Pacte Dutreil and Sole Proprietorship: Non-essential business assets are excluded

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In a ruling issued on February 9, 2022, the Court of Cassation invoked an element of the enforcement of the agreement Dotrell for individual companies. The tax authorities can always prove that the assets entered on the balance sheet are not necessary for the company’s activity. In this case, the amount of cash transferred should not exceed the normal cash requirements.

Companies are better known than Sole Proprietorship, Charter Dotrell It makes it possible to exempt from registration fees up to 75% of the value of the individual property transferred free of charge, by donation or after death. Transfer covers all movable or immovable property, tangible or intangible, intended for the operation of a sole proprietorship. It may also relate to the whole property or an undivided share. Finally, in the case of a donation, it may only relate to usufruct or mere ownership of the company (CGI, Article 787c).

A recent judgment of the Court of Cassation indicates that the recording of goods on the company’s balance sheet makes it a presumption necessary for the company’s activity. However, tax authorities can always provide evidence to the contrary (Cass.com., February 9, 2022, No. 20-10753).

Agriculture as a Sole Proprietorship

In this case, Mr. B. passed away. , a farmer, leaving the world delegates to his nephew and niece Mr. and Mrs. T. , who requested to benefit from Section 787c of the CGI. This provision provides for individual Dutreil eligible companies (with industrial, commercial, craft, agricultural or liberal activity) a partial waiver of 75% transfer fee free of charge, on all or an undivided share of all movable, immovable, tangible or intangible property assigned to the operation.

To qualify, the sole proprietorship must have been owned for more than two years by the deceased or giver when it was acquired for a consideration. Also, every heir, gifted or delegated person shall, in a declaration of succession or deed of gift, be bound, for him and his assignee free of charge, to keep all property destined for the operation of the company for a period of four years from the date of the transfer. Finally, one of them must continue to run the business for three years after the transfer date. In this case, the delegates committed themselves to retaining, for a period of four years, all property assigned to the estate of the deceased. One of them, his nephew, has pledged to continue the activity for three years. The operation was valued based on the declaration of inheritance at €920,265.59 (€182.700 of operating equipment, €451,000 of built and non-built land assets, €286.565.59 of current assets on the balance sheet).

Restitution in the field of inheritance tax

Delegates benefited from a total exemption of 690,199.17 euros, but the tax authorities refused to take advantage of the exemption for certain goods on the grounds that they did not constitute goods essential to the exercise of the profession: three real estate (160,070 euros), negotiable securities (90,121.52 euros) and the amounts of the lady’s estate B, who died a few months before her husband (€115,192.79). As a result, the tax authorities reassessed the value of the exempted assets at €554,881.28 and claimed the excess inheritance tax (€84,692 in tax and €9,486 in late payment interest).

Delegates challenged this proposed correction. Regarding the buildings, they argued that one housed the live cattle as well as the semi-permanent housing of the farm manager and that the other two were used to store equipment and fodder. With regard to the securities, they indicated that they correspond to the current assets in the balance sheet of the discontinuation of the activity and that they are allocated to the assets of the professional activity in order to ensure their operation. The IRS heard arguments about the property but supported the correction of real estate funds and investment securities. The delegates appealed this decision, contending that management had not provided evidence that the sums resulting from Mrs. B’s inheritance should not be exploited. The life insurance contribution collected during the latter’s death.

Simple Assumption of Utility

Tarbes TGI (TGI Tarbes, September 13, 2016, No. 16/00022) and the Court of Appeal of Pau (CA Pau, November 19, 2019, No. 16/03456) confirmed the management position tax, ruling that this evidence of the necessary nature of the assets to operate was not provided by delegates.

The Court of Appeal noted that, according to the case law of the Court of Cassation, in the case of a sole proprietorship, the entry on the balance sheet assumes a professional nature, and that management can resist this assumption by establishing that this good is not really necessary for the operation. “Cash and similar financial investments, therefore, are taken into account as professional assets, when they are entered in the balance sheet of the company, in so far as their amount does not exceed the ordinary cash requirements of the latter. and where they are necessary for the activity of the company.”

The Court of Cassation states that if the entry of movable and immovable property, tangible or intangible (here cash) in the balance sheet, is assumed to be intended for the operation of the business, management has the option of reporting proof that it is not necessarily and actually assigned.

In this case, the Court of Appeal argued that the amounts in dispute, coming from his wife’s estate, had been deposited by the master in a personal account and that there was no evidence that the latter, aged 86, had planned, at the time, changes in the management of the company; That the amounts in dispute were not mentioned in the company’s balance sheet assets until after Mr. B’s death, as well as the marketable securities, which do not appear on the balance sheet for the fiscal year ending December 31, 2010. After evaluating the company’s average cash flow needs over the three years past complete, it had liquidity in excess of current operating expenses. In addition, if the delegates prove that, after Mr. B’s death, they invested in equipment and works, the company’s liquidity, excluding the amounts in dispute, was sufficient to finance such investments. Finally, the Court of Appeal held that the benefactors had not produced any evidence to the contrary that would likely enable them to benefit from the exemption provided for in Article 787c ICC, and the Court of Cassation reminded that the Court of Appeal was not required to explain the evidence which it decided to ignore.

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