Contributing a Business, Lease or IP to a SARL

Contributing a business, a commercial lease or intellectual property to a SARL is not the same operation as paying in cash. The asset must be valued in the articles and paid up in full, the transfer carries publicity and creditor formalities of its own, and it can generate two separate tax charges - registration duty on the contribution and tax on the capital gain it reveals. Both can usually be neutralised, but only by commitments and elections made in the contribution deed itself, not afterwards. This guide covers what each asset class requires, what the duty costs and how to avoid it, and how the capital-gains deferral regimes work when you move an existing business into a company.

Contributing a commercial lease to a SARL

The leasehold right is one of the most valuable things a founder brings into a company, and one of the easiest to lose through a formality. Since October 2016 a contracting party can assign its status as a party to a third party with the other party's agreement, which may be given in advance - the assignment then takes effect against that party when the assignment contract is notified to them or they acknowledge it (C. civ. Art. 1216), and registered post with acknowledgment of receipt suffices.

Commercial leases keep a special rule that displaces the general one. The landlord cannot prohibit the tenant from assigning the lease to the buyer of their business (C. com. Art. L. 145-16) - but where the landlord does not give agreement, the formalities of Article 1690 of the Civil Code must be followed: service of the assignment on the landlord by a judicial officer, or the landlord's acceptance in a notarial act. Some leases stipulate Article 1690 in terms, which again requires a judicial officer or a notary.

The consequence of omitting service is severe and is not curable by conduct alone. The lease is unenforceable against the landlord, who can refuse renewal to the assignee without any indemnity, and can seek termination - leaving the company unable to rely on the commercial-lease protections at all. The courts have upheld assignments despite the absence of service where the landlord's positive acts showed unequivocal acceptance, but knowledge of the assignment is not enough: acceptance must be unambiguous.

Leases also commonly impose an additional condition or a particular form on any assignment, and those clauses must be respected. Restrictive clauses, including approval requirements, are valid so long as they do not amount to a general and absolute prohibition on any assignment. Formal requirements - assignment by notarial act with an enforceable copy delivered to the landlord, for instance, so the landlord holds an immediately enforceable title - must equally be respected, on pain of termination or refusal of renewal without indemnity. Read the lease before valuing it, not after.

Contributing a business (fonds de commerce): publicity, creditors and pre-emption

The contribution deed can be a private or an authenticated act; the mandatory particulars formerly required in it were abolished in 2019. What remains is a sequence of formalities borrowed from the law on sales of a business, and each has a deadline.

Publicity and the creditors' window

Contributing a business to an existing or forming company follows the same publicity formalities as a sale: the contribution is brought to the notice of third parties and creditors by a notice in an authorised legal-announcements medium and in the official bulletin, within fifteen days of the contribution (C. com. Art. L. 141-12). Exceptions apply where the contribution is made to an EURL, or results from a merger, a demerger or a partial asset transfer.

Within ten days of the later of those publications, any unregistered creditor of the contributing shareholder must inform the commercial court registry of the place of the business of their status as a creditor and the sum owed, and receives a receipt (C. com. Art. L. 141-22). Where the contribution is for consideration and treated as a sale, creditors instead follow the price-opposition formalities applying to sales of a business (C. com. Art. L. 141-14) - so the notice must expressly state the ten-day period for opposition at an address elected within the district of the business. On a mixed contribution, remunerated partly in shares and partly by the company assuming liabilities, the notice must cover both procedures, with an election of domicile allowing creditors to oppose and to declare their claims.

Then comes the shareholders' option, which is the part founders most often miss. Unless a shareholder applies, within the fortnight following the expiry of the declaration period, to annul the company or the contribution - and unless annulment is granted - the company becomes jointly liable with the principal debtor for the liabilities so declared, where they are justified. That makes it necessary to obtain the registry statements as soon as the opposition period expires, so the shareholders can take a position on the option the law gives them. In practice the declaration procedure is little used, either because creditors are unaware of it or because they cannot follow the official bulletin - which is a reason to check, not a reason to relax.

One point of substance about liabilities: a clause in the contribution agreement providing that the company takes on all or part of the trade debts does not release the contributor towards their creditors. Only the creditors' express agreement to release the contributor achieves that.

