Passing On a Family Business in France: The Pacte Dutreil

What the Pacte Dutreil is: the 75% exemption

The Pacte Dutreil is the main French tax relief for passing a family business to the next generation. Where its conditions are met, only one quarter of the value of the business is subject to gift or inheritance duty: the transferred shares or business assets "are exempt from transfer duty free of charge, up to 75% of their value" (Article 787 B of the General Tax Code, for company shares). The other three quarters escape the tax entirely. That is the whole point of the scheme, and it is what allows a company or a trading business to change hands within a family without a tax bill large enough to force a sale.

The relief takes two parallel forms, depending on how the business is held. For a business run through a company, the exemption applies to the parts or shares (parts ou actions) transmitted, on the conditions of Article 787 B. For a business run in the owner's own name — a sole proprietorship (entreprise individuelle) — the exemption applies to "the movable and immovable, tangible and intangible property used in the operation of an individual business" on the conditions of Article 787 C. In both cases the figure is the same three quarters of the value, and in both cases the relief flows from a set of holding undertakings designed to keep the business in the family and under family management for a defined period.

It is important to be clear about what the 75% is a discount on. The exemption reduces the taxable base — the value on which duty is charged — not the duty itself. You value the business, remove three quarters of that value, and the remaining quarter then passes through the ordinary machinery of gift and inheritance tax: the personal allowance for the relationship (for a gift from parent to child, an allowance of €100,000 per parent per child), and then the progressive scale of duty. Only after all of that, and only for a lifetime gift in full ownership by a donor under 70, does a second and separate advantage apply — a 50% reduction of the duty finally due (Article 790). The two reliefs stack, and together they can bring the effective cost of passing a substantial business close to zero.

The Pacte Dutreil is not confined to any particular size or sector. It covers commercial, industrial, craft, agricultural and professional (libéral) businesses, whether carried on directly or through a company, and it extends to the shares of an animating holding company (holding animatrice) that actively directs the policy of its group and controls its subsidiaries — such a company is treated as an operating company for these purposes (Conseil d'État, 13 June 2018, no. 395495). What it does not cover is a passive holding of assets: a company whose real activity is managing its own portfolio of investments or its own property, rather than trading, falls outside the scheme, and a non-animating holding is excluded. The dividing line — is the company genuinely operating, or is it in substance a private investment vehicle? — is where a great deal of the litigation sits, and it is assessed on a bundle of indicators such as turnover and the make-up of the assets (Cour de cassation, com., 14 October 2020, no. 18-17955).

The conditions: the collective and individual undertakings

The 75% exemption is not automatic. For company shares it rests on three interlocking conditions: a collective undertaking to keep the shares, an individual undertaking taken by each person who receives them, and a management condition that requires the business to be run by someone inside the pact. Understanding these three is the whole of the Dutreil discipline, because a failure on any of them can cost the relief.

The collective undertaking (engagement collectif de conservation)

The first condition is a collective undertaking to retain the shares (engagement collectif de conservation). At the date of the transfer there must be in force an undertaking, of a minimum duration of two years, by which the owner and at least one other shareholder commit to keep a block of the company's shares. The undertaking must cover a minimum holding: for an unlisted company it must bear on at least 17% of the financial rights and 34% of the voting rights; for a listed company, at least 10% of the financial rights and 20% of the voting rights (Article 787 B, b). Since 1 January 2019 a single shareholder who meets the thresholds can even sign the undertaking alone, as a unilateral undertaking (engagement unilatéral), which opens the scheme to one-person companies.

The undertaking must be recorded in a deed and, if it is a private deed, registered to be enforceable against the tax authority; registration attracts a fixed duty of €125 (Articles 658 and 680 of the General Tax Code). The two-year clock runs from the registration of the deed, or from the date of the deed if it is a notarial (authentic) act. The undertaking should in principle be in force on the day of the transfer — which is why families who plan ahead sign the collective undertaking well before any gift. Where nothing has been signed, two rescue mechanisms exist: the undertaking can be "reputed acquired" (engagement réputé acquis) where the owner has held the qualifying threshold for at least two years and has run the company or held a management post throughout (Article 787 B, b); and, on a death, the heirs can conclude a collective undertaking between themselves within six months of the death (engagement post mortem, Article 787 B, a). Neither is a substitute for planning: both are read strictly, and the reputed-acquired route in particular has its own conditions on who may run the company afterwards.

