France: The Finance Law 2019 Contribution And Sale : Changes To The Conditions Governing The Reinvestment Of Sale Proceeds

A contribution of securities to a holding company by a natural person or through an intermediary (where the contribution is made to a company liable for corporation tax controlled by the contributing party) may benefit from deferral of taxation in accordance with Article 150-0 B ter of the General Tax Code.

In order to combat, in the view of the authorities, the abusive and wrongful use of the tax neutrality regime applicable to contributions of securities, legislators have regulated this regime.

In order to ensure that it is ultimately entitled to such a deferral of taxation, the holding company receiving the contribution must:

  • retain the securities received as consideration for the contribution for a period of three years from the date of the contribution; or
  • reinvest the proceeds of any sale of the contributed securities in an economic activity within a period of two years from the date of the sale.

This reinvestment obligation therefore requires company managers to identify within two years of the sale, which period may appear on the short side, investment opportunities which are eligible for the "reinvestment" mechanism and are also in line with their objectives in terms of sector, risk, manager preferences and investment size.

In light of this fact, Finance Law No. 2018-1317 of 28 December 2018 for 2019 made certain changes to the conditions governing the reinvestment of sale proceeds, seeking inter alia to extend the scope of the definition of reinvestment, in order to offer more investment opportunities to company managers.

In parallel to this loosening of the relevant conditions, the new provisions provide for an increase in the minimum reinvestment threshold, in order to ensure that a substantial portion of the sale price continues to be effectively invested in the capital of operational companies.

Indeed, in the case of sales of contributed securities completed up to and including 31 December 2018, 50% of sale proceeds had to be reinvested in:

  • the financing of permanent operating resources allocated to a commercial, industrial, small-scale manufacturing, professional, agricultural or financial activity (excluding the management of movable or immovable assets);
  • the acquisition of a portion of the capital of one or more companies1 carrying on one of the aforementioned operational activities, subject to the same exclusion, leading to control over each one of such companies;
  • cash subscriptions for the initial capital or capital issued in the context of a capital increase by one or more companies2 carrying on one of the aforementioned operational activities, subject to the same exclusion, or having as their sole corporate object the holding of shares in companies carrying on such activities (for example the capital of a start-up or SME or its holding company).

The forms of reinvestment remain the same, but the amount of the reinvestment no longer corresponds to 50 % but rather to 60 % of the proceeds of the sale.

Although this new threshold might appear onerous for the vendors of a business, the Finance Law for 2019 offsets this more onerous condition by introducing a new form of reinvestment.

A reinvestment may therefore now be made in the form of subscriptions for units or shares issued by the following structures (the "Funds"):

  • French fonds communs de placement à risques (venture capital funds) (FCPR);
  • French fonds professionnels de capital investissement (private equity funds for professional investors) (FPCI);
  • French sociétés de libre partenariat (a type of alternative investment fund) (SLP);
  • French sociétés de capital-risque (venture capital companies) (SCR); and
  • structures similar to such entities established in another member state of the European Economic Area (EEA).

The Law therefore covers Funds reserved for professional investors and Funds reserved for non-professional investors, thereby making it possible for investors who do not satisfy the statutory conditions to invest in a Fund for professional investors (and in particular the financial thresholds for initial subscriptions), to invest in a Fund and benefit from the deferral of taxation.

In order to inject funds into the real economy and to channel investment towards businesses and primarily SMEs, the acquisition of holdings in Funds are strictly regulated.

At least 75% of the assets of the Funds must therefore be comprised of the units or shares issued by companies ("Targets") which inter alia carry on an operational activity (a commercial, industrial, small-scale manufacturing, professional, agricultural or financial activity within the meaning of Articles 34 and 35 of the General Tax Code) and are liable for corporation tax and have their centre or effective management in a Member State of the EEA and must not be capable of characterisation as a company in difficulty within the meaning European legislation. The rules laid down by the Law of 28 December 2018 therefore derogate (more strictly) from the assets structure ratios applicable to Funds pursuant to the French Monetary and Financial Code. To a certain extent the Law of 28 December 2018 creates a new category of proceeds.

The units or shares issued by the Targets must (in order to qualify for inclusion in the quota) be either received as consideration for a subscription for the initial capital of or pursuant to a capital increase by the Targets (the Fund must therefore subscribe for new equity securities issued by the Targets) or be acquired in the context of a purchase of existing units or shares (the Fond therefore acquires from a third party already existing equity securities), which confers upon the Fund, acting either alone or in concert, control within the meaning paragraph 2° of Section III of Article 150-0 B ter [of the General Tax Code] over the Targets (in particular the taxpayer and one or more persons acting in concert shall be deemed jointly to control a company where they de facto determine decisions in its general meetings).

Two thirds of the Targets (namely 50% of the assets of the Fund) must be unlisted or must be listed on an exchange where a majority of the instruments traded are issued by SMEs.

The last condition to which the maintenance of the deferral of taxation is subject relates to the date on which the Fund must be in compliance with the aforementioned quotas of 75% and 50%.

Indeed, these investment quotas need not be complied with immediately on the date of the subscription for the units or shares by the company controlled by the taxpayer but must be complied with on the expiry of a period of five years from the date of the subscription for the units (or shares) issued by the Fund: the deferral of taxation may be maintained on the one hand if the holding company receiving the contribution retains the units or shares issued by the Fund until the expiry of such period of five years and on the other hand if the quotas of 75% and 50% are reached on the expiry of such same period. It is specified that the deferral of taxation must come to an end in the year during which the condition requiring the retention of the units or shares in the Fund by the holding company having initially received the contribution is no longer satisfied, even where such holding company reinvests the sums received pursuant to such a sale within two years thereof.

These provisions, which are applicable to sales of contributed securities completed by the company controlled by the contributing party with effect from 1 January 2019, may therefore lead to the creation of new dedicated Funds on the market, in order to offer a new investment product to business vendors. The reinvestment opportunities for holding companies are hereby increased, to the benefit of an intermediated investment (hence management costs to be paid) but diversified and managed by investment professionals.


1. The company must be liable for French corporation tax (or would be liable for corporation tax in accordance with the same conditions if the activity were carried on in France) and have its centre of effective management in France, in another member state of the European Union or a Member State of the European Economic Area (EEA) which has concluded an administrative assistance convention with a view to combating tax avoidance and evasion (Iceland, Norway and Liechtenstein)

2. Supra

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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