Without proper planning, transferring a business can cost up to 45% of its value in gift taxes—but the Dutreil Agreement allows you to reduce this cost by a factor of 10, provided you activate it at the right time and manage it rigorously for 8 years. The most common mistakes involve failing to establish a preventive agreement, holding an insufficient percentage of shares (below the legal threshold of 34%), or failing to ensure that a holding company continues to play a leading role. Added to these are often-overlooked operational risks: unforeseen changes in shareholding, a lack of annual monitoring of commitments, and failure to submit the end-of-commitment certificate to the tax authorities within three months of the expiration date. These are all pitfalls that can lead to the exemption being completely called into question—even years after the transfer.
The 7 Most Common Mistakes Regarding the Dutreil Pact
You’ve spent part of your life building and growing your business. Who will benefit most from this financial and human capital? The government? Your loved ones? Without proper planning, the tax cost of transferring ownership can be as high as 45% between parents and children. If you have two children, the government may end up receiving more than either of them.
However, the Dutreil Pact can reduce this cost by a factor of 10! The cost is lower when transferring property under the “nue-pleine propriété” arrangement. Before the age of 51, you can thus transfer up to 1 million per child tax-free.
If you are an executive or shareholder of a company and are between the ages of 40 and 65, now is the right time to protect your family.
For a registration fee of 125 euros (and possibly 800 euros in attorney's fees), you can protect your family with a prenuptial agreement.
Here are the mistakes you should avoid.
MISTAKE #1 - Failing to sign a preventive agreement (before and after the transfer)
Accidents don’t just happen to other people. It is essential for every executive and shareholder of a company to establish a Dutreil agreement to secure the tax exemption from which their beneficiaries might benefit. This allows the initial two-year period to begin and ensures that the conditions are met. The beneficiaries of an ailing executive who must be replaced lose the tax exemption that had previously been guaranteed to them. This precaution is also necessary even after an initial transfer has already taken place, in order to anticipate future transfers (including those initiated by the donees).
We always have our clients sign a Dutreil agreement, even if they plan to sell their business at some point in the future.
MISTAKE No. 2 - Limiting the scope of the agreement and failing to meet the 34% capital threshold
Sometimes, I’ve seen notaries limit the scope of the agreement to the shares being transferred… even though they represented less than 34% of the capital. Sometimes, it’s after a capital increase that the ownership falls below the legal threshold. This error cannot be corrected. It’s better to draft a broader Dutreil agreement.
We work with our client to determine the appropriate scope and always have a Dutreil agreement signed covering all shares, even if other Dutreil agreements may be signed at the same time.
MISTAKE No. 3 - Failing to anticipate future changes in share capital
It is necessary to anticipate future transactions involving the share capital: capital contributions, capital reductions, mergers, etc. These may have a dilutive effect on the capital or other impacts on the maintenance of the commitments. This is even more true when the transfer does not directly involve the company whose securities are subject to a Dutreil agreement, but rather the securities of a passive holding company. In this case, all shareholdings must remain unchanged for the entire duration of the commitments!
We are implementing the Dutreil Pact as part of a comprehensive strategy for the company’s future and are considering possible changes in ownership over the medium term, even if this means transferring the shares after certain transactions have been completed.
MISTAKE No. 4 - Signing the Dutreil Agreement before ensuring the holding company’s management is in place
The holding company’s coordinating role must be demonstrated based on a body of evidence, prior to the transfer and throughout the duration of the commitments. Simply billing for a few services is not enough to qualify as a controlling entity. This requires careful consideration of the group’s organization, the holding company’s strategic role, and the allocation of support functions. It is therefore important to plan for this work in advance and ensure compliance with the established processes for a period of 8 years.
We conduct a preliminary 8-point assessment of the company’s leadership qualities. The Dutreil Agreement is signed with respect to the holding company’s securities once most of our recommendations have been implemented.
MISTAKE No. 5 - Assuming you are entitled to a “deemed entitlement” when no child can serve as an executive
You can transfer your business assets to a minor child while retaining control over the management of those assets by appointing a third-party administrator. However, the minor cannot serve as a corporate officer, and if any of his or her siblings do, the minor will not be eligible for the Dutreil tax exemption under a “deemed to have been entered into” agreement. A preventive Dutreil agreement is therefore necessary. The same applies when no donee or heir can or will serve as an executive.
Have you been told that a preventive Dutreil agreement is always put in place?For us, governance is a key issue: beyond the legal aspects (articles of incorporation, shareholders’ agreement, donation clause), our consultants at Jaberson Conseil also help our clients address their approach, the buyer’s leadership, the transition process, and intra-family dialogue.
MISTAKE No. 6 - Failing to conduct an annual review of commitments
The total duration of the Dutreil commitments has now been extended to eight years. Case law has reaffirmed that the conditions for the tax exemption and the maintenance of the three commitments must be met throughout the entire eight-year period. An annual review of changes in the group’s capital, governance, and operations is essential to prevent errors.
We update our initial assessment every year to ensure that our clients remain as secure as they were on day one. Even though the legal framework is established on the date of the gift, changes in legislation and case law sometimes require a few adjustments.
MISTAKE #7 - Forgetting to submit the certificate of completion of service
It is no longer necessary to send a certificate of compliance with the commitments to the tax office every year… but you must send one at the end of the commitment period, which is eight years after the gift! The deadline for submitting it is three months from that date. Although, to the best of our knowledge, this penalty has never been enforced, failure to submit this certificate could result in the exemption being revoked.
Our annual follow-up ensures that the certificate is sent out on time. Very few professionals actually carry out this task. If you have signed a Dutreil agreement, do you know who will send you the draft certificate upon completion of your commitments?
Between preliminary assessments and regular follow-ups on commitments, our communications consultant has asked us to identify our clients’ most pressing need, and we’re not sure how to respond. Let us know in the comments what stood out to you the most in our list of mistakes!
For us, the Dutreil Pact and business succession are part of a comprehensive approach and long-term support. No matter what stage you’re at today, it’s time to assess your situation to see if your loved ones are truly secure.
Links for further reading:
- For each error, the business case
- Is your holding company an active one? The test
- Our Gift Tax Calculator
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