New Benefits and Limitations of the Contribution-in-Kind: Tax Treatment Determined by the Year of the Contribution

In order to bring the provision into compliance with the recent decision of the Constitutional Council dated April 22, 2016 (Cons. Const. Decision, April 22, 2016, No. 2016-538 QPC), the 2016 Amended Budget Act (Section 34) significantly modified the tax regime applicable when tax deferral is terminated.

Until now, the amount of the capital gain for which taxation was deferred was fixed as of the date of the contribution, taking into account the tax base rules applicable at the time of the contribution, such as deductions based on the length of ownership. The tax rate, however, was not fixed and followed any applicable changes until the tax deferral ended, offering the possibility—where applicable—of benefiting from a reduction in the applicable tax rate, but in return creating the risk of facing an increase in that rate.

From now on, the tax rate applicable at the end of the deferral period will be determined based on the tax regime in effect for the year in which the contribution was made, by calculating the rate that would have applied to those capital gains had they not benefited from the tax deferral.

With regard to income tax and the special levy on high incomes—subject to certain specific provisions applicable to nonresidents or contributions made at the end of 2012—the applicable rate will be determined by a relatively complex formula designed to take into account the application of the progressive income tax scale by calculating the taxpayer’s average tax rate. The applicable rate is, in fact, equal to the ratio of:

(i) an amount equal to the difference between:

(a) the income tax that would have been due by the taxpayer for the year of the contribution if the capital gains subject to tax deferral had been included in the taxpayer’s taxable income, and

(b) the income tax due on his or her other taxable income, and

(ii) the total amount of capital gains for which tax deferral has been requested:

With regard to social security contributions, the text specifies that they will be calculated based on the rate in effect at the time the capital gain subject to tax deferral was realized, with the date of realization generally understood to be the date on which the contribution was made to the holding company.