The individual undertaking (engagement individuel de conservation)

The second condition falls on the people who receive the shares. In the deed of gift or the declaration of succession, each heir, legatee or donee who wants the exemption must give an individual undertaking (engagement individuel de conservation) to keep the shares transmitted to them for four years, running from the end of the collective undertaking. This is a strict, form-bound requirement. The individual undertaking must be given in the deed itself and cannot be added afterwards: the Cour de cassation has held that an undertaking not contained in the original act is fatal to the relief (Cass. com., 16 April 2013, no. 12-17432). During those four years the recipient cannot in principle sell or give away the shares — with narrow exceptions, chiefly a gift down the direct line to their own children or an approved contribution to a family holding company. Add the two-year collective period to the four-year individual period and a family is looking at a holding discipline that can run to six years, and often longer where the collective undertaking is renewed.

The management condition (fonction de direction)

The third condition is that the business must actually be run by a member of the pact. One of the signatories to the collective undertaking, or — from the transfer onward — one of the people who received the shares, must exercise a management function (fonction de direction) throughout the collective undertaking and for the three years that follow the transfer (Article 787 B, d). For a company subject to corporation tax, the relevant post is one of the management functions that qualify for the professional-asset exemption from the wealth tax on real estate (Article 975, III of the General Tax Code); for a partnership taxed in the partners' hands, the condition is the exercise of one's principal professional activity in the business. The same person need not hold the post throughout — the role can pass from a signatory of the collective undertaking to one of the recipients — but the chain must not break: a vacancy of no more than three months is tolerated, and the death of the director is treated as force majeure only where no one bound by the undertakings is in a position to take over. The message for the family is plain: the Pacte Dutreil is a relief for a business you keep running, not one you sell.

The extra 50% reduction where the donor is under 70

The Pacte Dutreil carries a second, separate advantage that applies only to lifetime gifts and only from a younger donor. Where a business covered by a Pacte Dutreil is given in full ownership by a donor aged under 70, the transfer duty that remains due after the 75% exemption is itself reduced by 50% (Article 790 of the General Tax Code). This is a reduction of the duty, not a further cut to the taxable base, and it comes on top of the exemption rather than instead of it. In combination the two reliefs are powerful: three quarters of the value is removed, the personal allowance applies to the remaining quarter, and the duty on what is left is then halved.

Two conditions govern this second relief, and both matter. First, the gift must be in full ownership (pleine propriété). The 50% reduction does not apply where the owner keeps the usufruct and gives away only the bare ownership — a very common way of structuring a family gift, because it lets the parents keep the income and control for life. Families therefore face a genuine trade-off: a full-ownership gift unlocks the 50% duty reduction but hands over the whole asset now; a bare-ownership gift keeps the parents in place but forgoes the reduction, relying on the 75% exemption alone (which is available for gifts with reserved usufruct as well as for full-ownership gifts and transfers on death). Second, the donor must be under 70 at the date of the gift. The relief is deliberately structured to reward passing the business on earlier rather than later, and the seventieth birthday is a hard cut-off. Only gifts of company shares within Article 787 B, or of the whole (or an undivided share) of a sole proprietorship within Article 787 C, qualify for this reduction — it tracks the Dutreil scheme exactly (Article 790).

The practical lesson is one of timing. A parent who intends to hand over the family company should, wherever the family circumstances allow, do so by a full-ownership gift before turning 70, because doing so can halve a duty bill that is already reduced to a quarter of the business's value. Waiting until 70, or structuring the gift as bare ownership only, throws that advantage away. The interaction with the retained-usufruct route, and with the personal allowances that renew every fifteen years, is exactly the sort of question that should be modelled before the deed is signed, not after.

Company shares versus a sole proprietorship

The Pacte Dutreil applies to both a business held through a company and a business run in the owner's own name, but the mechanics differ, and the difference decides which article you are working under. Company shares fall under Article 787 B and the collective-and-individual undertaking machinery described above. A sole proprietorship falls under Article 787 C, which reaches the same 75% result by a lighter route because there are no shares and no other shareholders to sign a collective undertaking with.

