New Benefits and Limitations of the Contribution-in-Kind: Clarification on the Nature of Economic Reinvestment Conditions

Initially, eligible assets used to meet the 50% reinvestment threshold in economic activities within two years of the sale—in order to maintain the tax deferral regime—had to fall into one of the following categories:

The 2016 Amended Budget Act (Section 33) made minor adjustments to the types of reinvestments that qualify.

First, the amended budget law usefully removed a partially inconsistent reference that appeared in the initial version of Article 150-0 B ter of the General Tax Code regarding cash subscriptions to corporate capital, which could have suggested that the requirement for the company in which the reinvestment is made to engage in an “operational” activity was required of the company in which the reinvestment is made for a continuous period of five years prior to the sale. However, since this amendment applies only to sales made on or after January 1, 2017, the question arises as to whether the tax authorities will require, for dispositions prior to that date, that the company in which the investment is made have been in operation for five years and will seek to challenge any subscription to the capital of new companies in connection with such transactions.

Second, the Amended Finance Act incorporated into the text of Article 150-0 B ter of the General Tax Code a clarification found in administrative doctrine (BOI-RPPM-PVBMI-30-10-60-20160304, No. 305) regarding the direct financing of an operational activity, according to which the reinvestment must relate to the financing of permanent operating assets allocated to the activity. This naturally excludes real estate classified as assets but not allocated to an economic activity, but could also exclude the financing of simple inventory, for example, in the context of a real estate investment business.

Finally, the amended budget law has partially harmonized the types of companies in which reinvestment may take place by restricting the acquisition of a controlling interest to companies whose registered office is located in a European Union member state, Iceland, Liechtenstein, or Norway, in line with the conditions initially established for reinvestment in the form of a cash capital subscription. Nevertheless, a discrepancy remains with regard to the direct financing of a business, which remains possible regardless of the location of that business. Furthermore, a fundamental difference persists between the scenario of a reinvestment in the form of acquiring a stake conferring control over a company and that of a simple cash subscription to capital, insofar as the latter remains possible in a simple holding company. Furthermore, these new provisions have not introduced any specific restrictions or clarifications regarding the size of the companies in which the reinvestment is made, their legal form, whether their securities are traded on a financial market, or the development of these companies following the reinvestment.

Any additional proceeds received by the holding company from the sale of securities contributed to it are also subject to specific provisions. Henceforth, by analogy, the additional proceeds must be reinvested within two years from the date they are received—and only to ensure that the tax deferral remains in effect—counting from the date of the sale itself.