Turnover, records and the tax filings

The contributor and the company's qualified representative - at incorporation, a mandated founder - must endorse a document showing the monthly turnover achieved between the close of the last accounting year and the month preceding the contribution (C. com. Art. L. 141-2). A dossier must be filed on the single-window portal, and two declarations go to the tax service: a cessation declaration within 45 days of the contribution and a result declaration within 60 days (CGI Art. 201). The contributor must also make available to the company, on request and for three years from its entry into enjoyment of the business, all the accounting records kept during the three financial years preceding the contribution.

The municipal pre-emption right

Communes that have created a safeguard perimeter for local commerce and craft hold a pre-emption right over transfers for consideration of businesses, craft businesses and commercial leases within that perimeter (C. urb. Arts. L. 214-1 to L. 214-3) - and the contribution of a business or of a commercial leasehold right to a company is treated as a transfer. The contributor must therefore establish whether a perimeter exists, requesting a certificate that no perimeter has been created or that the premises fall outside it, and annexing it to the articles or the contribution deed. Where a perimeter does exist, a prior declaration is filed with the commune of the place of the business, which has two months to decide. A decision not to pre-empt results either from an express renunciation notified to the contributor, or from the commune's silence for two months from receipt of the declaration. Insert a condition precedent in the contribution agreement that the commune does not exercise the right.

Contributing the business in enjoyment rather than in ownership

A contribution in enjoyment is an alternative worth knowing. Where it bears on a business, an undertaking or real property, the asset is placed at the company's disposal for a determined time and the company may use it for the period agreed. The contributor remains the owner but owes the same warranty as a seller (C. civ. Art. 1843-3). For a founder who wants the company to operate the business without transferring title - and without triggering the transfer taxation that goes with it - this is the structure to examine.

Contributing a trademark or a patent to a SARL

Intellectual property has the simplest formality and the sharpest consequence for missing it. The contribution of a trademark to a company, whether in ownership or in enjoyment, is valid against third parties only after entry on the national trademark register held by the industrial property institute (C. propr. intell. Art. L. 714-7). The same applies to a patent (Art. L. 613-9). The application for entry must be accompanied by a copy or extract of the deed recording the contribution, and proof of payment of the fee.

Until that entry is made, the company's title is fragile against anyone who deals with the contributor. Where the contributed business itself contains a trademark or a patent, the contribution triggers those same specific publicity formalities at the trademark or patent register, in addition to the business-contribution formalities described above.

Know-how that is not patentable falls outside this regime and can be handled differently: it can form a contribution in industry, which gives the contributor shares carrying rights to profits and net assets but builds no capital, and which is examined in SARL share capital and contributions.

Registration duty on contributions in kind, and how to avoid it

Everything turns on a distinction the contribution deed itself must get right. A contribution is pure and simple where it is remunerated by the allocation of shares in the company. It is for consideration where the contributor receives in exchange an equivalent removed from the risks of the business - a sum of money, or the company's assumption of liabilities owed by the contributor - and it is then taxed under the transfer-for-consideration regime that matches the nature of the assets, on the sum paid to the contributor or the liabilities assumed. A mixed contribution is remunerated partly in shares and partly in cash or by an assumption of liabilities.

Pure and simple contributions are, as a rule, registered free of charge (CGI Art. 810). That exemption covers cash contributions to any company; pure and simple contributions of buildings or property rights, a business, goodwill or a leasehold right made to companies not liable to company tax, or between companies both liable to it; and pure and simple contributions of other movable assets to any company. Where contributions on the formation of a company are registered free, the provisions of the incorporation acts and their annexes are registered free too, including the appointment of the executives and the powers granted to complete the formalities (CGI Art. 810 bis).

The exception, and the three-year commitment that defeats it

The case that catches founders moving an existing business into a company is this: a pure and simple contribution made to a company liable to company tax by a person or entity not subject to that tax is treated as a transfer for consideration where it consists of a building or property right, a business, goodwill (commercial or civil), or a right to a lease or a promise of lease over all or part of a building (CGI Art. 809). The escape is an undertaking, given in the deed or the declaration, to keep the shares received for at least three years (CGI Art. 810). Other assets contributed by such persons - cash and other movable property - are in principle exempt anyway.

Where the commitment is given, the exemption covers contributions of buildings or property rights that are included in the contribution of the whole of the fixed assets and are used for the professional activity. Three cases stay outside it and remain subject to transfer duty: contributions of buildings not used for the professional activity, even where included in the whole; contributions of buildings used in the business but made in isolation; and contributions of other assets within the proportional-duty scope where the holding commitment was not given, or was not respected.

