With a case referred to it by the Montpellier Administrative Court for an opinion, the French Administrative Supreme Court ruled for the first time on the issue of whether a refusal by some employees to be transferred with the sale of a complete line of business is an obstacle to obtaining the exemption for professional capital gains provided in Article 238 quindecies of the French Tax Code.

Although this opinion involves only Article 238 quindecies of the French Tax Code, its scope is much broader because the details provided should be applicable to other preferential regimes, such as the one provided in Article 210 B of the French Tax Code.

In the case, a company had sold its oenological products business to another company. However, finding that only two of the seller company’s four employees--the secretary and the stock controller, but not the two sales representatives--had been transferred to the buyer, the tax authorities had refused to allow the seller to apply the regime for exempting business capital gains, provided in Article 238 quindecies of the French Tax Code, on the ground that the sale had not involved a complete line of business.

The Court first of all pointed out that, given the legislature’s purpose, the exemption for business capital gains realised from the sale of a complete line of business is specifically subject to the effective transfer of staff who are necessary—taking into account the nature of the activity and the specific roles assigned to it—for continuing the activity’s autonomous operation. The Court then ruled that, in principle, the automatic transfer of current employment agreements, on the terms provided for in Article L. 1224-1 of the French Labor Code, is an effective transfer of staff.

This being said, the French Administrative Supreme Court does not require that all the current employment agreements be systematically transferred to the buyer since the Court nevertheless found that, if some staff members who are necessary for continuing operations refuse to be transferred, an assessment must be made on a case-by-case basis of whether their refusal is an obstacle to having the transfer of the activity’s essential elements regarded as complete.

Given these clarifications, it is likely that, in the case at hand, the lower court will rule that the transfer of two employees assigned to administrative functions (excluding sales representatives) is insufficient to reach a finding that the line of business sold was a complete line of business.

More generally, this opinion leaves unanswered the issue of dismissals of employees prior to the sale or the criteria possibly to be taken into consideration by lower courts in order to assess whether employees are necessary for continuing the activity or whether a line of business is complete when involving a refusal by some employees to be transferred. In order to provide legal certainty for companies, it would be preferable to refer to objective criteria that may be easily verified by third parties, such as the relative proportion of employment agreements that are not transferred, keeping sales at the same level after the transaction or whether or not jobs may be substituted given the job market situation.