In it, the SDA clarifies when the reinvestment undertaking is required, how much must be reinvested, and on what terms and within what time limits. We summarise the key points below.

First, a reminder: when a company sells part of its business, there are two possible options:

1. sell that business directly to a third party, or

2. first separate it into a distinct company by means of a tax-neutral demerger or contribution, then sell the shares in that company to the third party.

The tax treatment of the second option can sometimes be attractive (no corporate income tax on the latent capital gain owing to the tax neutrality of the demerger, and taxation of capital gains on shares that differs from that on the sale of a business), provided it is not regarded as tax abuse within the meaning of Article 344(1) ITC 92.

In this context, the SDA may accept these successive transactions — demerger or contribution followed by the sale of the shares — provided the applicant gives a reorientation undertaking.

What does the reorientation undertaking involve?

The shareholders must undertake to reinvest the proceeds of the sale of the shares in order to develop the activities retained after the demerger/contribution, or to launch new ones. Without this undertaking, the tax authorities may regard the transaction as tax abuse and tax it as if the business had been sold directly to a third party.

When is the undertaking required?

• Only when all the shares in the company are sold (at once or in several stages). The reorientation undertaking does not apply where only some of the shares are sold.
• Only in the case of a sale to a third party. Conversely, if the demerger or contribution is followed by a transfer within the same group, the reorientation undertaking is not required.

Note, however, that within the same family, each member is regarded as a “third party” in relation to the others. For example, a transfer by parents to their children (through a sale of shares or a sale followed by a gift) is covered by the reorientation undertaking.

How much must be reinvested?

A distinction must be made here between individuals and companies:

• For individual shareholders, the amount to be reinvested corresponds to the sale price received, less certain direct transaction costs and the tax already paid on the capital gain.
• For corporate shareholders, the amount to be reinvested corresponds to the equivalent of the capital gain that would have been taxable under a conventional sale (share sale price – net book value – exempt capital gains on the underlying shareholdings).

How to reinvest

• For an individual: reinvestment must take the form of a capital increase (never a simple loan). In this case, a ban on capital reductions applies to the company that received the funds through the capital increase, to ensure that the investments are maintained in the company on a lasting basis. This ban applies until the company is liquidated, but profit distributions remain permitted.
• For a company: it must itself reinvest the funds received on the sale of the shares. In some cases, the company may distribute or lend these funds to another group company, which will then make the investment.

What types of investment?

These investments must relate to durable assets: business investments, certain financial investments, or repayment of the group's bank debts.

Not permitted: buy-backs of own shares, assets made available to directors, luxury goods, or any internal transfer within the group.

Time limits

• Starting point: generally the date of sale of the shares (although the SDA has already accepted investments made from the legal date of the demerger or contribution).
• Reinvestment deadline: ends six months before the expiry of the three-year assessment period for the financial year in which the demerger or contribution took place.
• Deferred payment (earn-out): 2 additional years from receipt of each payment.

Finally, a statement of the investments made must be submitted to the tax authorities.

In summary

This transfer method can be attractive, provided you anticipate the reorientation undertaking, identify the amount concerned and the permitted investments, and strictly comply with the reinvestment timetable.

Do not hesitate to contact us before any restructuring transaction to secure its tax treatment.