The tax threat rises for the bosses of companies bought by funds

New court decisions have ruled in favor of business leaders facing Bercy. At the heart of the litigation: the taxation of gains from the sale.


The tax threat is receding for executives of companies bought by investment funds. While the administration has long won its case against the leaders in leveraged arrangements (LBO), the cases brought before the courts today lean much less in favor of Bercy.

This is evidenced by two new decisions handed down in January and February of this year … in cases dating from 2007: that of the Versailles Court of Appeal in favor of the directors of the company La Providence of the LBO France fund, and that of the court appeal from Paris which agreed with the leaders of Editis, ceded by Wendel.

At the heart of the debate: the capital gain on disposals paid to managers who have invested in their company’s capital alongside private equity funds.

“The rules of the game are becoming clearer, says Eric Ginter, tax lawyer. The association with the capital of companies of executives and directors presents less tax risk now, after the wave of adjustments initiated on LBO transactions since the financial crisis. “ This is the end, he believes, “An unequal balance of power: the administration could be in litigation ten years, not a company and its executives who ended up leaving, not to mention the personal tragedies”.

Over 60% tax

These decisions indeed mark a turnaround. Since the Gaillochet judgment rendered by the Council of State in 2014, Bercy had free rein to reclassify the capital gains of LBO managers as salaries. And therefore tax them not up to 30%, but often more than double. However, these executives could invest tens of thousands of euros without assurance of recovering them five years later. And there were many cases of failure after the financial crisis.

The administration has never really sought to clarify the rules. Where was the crux of the dispute? In taking risks. If this was considered sufficient – in other words if the executive had invested a lot – it was taxable on the basis of the capital gain, therefore at a rate of 30%.

But when the capital gain on the sale turned out to be very high, it was easy to demonstrate that he had not invested enough. The administration has long considered that the risk taken was too low to claim the capital gains tax regime. “The battle was so fierce that Bercy and the taxpayers turned to assessors confronting their mathematical models. This endless debate no longer made sense! “, says Eric Ginter.

Healthier practices

This tax clarification is not only due to court decisions. “Practices have evolved a lot and the tax threat has in fact also greatly encouraged executives and managers to take conservative assumptions and to use much more readable instruments”, explains Jérôme Commerçon, partner of Scotto Partners.