Invest in a business? Yes, but beware of various taxes

To take part in fundraising means to contribute to the development of an entrepreneurial enterprise, as well as to give yourself the opportunity to benefit from a large added value in the future. The risk of capital is never zero, but the profit that can be made is not negligible. Whether directly through a Equity Savings Plan (PEA) or a holding company, the right choice and the resulting tax implications can play a very significant role in the ultimate return on investment.

The simplest and least restrictive option: direct investment

Direct investment in some cases may offer income tax reductions of up to 25% of the investment amount. Indeed, subscriptions to the initial capital of an SME or an increase in the capital of an SME less than 7 years in the development phase entitle them to a reduction in income equal to 18% or 25% of payments withheld within the limits of EUR 50,000 for a single entry per person or EUR 100,000 for a couple. This device is called Loi Madelin’s Income Reduction. In order not to lose the benefit of the reduction, shares should in principle be held for 5 years. In turn, dividends and capital gains are subject to a flat tax (or “flat flat fee”), resulting in a 30% reduction in productivity.

Preferred option for holdings less than 25%: PEA

Investments are not eligible for the tax reduction, but dividends and capital gains are capitalized in tax-exempt PEA (except dividends exceeding 10% of the value of unquoted securities). If withdrawals occur only after the 5th year of holding a PEA, they are exempt from income tax and pay only Social Security contributions of 17.2%.

However, this solution is limited, since the total amount of payments made from the beginning in PEA and PME PME by its holder is limited to a total limit of 225,000 euros.

However, payments should not be confused with acquired capital. Indeed, if the payments are limited, the capital acquired on PEA is not limited, and it is not uncommon to find PEAs of several million!

The most important limitation of the PEA is that the family group’s ownership of the company must not exceed 25% for the duration of the plan. Otherwise, the tax benefits of PrEA will be lost. So, if you want to take control of the company by owning more than 25%, forget about this option! Otherwise, go ahead!

Ideal for Serial Investors: Owning Securities Through a Holding Company

It is a powerful capitalization tool: in the event of a sale, capital gains are subject to a very low tax rate, capped at 3%, leaving 97% of the holding company’s profit. This preferential treatment applies to equity securities owned by the holding company for more than 2 years. Beware of transfers that are too fast: they are subject to the normal corporate tax rate.

Dividends distributed to a holding company are also subject to preferential treatment, known as mother-daughter treatment. Acceptable if the holding company owns at least 5% of the operating company, this regime allows taxation limited to 1.25% (exemption except for the 5% share of costs and fees taxable in IS).

To be able to take advantage of the holding company’s cash, you must first go through the “dividend distribution” or possibly “decrease in capital” field and therefore pay 30% tax before you can use the remaining 70%. Thus, the holding company tool is not suitable for investors who need income or cash on a personal basis. On the other hand, it will be ideal for investors who want to capitalize their profits in a structure.

Also remember before starting:

– Investments by a holding company made solely for the benefit of a partner are completely prohibited for fear of falling into the scope of misuse of corporate assets.

– It is necessary to ensure that the securities owned by the holding company are subject to preferential regimes known as the “parent-subsidiary regime” for exemption from dividends and the so-called “equity regime” for partial exemption of capital gains in the event of a sale. To benefit from all these arrangements, the securities must be registered as equity securities on the balance sheet of the holding company for more than 2 years, and the latter must own at least 5%. However, for the equity securities system, case law allows for a lower holding threshold if the utility and necessity of long-term equity ownership by a holding company can be demonstrated.

– It is necessary to bear the operating costs and comply with the rules for the administration of the structure subject to corporate tax, which far exceed the operations of the securities account or PEA.

If an investor’s first choice is to purchase their shares directly or through a PEA, using a holding company may be entirely possible or even sometimes appropriate in the second step to raise cash through leverage effects (LBO). In fact, the securities can be sold to a holding company that will go into debt to purchase them. This will allow the investor to monetize their shares, indirectly remaining in the capital of the company.

PEA also remains a great investment vehicle from time to time or if you don’t want to own more than 25%. Otherwise, the winning combination will undoubtedly be to find the right balance between direct possession and hold through possession. Thus, the investment benefits from an optimized tax regime without depriving the investor of a share of its results.