Selling your start-up in France: how to limit your exit tax

Founders of start-ups in France have several tax options when they decide to leave the business and sell their shares. A number of factors will determine whether the “flat tax”, the regime for “SMEs less than ten years old” or the “contribution-cession” system (also known as 150-0 B Ter) is best – but in order to create the most efficient sale structure, founders must also consider their future personal and professional plans. Interview with Valérie Montel, an expert in wealth engineering at our Paris office.

What tax regime would a founder selling his start-up currently be subject to?

The current tax regime for business transfers in France was put in place by Emmanuel Macron in 2018. Under this flat-rate tax, all capital gains – including those realised on the sale of a company – are taxed at 30% (made up of income tax of 12.8% and social security contributions of 17.2%). There is also an exceptional contribution of 3% to 4% payable on incomes that go over certain thresholds, which is usually the case for business transfers. Where a start-up is sold by its founder the capital gains will usually be calculated on the basis of a cost price of near zero, which means this 34% rate (including the exceptional contribution) will apply to the entire sale price.

So there is no specific regime from which start-ups can benefit?

There is, but only for start-ups created before 1 January 2018. These can take advantage of an old tax regime created following the famous Pigeon Movement under François Hollande’s presidency. Under this system, known as the regime for SMEs less than ten years old, capital gains are taxed as a professional income in line with income tax bands, i.e. up to 45% in the highest bracket. However, a rebate is subsequently applied to the basic rate of tax depending on how long the seller has held the company shares. For this route to be more attractive than the flat tax sellers need to have held their shares for at least eight years, at which point they benefit from the maximum rebate of 85%. This is because the rebate only applies in relation to the income tax and not the social security contributions, which are based on the full amount of capital gains. Thus, we can aim for a rate of 27.95%.

Can the “apport-cession” system reduce this tax burden?

Yes, but only in specific circumstances. When a founder plans to reinvest all or part of their anticipated capital gains then one option is for them to transfer their shares into a specially created holding company prior to the share sale. It’s then the holding company that sells the shares in the start-up. As a capital contribution and subsequent share transfer this lets the entrepreneur defer the payment of capital gains tax – almost ad infinitum – maximising the amount available to reinvest. There are constraints though. At least 60% of the capital must be reinvested within two years of the sale, or capital gains tax will be triggered on the full amount that was transferred to the holding company.