The Dutreil Pact : Let's Not Sacrifice the Future of French Family Businesses !

Let's Not Sacrifice the Future of French Family Businesses!

Fidal, France's largest leading business law firm, has been supporting businesses for over 100 years. With offices throughout the country, its 1,200 lawyers, practicing in 87 cities across France, advise tens of thousands of SMEs, mid-cap companies, and large groups, many of which are still family businesses. 

The numerous transactions we have carried out for our clients have enabled us to garner in-depth knowledge of how they operate and the issues they face in terms of business succession.

We have been serving 30% of our clients for over 30 years, and some for even longer. We therefore follow their development over the very long term.

With this unparalleled practical experience, we wish to attest that family businesses are absolutely vital to our economy and national sovereignty, and that it would be particularly dangerous to call into question – as some are advocating – the Dutreil scheme, which alone enables these businesses to be transferred and preserved within the family.

A recent report by the French Court of Auditors shows that more and more entrepreneurs are using this scheme. Instead of welcoming what is excellent news, given France's chronic lag behind all its European neighbors in terms of family business transfers, it advocates tightening the scheme to reduce its scope on the grounds that it allegedly represents a "tax expenditure" of €5 billion in 2024. 

The budgetary argument put forward by the Court of Auditors is flawed for several reasons. 

1. First, it is based on an unrealistic assumption: business owners who transferred their businesses in 2024 under this regime (with a tax rate on the value of the transferred business generally between 5% and 11%) could have carried out the same transaction at a rate of 45% without the Dutreil pact. However, the transfer of a business, which is a non-liquid asset, is simply impossible in an environment with inheritance taxes as high as the 45% applied in France, especially when its value is significant. This was demonstrated between 1983 and 2000: during that time, the Dutreil pact did not exist and almost no significant family transfers took place. Retiring business owners were forced to sell their businesses to third parties, often foreign groups or investment funds. It was for this reason, and to prevent the gradual demise of France's entrepreneurial fabric, that the Dutreil scheme was created in 2000.
    
2. The second error in the reasoning of the Court of Auditors' report is that it fails to take into account the immediate tax revenues resulting from the donations encouraged by the scheme. In more than 90% of cases, the transfer of a business under a Dutreil pact is carried out during the lifetime of the business owner and not upon their death. Significant gift taxes are therefore paid in advance. Otherwise, they would only have been payable by the heirs upon the death of their parents, several decades later. 
   In the current budgetary context, it is preferable for the State to collect tax revenues quickly, even if they are lower, rather than wait several decades for hypothetical inheritance taxes. In addition, encouraging business owners to transfer their businesses by donation, while they are still relatively young, also significantly improves the chances of a successful transfer compared to one resulting from death.
    
3. The Court of Auditors also fails to take into account multiple positive effects. A company that remains French and has not suffered a drain on its cash flow, distributed in the form of dividends to enable heirs to pay excessively high inheritance taxes, will be able to continue to invest and develop its business. It will then generate greater tax revenues for the State in subsequent years through various other taxes (corporate income tax, VAT, etc.).

The French National Assembly, for its part, adopted three amendments aimed at restricting the scheme. 

1. Extending the lock-up period for company shares from six to eight years, as proposed, would place an unnecessary burden on heirs, given that France already imposes a lock-up period that is above average compared to other European countries. This rigidity would discourage transfers without generating additional revenue for the State.
    
2. Requiring a donee to be between 18 and 60 years of age would exclude families with minor children, even though the scheme does not require them to immediately take on management roles. This amendment defies common sense, as promoting early transfers maximizes the chances of the business surviving.
    
3. Limiting the exemption to business assets alone is based on the illusion that it is easy to identify and evaluate non-business assets. In reality, this measure would lead to practical difficulties of implementation in groups with numerous subsidiaries, additional tax costs that would often be impossible for the companies concerned to finance, and an increase in litigation over the assessment of whether or not certain assets (cash, land reserves) are attributed to business operations.

In short, these amendments would complicate and increase the cost of transferring family businesses, without any real benefit to public finances, and would risk permanently weakening the French entrepreneurial fabric.

The French High Council of Notaries has also just proposed tightening the scheme. For the reasons outlined above, we believe that such proposals are inappropriate. To the contrary, the possibilities for using the scheme should be maximized, not limited.

Finally, a report by the French Institute for Public Policy purports to demonstrate that family businesses are in fact of no benefit to the economy. We strongly disagree with this assertion. Our practical experience, gained from decades of monitoring thousands of family businesses, has shown us that, on the contrary, they offer many advantages, not only for the national economy but also in many other areas: 

1. Family businesses distribute fewer dividends than the average company, which makes them more resistant to crises and more resilient. 
    
2. They focus on long-term development, which allows them to invest in longer-term projects and, in particular to be more active in the areas of sustainable development and energy transition. 
    
3. They also foster a better social climate (less absenteeism, fewer strikes).  
    
4. They have strong local roots. Most of them remain based where they were founded and, in some municipalities, may be the main source of jobs and funding for the community. 
    
5. Lastly, in certain regions or sectors of activity where there are not enough potential buyers, family transfer is sometimes the only option when the business owner retires. If this is made impossible due to inheritance tax, such businesses will disappear, along with their jobs. 

These positive externalities of family businesses are obvious to anyone familiar with the reality on the ground. They are also unanimously shared abroad. 

All neighboring countries encourage family transfers of businesses by providing mechanisms to reduce the applicable tax burden, even though in most of these countries the standard rate is already significantly lower than in France.

On 8 September 2015, the European Parliament itself adopted a resolution recognizing all these favorable characteristics and calling on Member States not to hinder the activity and transfer of family businesses, particularly through inheritance tax.

Tax costs are indeed one of the major obstacles to the transfer of businesses within families. A full-scale survey conducted in Greece following a reform that significantly reduced inheritance tax in 2002 (from 20% to 2%) showed that in the years that followed, the percentage of family transfers almost doubled, and that the businesses concerned continued to invest and grow; whereas before the reform, the heavy tax burden on the company's cash flow to pay transfer taxes significantly reduced investment. This seems obvious. It is therefore particularly surprising that the analysis conducted in France could lead to a different conclusion.

It should be recalled that in France, only 15% of companies are transferred within families, compared with 50% in Germany and 70% in Italy. This lag weakens our economic fabric and explains why we have significantly fewer medium-sized companies than our neighbors. 

Tightening the Dutreil pact means running the risk of weakening the French economy and compromising national sovereignty. The stakes are high: it is time to raise the alarm and take action before it’s too late.