For a sole proprietorship, the exemption covers the whole, or an undivided share, of the tangible and intangible assets used in the business — the goodwill, the equipment, the stock, the business premises — where three conditions are met (Article 787 C). First, the business must have been operated by the person making the gift or leaving the estate; where the business was acquired for value it must have been held for at least two years, although no minimum period applies where it was created or received by gift or inheritance. Second, each heir or donee must undertake, in the declaration of succession or the deed of gift, to keep all of the business assets for four years from the transfer. Third, one of the heirs or donees must actually continue to operate the business (poursuivre effectivement l'exploitation) for the three years that follow. There is no two-year collective undertaking to worry about, because a sole trader has no co-owners; the four-year holding period simply runs from the transfer itself.

The courts have read the "continue to operate" condition with a degree of flexibility that owners should understand. The Cour de cassation has accepted that a business need not still be run by the deceased at the moment of death — the relief was allowed where the individual trader had retired and the business had been taken over by his spouse (Cass. com., 10 September 2013, no. 12-21140) — and, in the furnished-lettings context, that entrusting the management of the activity to a company did not by itself defeat the exemption (Cass. com., 21 June 2023, no. 21-18226). "Continuing the operation" has been treated by appellate courts as a matter of keeping the business going, including through administrative and commercial management, rather than requiring the heir personally to perform the trade or to draw a professional income from it. That flexibility is real, but it is not a licence: the safe course is for an heir who wants the relief to take genuine charge of the business for the three-year period.

Choosing between the two routes is rarely a free choice — it follows from how the business is already held — but it does inform planning. A trader who expects to pass the business on may benefit from incorporating first, so that the transfer is of shares under Article 787 B, which sits more comfortably with staged gifts, reserved usufruct and a family holding structure. Conversely, an established company that is in substance a passive asset-holder will not qualify at all, whichever article one reaches for, because the scheme is reserved for genuine operating businesses.

Valuing the business and unlisted shares

The 75% exemption is a percentage of a value, so the value of the business is the number that drives everything. For a sole proprietorship, the assets are valued and the debts of the business are deducted under the ordinary rules (Article 776 bis of the General Tax Code) before the 75% exemption is applied to the net figure. For a company, the question is how to value the shares — and because family companies are almost never listed, this means valuing unlisted shares (titres non cotés), which is one of the more contested areas of French transfer-tax practice.

There is no single formula. Unlisted shares must be valued "taking account of all available elements, so as to arrive at a value as close as possible to that which the normal play of supply and demand would produce in a real market", the value of the company's net assets being only one of those elements (Cass. com., 31 May 2005, no. 01-17593). Where genuine comparable transactions in the same or similar shares exist, the comparison method (méthode par comparaison) is the primary approach and is preferred. Failing sufficient comparables, the value is built up from a weighted combination of alternative methods — a mathematical (net-asset) value, a yield value based on dividends, and a profitability value based on earnings multiples such as a price-earnings ratio. The Conseil d'État has held that the comparison method and the alternative methods are mutually exclusive and cannot be combined, although the alternative methods can be weighted against one another (Conseil d'État, 21 October 2016, no. 390421).

What makes valuation more than an accounting exercise is the range of discounts (décotes) the courts allow to reflect the real weaknesses of a private shareholding. A holding that carries no control commands less than a block that does: a discount of 20% has been accepted for a minority shareholding, on the principle that an isolated share is not worth as much as a controlling block (Cass. com., 23 November 2010, no. 09-17295). Restrictions on selling the shares reduce value too — a 10% discount is generally admitted for a pre-emption or approval clause (clause d'agrément) in the articles, at least for minority holdings. Legal and contractual constraints have supported a 15% discount where a commercial lease burdened the property held by a company (Cass. com., 9 February 2022, no. 19-22861), and the company's prospects can justify more — a 40% discount was allowed to reflect the risk attached to a company's heavy dependence on a single "key man" employee (Cour administrative d'appel de Bordeaux, 22 November 2019, no. 18BX03020). These discounts are fact-specific and vary widely, but they can materially lower the base to which the 75% exemption then applies.

One valuation trap is specific to the Dutreil scheme. Cash on the balance sheet can be counted in the base that benefits from the 75% ratio, but only up to the company's normal treasury needs; cash beyond that is at risk of being stripped out (Cass. com., 9 February 2022, no. 20-10753). A company sitting on a large cash pile that has nothing to do with its trade is inviting the tax authority to argue that the surplus is not "business" value at all and does not deserve the exemption. Getting the valuation and the balance sheet right before the transfer — sometimes by distributing surplus cash first — is part of doing the Dutreil properly.

