Holding Companies in France (SCP)

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A holding company is a privileged tool for a good patrimony management and an excellent vehicle fror securities transmission.

Holding companies are associations, normally created among relatives, whose sole purpose is the management of a securities portfolio. A holding company is known in France as “Societé Civile de Portefeuille” or SPC, and they are often established to ease the process of transfer of securities after the decease of a direct relative in an inheritance process. They can also be transmitted by means of donations.

Both holding companies and real estate companies are created according to the French civil law. However, holding companies are less widespread in France than real estate companies, although they are not of no lesser interest. Instead of real estate, their activity mainly involves managing a large portfolio of securities via a legal entity that can be subject to two types of taxation, and it depends on the volume of revenues derived from the securities and the decision of the members to choose either one. Holding companies are thus known as “transparent” if they are subject to the income tax (IR in French), or “opaque” if they are subject to corporate taxes (IS in French).

Holding companies subject to an income tax (IR)

When a holding company is subject to an income tax, the associates are taxable in accordance to the different revenues derived from their corresponding shareholdings. Therefore, the capital gains are taxable from the moment that any money is generated, and the dividends are taxable with the benefit of the 40 % allowance according to a progressive scale or the flat-rate lump-sum deduction.

When the shares are dismembered, the “usufructuary” (life tenant, who is normally the deceased’s spouse) is entitled to the dividends (fruits) and the owners of the freehold (the descendants, normally the children, of the deceased), to the sums set aside (products). Capital gains may be allocated to the owners of the freehold or the usufructuary on the basis of the property sold.

These rules may of course be subject to conventional derogations between the parties.

Holding companies subject to a corporation tax (IS)

In some rare cases, the holding company opts for the corporation tax instead. The company is then known as "opaque" instead of transparent, as in the previous case. In this case, taxation occurs at company level and not at the individual level of each associate.

This option is advantageous only for securities that generate a great amount of benefits, and which are generally heavily taxed, so in the case of a company composed of associates who do not have the need to perceive any funds held by the holding company. The corporate tax is the same for any type of company in France (33.33%)

However, all the associates should be aware that, the outflow of funds is very penalizing and they will quite possible be subject to a double tax (IS + IR + social security).

Advantages of a Holding Company

  • Preparing the transfer of the patrimony while retaining the revenues: the holding company allows the owner of the securities to start transmitting his patrimony to his heirs while he’s still alive at a lower tax rate (allowance for the value of the life interest trust (or usufruit), an allowance of € 100,000 per parent and per child). The founders reserve for themselves the right to collect every revenue.
  • Ensure continuity in the management of the patrimony and prevent the heirs from dilapidating too quickly their part of heritage: as the founder, the owner retains full powers of management and disposition on the property attributed to the company (which, in turn, is subject to an appropriate drafting of the statutes of a company in compliance with the French civil code).
  • Anticipating the disadvantages of joint possession: the transmission of real estate directly creates a joint possession between the heirs with two major drawbacks, namely the unanimous decisionmaking for any action concerning it and the possibility of each coindividual to leave the joint possession by forcing its sale. With a holding society, each one of the heirs receives clearly differentiated shares of the society that do not enter the field of family joint possession. Normally the remaining associates buy the share should a member wish to leave, but a third party can also purchase it. In any case, the society isn’t dissolved because an associate leaves.
  • Eliminate unwanted people: the insertion of approval and preemption clauses makes it possible to control the entry of new undesirable associates (associates' spouses and heirs, etc.).
  • Organise the management of the patrimony after death: as the founder, the owner retains full powers of management over the patrimony. A substitute manager may be appointed to manage the company in the event of incapacity of the founder or following his death. Said substitute manager is normally the “usufructuary” and should be cautious when redacting the company statutes so as to grant themselves the right to plural vote, as the children can decide to sell the actives in the securities portfolio, which results in a fund outflow which makes the usufructuary liable in terms of taxation. The decisions concerning the company will be made by the designed person. The tutelary judge is excluded from the management and the free disposal of the properties attributed to the holding company.