How to own shares in a start-up?

After interviewing a number of Galion founders, we realized that this was not an easy choice. In fact, about half had opted to keep all their shares directly, while the other half had stored all or part of them in a personal holding company.

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In short, it was an opportunity to take stock of an issue that can have a significant impact on taxation when selling their shares, which every entrepreneur is necessarily (a little) sensitive to.

Like everything related to taxation, this requires a numerical vision that is all the more precise as the regulatory framework tends to change (too) often. To ensure that we had the right parameters in hand, we relied on the expertise of the wealth engineering team at Edmond de Rothschild (France), which monitors the evolution of tax administration regulations and doctrine on a daily basis. We thank them for their support on this study.

Throughout the document, we assumed that the entrepreneur is a French tax resident.

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1. TAXATION ON SHARES IN THEIR OWN NAME

Before looking at the case of holdings, let's recall the taxation in case of holding shares in their own name, which — despite a certain complexity — remains the simplest case.

Since 2018, a 30% Flat Tax regime has applied to all capital income. This of course includes capital gains but also dividends or interest on bonds.

This rate of 30% is broken down as follows:

— 12.8% for income tax

— 17.2% for social security contributions

It should be noted that the CEHR or “exceptional contribution on high incomes” of 4% over €500K or €1M (depending on whether you are single or in a relationship), established by the Sarkozy government, has been maintained as it is. We can assume that it is permanently embedded in the tax landscape.

For Galion entrepreneurs who hope for added value in millions of euros, the expected taxation will thus be 34% in total.

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i. An exemption regime for growing SMEs.

Despite the establishment of this Flat Tax, there remains, at the express request of the taxpayer and for titles acquired before 2018, a previous derogatory regime.

As a reminder, the principle of taxation introduced in 2012 by the previous legislature was based on a taxation of capital on the same basis as income from work. It was the fight led by the pigeon movement that allowed the establishment of allowances for the duration of detention.

The use of this method of taxation can make it possible to reduce the overall taxation of capital gain to 27.49% (with the application of the deductible CSG).

The definition of this regime is very broad and easily allows all Galion entrepreneurs to qualify for it. To do this, at the time of the acquisition, prior to 2018, of the shares by the founder, the company must meet the following criteria:

— be less than 10 years old in the event of an acquisition or subscription,

— or be an ex-nihilo creation and not a restructuring or takeover of existing business

— have fewer than 250 employees and a balance sheet total of less than €50M or a turnover of less than €43M

Of course, for the creator of a business, these conditions are by definition respected.

In addition, throughout the life of society, it is necessary that society:

— does not grant any capital guarantees to shareholders in return for their subscriptions

— that it has its headquarters in the European Union

— that it carries out a real commercial activity

Looking back on this mechanism, it is important to trace the history of transactions on the company's capital to ensure continuity in eligibility for the regime.

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ii. An allowance for the duration of ownership of shares

By combining the derogatory regime and 8 years of detention (and it is clear that the greatest successes of French Tech have practically all taken more than 8 years to reach maturity!) , we benefit from a fairly spectacular reduction of 85%. However, this deduction only applies to income tax and not to social security contributions and exceptional contributions, which in all cases apply to the entire tax base. Moreover, it is a fairly general trend for social security contributions to be excluded from the numerous tax niches that wealth advisers enjoy.

In the end, after 8 years of detention, we thus manage to an all-inclusive marginal rate of 27.95%. We can see that we are very far from the initial 64.5%. For comparison, in California, a paradise for entrepreneurs, the taxation on founding shares is 37%.

Finally, to be complete, it should be mentioned that the tax administration in its great wisdom has added a small additional carrot by making it possible to deduct 6.8% of the CSG applied to the share of capital gains actually taxed at income tax (i.e. 6.8% x (1-85%) x Capital gains).

Let's take an example on a sale with a nice capital gain of €20 million.

For the sake of simplicity, we will pretend that all the capital gain was taxed at the marginal rate, knowing that in reality we are scratching off additional allowances linked to the progressiveness of income tax.

After an 85% reduction, there is still 15% to which the marginal portion of 45% of income tax applies, i.e. an effective rate of 6.75%.

At the same time, on 100% of the capital gain, we have 17.2% social security contributions and 4% in exceptional contributions (again, we only take the marginal portion for the sake of simplification, but in reality this contribution is gradual).

We therefore end up with a total taxation of €5.59M, or our 27.95% above.

The following year, the transferor can deduct 6.8% or 204,000 euros (6.8% x 15% x €20 million) euros from his taxable income. Assuming that our taxpayer-entrepreneur is still in a marginal income tax bracket (which is often the case especially if we remain working for the purchaser and we had the presence of mind to negotiate a good salary, or even a good earn-out), he therefore saves: 45% in taxes or 91,800€.

This therefore reduces its total taxation to €5.498 million, i.e. a real rate of 27.49% (slightly overvalued due to the progressiveness mentioned above). This recourse therefore makes it possible to benefit from a more favourable regime than the new Flat Tax which would have cost €6.775 million in our example.

Finally, it should be noted that the option for taxing capital gain on the progressive income tax scale (with the benefit of the deduction for holding period) is global for a tax year and concerns all financial income and all financial capital gains and dividends for the tax year.

It is common for a company not to be created by a single founder but several. If, at the time of the constitution or acquisition of shares, a founder owns less than 25% of the capital, he can register his shares in an Equity Savings Plan.

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iii. The Savings Plan in Shares

The PEA is a regulated banking envelope which makes it possible to house the titles of companies that have their head office in the European Union or in the European Economic Area and which are subject to corporate tax. It is possible to register unlisted shares provided that the founder and his family group (spouse, the partner to whom he is linked by a civil solidarity pact or their ascendants or descendants) do not hold more than 25% of the capital.

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