The rescrit-valeur: an advance valuation ruling

Because the whole relief turns on the value of the business, French law gives the owner a way to fix that value with the tax authority in advance. The valuation ruling (rescrit-valeur) lets a person who owns a business, or shares in a company in which they hold a management post, and who intends to give away all or part of it, consult the tax authority before the gift on the market value that will serve as the base for the duty (Article L.18 of the Book of Tax Procedures). Used well, it removes the single biggest uncertainty in a family transfer: whether the tax authority will later challenge the figure the family declared.

The procedure runs on a defined track. The consultation is made in writing, before the gift; the donor, acting in good faith, must give the authority every element needed to assess the value; and, if the authority agrees the value, the donor must carry out the gift within three months of the reply, on the basis of the value expressly accepted. Where the authority gives an express agreement, it can no longer rectify the valuation afterwards, provided the gift matches the honest project that was put to it — the declared base "can no longer be called into question for the assessment of the duty". The authority must reach a decision within six months of receiving a complete file (Article L.18, II). If it refuses, the taxpayer can seek a second, collegiate examination within two months, and can contest a negative position through the ordinary channels for challenging the authority's formal positions.

The ruling is open to businesses of any size and any form, individual or corporate, and the proposed gift can concern all or part of a sole proprietorship, or the shares of a company in which the taxpayer holds a management function within Article 975, III of the General Tax Code. There are two important limits. First, a company whose main activity is managing its own movable or immovable assets is excluded — non-animating holdings cannot use the procedure — which mirrors the exclusion of passive holdings from the Dutreil exemption itself. Second, the procedure only applies where the value is not fixed directly by law; it has no role, for instance, for listed shares whose price is set by the market rule of Article 759. A favourable ruling also carries a bonus: the value the authority accepts is binding for the deferred-and-instalment payment facility available to business transfers, and is used to set the guarantees for it. For a family about to commit to years of holding undertakings, locking down the valuation first is often the most valuable single step in the whole exercise.

Common pitfalls of the Pacte Dutreil

The Pacte Dutreil is generous, but it is also unforgiving of error, because the reliefs are conditional and the conditions run for years after the transfer. Most disputes come down to a handful of recurring mistakes, and knowing them is the best protection against losing an exemption that has already been claimed.

Breaking a holding undertaking. The gravest risk is a breach of the collective or individual undertaking. Where the individual undertaking is broken — typically by selling shares within the four-year window to someone who is not a party to the pact — the exemption on all of that person's shares is called back into question, and the recipient must pay the complement of duty that would have been due at the transfer, together with late-payment interest (Article 1727 of the General Tax Code) and, where bad faith is established, the penalty for deliberate default (Article 1729); the recovery machinery for a breach of the individual undertaking sits in Article 1840 G ter. A sale by a signatory to an outsider during the collective phase can likewise break the pact and, if it drops the holding below the minimum thresholds, unravel the relief for the other signatories too. The exceptions are narrow — mainly transfers between signatories, gifts down the direct line, and approved contributions to a family holding.

Getting the deed wrong. The individual undertaking must be in the deed of gift or the declaration of succession itself; it cannot be supplied later (Cass. com., 16 April 2013, no. 12-17432). A gift with reserved usufruct must be in writing to qualify, so that the limitation of the usufructuary's voting rights to the allocation of profits can be checked. These are formal traps that a well-drafted deed avoids and a home-made one walks straight into.

Mis-classifying the company. A company that is in substance a passive investment or property vehicle does not qualify, and the "animating holding" line is heavily litigated: the animation must be real and demonstrable, and it must exist from the start of the collective undertaking through to the end of the individual undertaking (Cass. com., 14 October 2020, no. 18-17955). A holding that cannot show genuine, active direction of its group is exposed.

Losing the management function. The management condition must be satisfied continuously through the collective undertaking and for three years after the transfer. A gap of more than three months, or a family in which no one bound by the undertakings actually runs the business, can defeat the relief. The condition can be satisfied by different people over time, but never by no one.

