During the life of a SARL (French LLC), it may be that a sole shareholder owns all the shares comprising the company’s capital, in particular in the frequent situation of the withdrawal of one or several shareholders through a buyback or a capital reduction, or a gratuitous transmission of shares (demise, donation) in a family-owned company.
Such situation, if poorly managed, may result in adverse tax consequences that are difficult to adjust a posteriori.
The loss of the right to pay corporate tax
If all the shares of a SARL are owned by a single shareholder, then the company is usually transformed into a one-person limited liability company (EURL), which is not part of the organizations that are automatically subject to corporate tax as defined in Article 206 of the French General Tax Code.
Generally, the EURL falls within the remit of income tax.
Consequently, the transformation of a SARL into a EURL gives rise de facto to a change of tax regime, the consequences of which are the cessation of activity (immediate taxation of the results, profits subject to tax deferral and unrealized gains).
Furthermore, the shareholders are taxed on the income deemed to be distributed, in proportion to their rights in the share capital, for the amount of the taxable results and reserves prevailing on the date of transformation.
Very fortunately, the tax consequences of such a cessation may be mitigated under the provision set forth in Article 221 bis of the French General Tax Code, if both the following conditions are met:
- No modification must be made to the accounting entries upon the transformation (a condition that is easily fulfilled).
- The taxation on profits or deferred capital gains must remain possible following the transformation.
Yet, this second condition may raise difficulties when the SARL’s activity is not an industrial, commercial or non-commercial activity.
Therefore, a SARL, which carries out the management of its personal estate shall not benefit from Article 221 bis of the French General Tax Code, insofar as upon the transformation into a EURL, any real estate capital gains made shall, in principle, be covered by the rules applicable to individuals.
Yet, these rules may give rise to a total or partial exemption, in particular for rebates during the period of possession.
In any event, the mitigation provision shall not enable the taxation on the profits and reserves to be avoided for the income deemed to have been distributed, which may, in practice, end up being quite significant.
Depending on the context, it may be appropriate to set up an option for corporate tax simultaneously with the transformation into a EURL.
Nevertheless, this option must be implemented promptly insofar as it shall only become enforceable upon the condition that it has been notified to the tax administration prior to the end of the third month which follows the event resulting in the transformation.
The specific case of a EURL which has opted for corporate tax prior to its transformation into an SARL
When a EURL, which has opted for corporate tax, changes to become a SARL, it shall automatically remain subject to corporate tax and this transformation does not give rise to any specific consequences.
In the specific situation whereby this SARL were to then return to being a EURL due to all the shares being held by a sole shareholder, the irrevocable nature of the corporate tax option initially formulated shall result in the continuation of the tax regime for limited liability companies.
Therefore, in this specific situation, the fact that a sole shareholder holds all the shares shall not give rise to any change in the tax regime of the SARL, now a EURL, with the company continuing to be subject to corporate tax.
As many different scenarios may occur, if all the shares are held by a single shareholder, it is important to make the right assessments in order to anticipate the negative tax implications that may result therefrom.