A ministerial response clarified that a capital reduction through the cancellation of the securities received in consideration for a contribution triggers the expiration of the tax deferral, as opposed to a capital reduction through a decrease in the nominal value of the shares.
In more detail
As a reminder, Article 150-0 B ter of the French Tax Code (FTC) allows individuals, under certain conditions, to benefit from a tax deferral on the capital gains realized upon contribution of shares to a company subject to corporate income tax which they control. Various events may terminate the tax deferral, in particular, the sale, redemption, reimbursement or cancellation of the securities received in consideration for the contribution.1
The Minister of the Economy was asked to rule on the status of the tax deferral in the case of a capital reduction by cancellation of shares motivated by losses, notably when a capital reduction through a decrease of the nominal value of the shares is not feasible.
The Government replies that, based on a literal application of Article 150-0 B ter of the FTC, the cancellation of the shares received in consideration for the contribution entails, in any case, the expiration of the tax deferral, even if it is motivated by losses and does not lead to any repayment.
The ministerial response quotes a ruling published in December 2022, in which the tax authorities confirmed that "in the absence of repayment to the shareholders, the reduction of the holding company's capital, motivated by losses, through a decrease of the nominal value of its shares, does not terminate the tax deferral of the capital gain from the contribution of shares".2
The ministerial response clarifies that the different treatment between the two operations is justified by the fact that, in the case of a capital reduction through the decrease of the nominal value of the shares, the number of shares remains unchanged both for the company and for the shareholder owning them, whereas, in the case of a capital reduction through the cancellation of shares, the latter are removed from the taxpayer's assets. Therefore, the absence of repayment in the case of cancellation of shares due to losses would not be sufficient to maintain the tax deferral, contrary to what might have been assumed with the ruling.
This unfavorable response must be taken into account when capital reduction operations are decided and, in general, taxpayers who have benefited from a tax deferral must be particularly careful with regard to the tax consequences of restructuring transactions involving shares received or contributed.