Forgetting the reporting. The exemption depends on declaratory obligations: a certificate from the company confirming that the collective undertaking was in force and the thresholds met at the transfer, and a further certificate at the end of the individual undertaking (or within three months of a request) confirming continuous compliance. Missing these is an avoidable way to jeopardise a relief that is otherwise fully earned. Each of these pitfalls is manageable, but only if the transfer is structured, drafted and monitored with the undertakings in mind from the outset.

Frequently asked questions about the Pacte Dutreil

What is the Pacte Dutreil?

The Pacte Dutreil is a French tax relief for passing on a family business. Where its conditions are met, the shares of a family company are exempt from gift or inheritance duty on 75% of their value (Article 787 B of the General Tax Code), and the same 75% exemption applies to the assets of a sole proprietorship (Article 787 C). Only the remaining quarter is taxed, which is what makes it possible to hand a substantial business to the next generation without a tax bill that forces a sale.

How much tax does the Pacte Dutreil save?

It removes three quarters of the value of the business from the taxable base, so duty is charged on only one quarter (Articles 787 B and 787 C). On top of that, where the gift is in full ownership and the donor is under 70, the duty that remains is reduced by a further 50% (Article 790). Combined with the ordinary personal allowances — such as the €100,000 allowance between a parent and each child — the two reliefs can bring the effective cost of transferring a family business very low.

What are the conditions of the Pacte Dutreil?

For a company, three conditions apply: a collective undertaking to keep the shares of at least two years, covering a minimum holding (17% of the financial rights and 34% of the voting rights for an unlisted company); an individual undertaking by each recipient to keep their shares for four years after the collective undertaking ends; and a management function held by someone in the pact throughout the collective undertaking and for three years after the transfer (Article 787 B). For a sole proprietorship, the business must be kept for four years and one heir must continue operating it for three years (Article 787 C).

How is a family business valued for the Pacte Dutreil?

A sole proprietorship is valued on its assets less its business debts (Article 776 bis) before the 75% exemption is applied. Unlisted company shares are valued on all available evidence, using comparable sales where they exist or otherwise a weighted combination of net-asset, yield and earnings methods (Cass. com., 31 May 2005, no. 01-17593). Discounts are commonly allowed — for example around 20% for a minority holding (Cass. com., 23 November 2010, no. 09-17295) — and the value can be fixed in advance with the tax authority through a rescrit-valeur (Article L.18 of the Book of Tax Procedures).

Does the Pacte Dutreil work for a sole trader?

Yes. A business run in the owner's own name qualifies under Article 787 C, which gives the same 75% exemption on the tangible and intangible assets used in the business. The owner must have run the business (and, if it was bought, held it for at least two years); each heir or donee must undertake to keep the assets for four years; and one of them must continue to operate the business for three years after the transfer. There is no collective undertaking to sign, because a sole trader has no co-owners.

What happens if a Dutreil undertaking is breached?

Breaching the collective or individual undertaking — for example by selling the shares within the holding period to someone outside the pact — calls the exemption back into question. The recipient must then pay the duty that would have been due at the transfer, plus late-payment interest (Article 1727 of the General Tax Code) and, where bad faith is shown, a penalty (Article 1729). Only narrow exceptions are allowed, chiefly transfers between signatories, gifts to one's own children, and approved contributions to a family holding.

Can the Pacte Dutreil be used if no undertaking was signed before a death?

Sometimes. If the owner had held the qualifying threshold for at least two years and run the company or held a management post, the collective undertaking can be "reputed acquired" (Article 787 B, b). Alternatively, on a death, the heirs can conclude a collective undertaking among themselves within six months (Article 787 B, a). Both routes are read strictly and carry their own conditions, so they are a fallback rather than a plan.

How our French lawyers help with the Pacte Dutreil

The Pacte Dutreil is one of the most valuable reliefs in French tax law and one of the easiest to lose through a drafting slip or a broken undertaking. We advise business owners and their families on whether a company or a sole proprietorship qualifies, on putting the collective and individual undertakings in place, on structuring a full-ownership or reserved-usufruct gift to make the most of the 75% exemption and the 50% duty reduction, and on fixing the value of the business in advance through a rescrit-valeur — so that the transfer is done once, correctly, and holds up for the years the undertakings must run.

This article is for general information only. It does not constitute legal advice and does not create a lawyer-client relationship. Whether a Pacte Dutreil applies, and how much tax it saves, depends on the business, how it is held, the undertakings in place, and the timing of the transfer. Contact our French lawyers for advice on your situation before acting.