French Family Wineries Need to Prepare Well for Inheritance Tax

When a wine estate operator dies in France, average inheritance tax now amounts to more than five years’ worth of a winery’s pure profit.

French inheritance taxes have a strong political background, as their origin goes back to the French Revolution. They’re also considered to encourage a form of wealth redistribution, as they’re part of the resources used by the state to finance the French social welfare system.

The following rules explain why French gift and inheritance taxes can reach expensive levels:

• Inheritance transmissions between spouses are exempt from inheritance taxes (gifts are taxable).
• Gifts between spouses and transmissions in direct line are subject to a progressive tax rate, where the highest rate of 45% applies on the net taxable transmission exceeding 1,805,677 euros ($2 million);
• Transmissions between siblings will almost directly hit a rate of 45%.
• Cousins pay a flat 55% rate.
• Transmissions to relatives above the fourth degree and to unrelated beneficiaries are liable to a 60% rate.

The Winemakers’ Dilemma

The transmission problem for winemakers’ families grows as the value of their businesses increases.

The market value of French wineries has dramatically increased over the last 20 years—especially but not only in the Bordeaux and Burgundy regions—thanks to a continuous increase in wine quality and fast-growing demand worldwide. This is how high-end wineries can reach a value exceeding, sometimes greatly, 20 million to 40 million euros.

Inheritance transmission between spouses may be exempt, but the transmission to the next generation can be expensive and, if not prepared efficiently, can lead to a sale of the business to pay taxes.

Consider a brief example: Jean Robert is a renowned French winemaker. His wine estate is worth 40 million euros. He has four children. If he hasn’t planned the transmission of his estate, each of his children will have to pay inheritance taxes amounting to 4.262 million euros. The total inheritance cost for all the children would be around 17 million euros.

Possible Solutions

As in most complex tax regimes around the world, the French inheritance tax provides for a number of checks and balances. High rates are balanced by measures designed to encourage the transmission of family-owned businesses. All these measures require some prior planning.

The following are two of the main transmission incentives that French law provides.

Collective holding commitment—usually called “Pacte Dutreil.” The tax benefits are an exemption from gift/inheritance taxes of 75% of the market value of the transferred business.

The exemption regime applies to operational companies engaged in a commercial, industrial, artisanal, or agricultural activity. Wineries can benefit from the exemption.

A shareholder or a group of shareholders representing at least 34% of the financial and voting rights should make a collective holding commitment of at least two years (in some circumstances, this requirement is deemed satisfied), and the heirs or beneficiaries of a gift must make an individual holding commitment of four years. At least one of the beneficiaries should take on a management position within the company.

Donation with a reserved lifetime usufruct. Under this construction, a person could make a gift and retain the right to use the property, to operate it, and to receive the corresponding income.

French tax law stipulates that in this case, the value of the gift is reduced by a rebate, for which the ratio depends on the age of the donor at the time of the gift. For example, a gift with retained usufruct made by a person between 51 to 60 years old would benefit from a 50% exemption.

It is worth keeping in mind that these exemption rules can be combined. If winemaker Robert, in our example above, considers a transmission of the winery to the next generation while he’s in his mid-50s, he could set a collective holding commitment allowing an exemption of 75% of the winery’s value, leading to a net taxable value of 10 million euros (instead of 40 million euros).

Robert may then also consider making a gift to his children, with a retained lifetime usufruct, and he’d obtain a rebate of 50% (because of his age) for gift tax purposes. This would lead to a net taxable basis of 5 million euros overall and 1.25 million euros for each child, leading to a gift tax of 352,700 euros per child—a total tax burden of 1.41 million euros.

This means that the net tax cost in this case would represent 3.52% of the business value. This level of taxes can often be financed without selling the winery.

Setting up a collective holding commitment and a gift with reserved usufruct requires careful planning, as the tax benefits go along with a number of conditions to be considered, but the benefits make it worthwhile.

Remaining Challenges

Under French inheritance law, each child is entitled to a reserved share so that, in cases where the operational business represents the main family asset, this business couldn’t be transferred to one single child, but only to all of them, leading to joint ownership of the company.

This aspect must also be considered to try to avoid a situation where the joint ownership of the company by the children leads to a blockage of the business’s management—and ultimately to its sale.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Dimitar Hadjiveltchev is a partner with CMS France.

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