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2.2.2. The Contributor is a Resident Corporate Shareholder

In principle, the contribution of shares by a resident company to another resident company is treated as a sale for tax purposes, regardless of whether the shares are part of a substantial or non-substantial participation.

Gains on such a contribution are either:

  • subject to corporate income tax at the standard rate; or
  • benefit from an exemption of up to 88% of their gross amount, provided that the shares qualify as participating shares and have been held for at least 2 years. Shares qualify as participating shares if they represent at least 5% of the capital.

French tax law provides for a rollover relief regarding the gains realized in case of a contribution of shares, if the following conditions are met:

  1. the contributed participation is deemed to be a complete branch of activity. This is the case if the contribution enables the acquirer to exercise control over a company, i.e. if:
    • the participation represents more than 50% of the share capital of an unlisted company, or more than 30% of the share capital of a listed company. Simultaneous contributions, by several companies or individuals, of participations held in the same company, may constitute a complete branch of activity if the multiple contributions, as a whole, represent more than 50% (unlisted companies) or 30% (listed companies) of the share capital of the relevant company;
    • the contribution confers on the beneficiary the direct holding of at least 30% of the voting rights of the company whose shares are being contributed (which was not the case before the contribution), to the extent that none of the other shareholders holds directly or indirectly a higher portion of the voting rights; or
    • the contribution is made to a company which already holds 30% of the voting rights, but the newly contributed shares confer on it the highest portion of the voting rights (which was not the case before the contribution).
  2. the contributing company undertakes in the contribution deed to keep the shares received in exchange for at least 3 years. This condition is meant to prevent abuse of law schemes, whereby a straightforward sale is disguised as a contribution. In a decision handed down on 13 July 2007 (No. 289658, Transalliance), contrary to the administrative guidelines on this matter, the French Supreme Court held that the breach of this commitment triggers the application of the tax rates as at the date of the breach. Such a breach has no retroactive effect. Furthermore, due to the participation exemption regime (exemption of capital gains of up to 88%), tax costs related to such a breach should be limited;
  3. the contributing company undertakes to compute any future capital gains on the shares received in exchange, by reference to the value that the contributed shares had in its balance sheet;
  4. in the contribution deed, the company benefiting from the contribution commits itself to compute any capital gains on a future disposal of the contributed shares, by reference to the value that the contributed shares had in the balance sheet of the contributing company; and
  5. the contributing company does not receive cash or transfers of liabilities as compensation for its contribution for an amount exceeding either 10% of the nominal value of the shares received in exchange or the realized capital gains.

The conditions under (3) and (4) may lead to double taxation in the sense that the contributing company shall compute capital gains on a future disposal of the shares received in exchange by reference to the value that the contributed shares had in its balance sheet, whilst, at the same time, the company benefiting from the contribution shall compute capital gains on a future disposal of the contributed shares by reference to the value that those shares had in the balance sheet of the contributor.

The only condition normally authorizing France to tax, in application of the EC Mergers Directive, is to require the contributor to book the shares received in exchange at the same value as the contributed shares. Therefore, unless the transaction is motivated by fraud or tax evasion, it could be considered that condition (3) is in conflict with the EC Merger Directive (there are grounds to contend that this should also apply to contributions between two French companies, pursuant to the European Court of Justice Leur-Bloem decision of 17 July 1997).

If, shortly after the contribution, the receiving company sells all or part of the contributed shares so that the participation falls below the 50% or 30% thresholds, the tax authorities may resort to the abuse of law concept if it appears that the sole purpose of the contribution was to enable the transaction to benefit from a favorable tax regime.