The same three-year commitment neutralises the duty on the classic incorporation of a sole trader's business: where an individual contributes to a company the whole of the fixed assets used for a professional activity under the conditions of Article 151 octies, the company's assumption of the liabilities charged on assets of the kind listed above is treated as a transfer for consideration (CGI Art. 809) - unless the contributor undertakes to keep the shares for three years. The conditions of the undertaking, and the consequences of breaking it, are the same.

What the duty costs when it does apply

Contributions for consideration of the intangible elements of a business - goodwill, leasehold right and the like - and of its tangible elements such as equipment and furniture, give rise to registration duty, save for new merchandise. Sales of new merchandise correlative to the transfer of a business are exempt from proportional registration duty where they fall within the scope of VAT, and the transfer of new merchandise accompanying the transfer can, on conditions, be relieved of VAT (CGI Art. 723). More broadly, supplies of goods and services between persons liable to VAT are relieved of it on the transfer for consideration or free of charge, or by way of contribution to a company, of a total or partial universality of assets (CGI Art. 257 bis).

For buildings the rate is fixed: a contribution for consideration of buildings for industrial, commercial, professional or residential use gives rise to transfer duty totalling 5% (CGI Art. 810), and the same 5% applies to a contribution for consideration of shares in property-heavy companies. Buildings used in the business and contributed at the same time as the fixed assets are exempt on the conditions set out above.

On a mixed contribution, the two regimes are applied side by side: the value of the assets remunerated by shares bears the pure-and-simple treatment, and the assets remunerated by a payment or by a consideration removed from the risks of the business bear transfer duty. The parties may allocate the liabilities across the contributed assets in the way most favourable to them - traditionally, charging the liabilities against the receivables and cash contributed, so as to reduce the duty. In practice mixed contributions are rare, because contributing the whole of an encumbered business can qualify for exemption under the holding commitment.

One point on who pays: all the parties appearing in the deed are jointly liable for the registration duties. The drafter of the deed, and a notary in particular, cannot be pursued for duties arising on the formation of the company.

Capital gains on contributions in kind: exemptions and deferrals

Cash contributions have no tax consequence. For income tax, by contrast, sales, contributions and exchanges of assets are transfers for consideration operating a transfer of ownership - and therefore capable of generating taxable capital gains. Which regime applies depends on who contributes and what.

Contributions by a private individual

Where an individual contributes real property to a SARL, the gain follows the rules on private real-estate gains, because the contribution to a company is a transfer for consideration. The gain is determined on the real value of the asset contributed, which equals the value of the shares issued in exchange. Save exemptions, the contributor is taxed at the flat rate of 19% (CGI Art. 200 B), plus social levies on investment income at 17.2%, plus where applicable the tax on taxable gains above €50,000. Withholding at source does not apply; the tax is paid when the gain is realised. Subject to international conventions, gains realised occasionally by non-resident individuals are subject to a compulsory levy, and French-source gains bear a single flat rate of 19% whatever the contributor's tax domicile, together with the social levies.

Holding periods reduce the charge. The gross gain is reduced by an allowance for each year of ownership beyond the fifth, at different rates for the two bases: for income tax, 6% for each year from the sixth to the twenty-first and 4% in the twenty-second year - full exemption after 22 years; for social levies, 1.65% per year from the sixth to the twenty-first, 1.60% in the twenty-second and 9% beyond - full exemption after 30 years.

Where an individual contributes securities, the gain is in principle treated as a transfer for consideration under the regime for gains on securities and corporate rights. Two mechanisms apply depending on control. A contribution of securities to a company liable to company tax that the contributor does not control benefits from a deferral by suspension: the exchange is treated as an intermediate operation, so the year of the exchange it is not taken into account for income tax or social levies - though the gain is not exempted for good, since on a later sale of the securities received the gain or loss is computed from the acquisition price of the securities contributed. A contribution to a company liable to company tax that the contributor does control benefits from a deferral of a different kind: the gain is realised at the time of the exchange, computed and recorded under the rules in force then, but payment of the income tax and social levies is postponed until the deferral ends - typically on a sale of the securities received - and the gain is then taxed at the rate in force at the time of the contribution.

Contributions of professional assets by an individual

Contributing to a company assets recorded on the professional balance sheet or the fixed-asset register of a business taxed under income tax falls under the professional capital-gains regime, which distinguishes short-term from long-term gains. Unless exempt, short-term gains are included in the profits subject to the progressive income-tax scale and bear the social levies on earned income. Long-term gains, where taxable, are taxed at 12.8% plus social levies on investment income at 17.2% - a combined 30%.

