“Dutreil” act: the heir is not bound to continue primarily business operation

October 9th 2015

In a decision dated September 8, 2015, the Court of Appeal of Grenoble ruled that the partial exemption of estate tax in a “Dutreil” covenant concerning an individual business is not subject to the condition that the heir continues its main activity.

Articles 789 B and 787 C of the French Tax Code provide, under certain conditions, for an exemption up to 75% of the estate tax value on assets dedicated to the operation of an individual business.

Amongst these conditions, one of the heirs has to effectively continue business operation for the three years that follow the date of transfer (1).

According to the administrative doctrine, this condition implied that the heir carried out his activities habitually and primarily in the business (2).

In a decision dated September 8, 2015 (3), the Court of Appeal of Grenoble ruled that the partial exemption of estate tax in a “Dutreil” covenant concerning an individual business is not subject to the condition that the heir continues its main activity.

In that matter, on his mother’s decease then his sister’s, the heir had continued the operation of a winegrowing business which he had inherited. The Tax Administration had however rejected the exemption on the ground that, considering his practice as a notary and geographical distance, the heir did not effectively operate the business.

The Court of Appeal challenged the Administration’s position and, on the contrary, ruled that the conditions required for the application of the partial exemption of the estate tax were fulfilled, adding that the legislation did not require the business’s main activity to be the owner’s main activity.

The Court of Appeal of Grenoble also confirmed the position of Pau Court of Appeal, which had ruled, in a decision dated January 10, 2013 (4), that the Tax Administration’s interpretation could not be sustained “unless making a confusion between the continuation of business and the exercise, within this business, of a professional activity and considering, ultra legem, that article 787 C-c imposes that the heir exercises himself the activity of the inherited business, whereas the continuation of business may very well be understood in terms of administrative an commercial management ensuring the continuation of the production activity”.

Claire Lachaux

(1) Article 787 C c of the French Tax Code.
(2) BOI-ENR-DMTG-10-20-40-40 no.90.
(3) Court of Appeal of Grenoble, September 8, 2015, no.13-00609.
(4) Court of Appeal of Pau, January 10, 2013, no.11/03410.