity is actually pursued by one of the beneficiaries during at least 5 years from the date of transfer, the capital gain initially carried forward is permanently exempt.
- Terms and conditions:
- The transmission must be free of charge (donation, inheritance).
- It must coverin full of the company or an entire branch of activity.
- It must be done in full ownership.
- The beneficiary(ies) must undertake to continue to operate for 5 years.
- End of deferral (before 5 years) : If the business ceases to operate or is sold before the 5-year period has expired, the capital gain initially deferred becomes immediately taxable in the name of the beneficiary who broke the commitment. A management lease is treated as a cessation of business for the purposes of this scheme.
These different schemes offer significant opportunities to reduce the tax burden when transferring or closing a business. However, their conditions of application are precise and sometimes complex. An in-depth analysis of the situation and upstream planning are essential to choose the most appropriate scheme and ensure that it is applied securely.
Sources
- General Tax Code (CGI), in particular articles 41, 151 septies, 151 septies A, 151 octies, 201, 202 ter, 221, 238 quindecies.
Transferring your business is a complex operation from a tax point of view. Anticipating this and choosing the right arrangements can considerably reduce the tax burden. Our firm can advise you on how best to prepare for this stage and secure your tax choices.. Let's talk about it.
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