Dividend payment or share repurchase: the choice is yours!

October 16th 2015

In a decision dated June 20, 2014 (QPC no.2014-404), the Conseil Constitutionnel challenged the taxation scheme applicable to the repurchase by a company of its own shares. Until then, such repurchases were generally treated as dividend payments, which led not to take taxation into consideration when choosing between these two methods of distribution of a company’s profits.

However, the Conseil Constitutionnel, then the lawmaker, in article 88 of the Supplementary Budget Act for 2014, relinquished this principle by subjecting the repurchase by a company of its own shares exclusively to the taxation applicable to capital gains on transfers, as from January 1st, 2015.

Such a change concerns individuals as well as companies.

For instance, for an individual shareholder subject to income tax, while dividend payment makes him eligible for a 40% exemption without consideration of holding period, share repurchase will make him eligible, under certain conditions, for a 50%, 65% or 85% exemption according to share holding period and other criteria, such as the owner’s retirement or the date of acquisition of the shares with respect to the company’s set-up date (called “régime des pigeons”).

In the same way, for a company shareholder subject to corporate tax, dividend payment will generally be more favourable than share repurchase:

  • In a parent company - subsidiary scheme (which requires a shareholding of at least 5%), only a fraction of costs and expenses of 5% is subject to corporate tax while for long-term capital gains on sale of equity, the fraction of costs and expenses is of 12%.
  • Concerning equity of companies investing predominantly in real estate, dividend payment will be subject to parent company - subsidiary scheme while share repurchase will be excluded from the exemption on long-term capital gains on sale of equity and will consequently be subject, in total, to corporate tax.

However, it should be noted that the repurchase by a company of its own shares may present the interest, for a company shareholder subject to corporate tax, of being able to elude the 3% contribution on distributed gains.

Finally, the option between dividend payment and share repurchase may also be of interest for non-profit organisations, such as associations, foundations and endowment funds, which are subject to corporate tax at a reduced rate on their incomes, especially, dividends, excluding capital gains on sales of equity.

You probably already understood that the introduction of such taxation differentiation between dividend payment and share repurchase must raise the question for each profit distribution. But you should also be aware that the substitution of the classical dividend payment by the mechanism of share repurchase may sometimes be considered as an abuse of right.

Edouard Rabatel