The professional regime offers several routes to relief, and they are worth testing before any contribution. The small-enterprise exemption gives total exemption where average turnover excluding tax stays below €250,000 for sales activities or €90,000 for services, and partial exemption up to €350,000 and €126,000 respectively, with the exemption rate computed on the excess (CGI Art. 151 septies); it is reserved to activities carried on professionally, excluding passive holding activities. Exemption by reference to the transfer price applies to a transfer for consideration or free of charge of a sole trader's business or a complete branch of activity: total exemption where the value of the assets transferred is up to €500,000, partial exemption between €500,000 and €1,000,000, with the rate computed as the difference from €1,000,000 divided by €500,000 (CGI Art. 238 quindecies) - real property and property rights are excluded, save shares in a property-heavy company in which the shareholder carries on their activity. And for buildings other than building land and investment property, a holding-period allowance reduces long-term gains by 10% for each year of ownership completed beyond the fifth, giving definitive exemption after 15 full years (CGI Art. 151 septies B). In each case the long-term gains exempted from income tax are not subject to the social levies on investment income.

Contributing a whole business or branch: the deferral regime

Sole traders contributing their activity to a company taxed under a real regime - income tax or company tax - can, on conditions, benefit from a deferral regime (CGI Art. 151 octies). The contributors must be individuals carrying on an industrial, commercial, craft, professional or agricultural activity in their own name, whatever their tax regime, and the contribution can be made to any type of company. It must bear either on a sole trader's business - an autonomous economic unit, managed and held by one or more individuals who have not formed a company between them, grouping means of operation and its own clientele, with a tax balance sheet recording the assets and liabilities devoted to the activity - or on a complete branch of activity. Buildings recorded on the balance sheet or forming part of the branch may be left out of the contribution where they are made available to the recipient company under a contract of at least nine years.

The mechanics run as follows. Because the contribution is analysed as a transfer, the contributed business is immediately taxed on the results of the period closed by the contribution, and the provisions on its last balance sheet are written back into its result only if they have become purposeless - the recipient company recording on its own balance sheet the provisions whose taxation is suspended. Profits generated on the contribution of stock are not taxed in the contributor's name where the recipient company records the stock at its book value in the sole trader's last balance sheet; the profits are then taxed at company level when the stock is sold.

Gains on non-depreciable assets are computed under the rules in force at the time of the contribution, but their taxation is deferred until the event ending the deferral - for both short-term and long-term gains - and the tax is assessed in the contributor's name. Gains on depreciable assets are taxed instead in the name of the recipient company, under the rules applying to mergers, on the total net long-term and short-term gains. The contributor may nonetheless elect for immediate taxation of the overall net long-term gain on depreciable assets, taxed at the long-term rate applicable to income-tax businesses; that election does not extend to gains on non-depreciable assets or to short-term gains on depreciable ones.

Where no such election is made, the company reintegrates the gains over a fixed schedule: 15 years for buildings and related rights - or the weighted average depreciation period of the buildings where the net gain on buildings exceeds 90% of the overall gain on depreciable assets - and 5 years in all other situations. The company may reintegrate all or part of the gains early, in which case it computes its depreciation and any later gains on the contributed depreciable assets by reference to their contribution value; and selling a contributed asset triggers taxation of the portion of the contribution gain not yet reintegrated.

The regime carries reporting duties that are easy to overlook and expensive to breach. The recipient company must file a tracking statement of the depreciable and non-depreciable assets contributed, and keep a register of the gains on non-depreciable assets (CGI Art. 54 septies). Failure to file the statement, or filing an incomplete one, is penalised by a fine of 5% of the omitted results - and the same applies to the register (CGI Art. 1763).

Two neighbouring regimes complete the picture. The contribution to a company of securities recorded as assets of a sole trader's business, covering the whole of the rights or shares recorded and necessary to the activity, defers the gain arising from the exchange until the sale, redemption or cancellation of the securities received or contributed (CGI Art. 151 octies B). The same deferral applies to the contribution of corporate rights necessary to the activity, where the whole of the rights having the character of professional assets is contributed (CGI Art. 151 nonies).

Frequently asked questions about contributing a business or lease to a SARL

This article states general principles of French law as at its date of publication and is provided for information only. It does not constitute legal or tax advice and creates no lawyer-client relationship. Figures, rates and thresholds evolve; verify them against the texts in force before acting, and take advice on your specific situation.