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Evaluation of a usufruct of shares

Evaluation of a temporary usufruct: NR Avocats obtains a reduction of almost €200,000

Me Nicolas Rozenbaum was entrusted with a case following a decision by an administrative court confirming a tax adjustment linked to the transfer of temporary usufruct of shares social benefits of an SCI (duration of 10 years).

In this case, the client, associated with his children in an SCI, transferred the temporary usufruct of the shares held in this SCI to another SCI which they also controlled . This second SCI was subject to corporate tax.

The tax administration considered that the price paid by the transferee SCI was overvalued and that this acquisition at an overvalued price constituted an abnormal act of management. This had two consequences:

- with the client and his children: the additional price paid constituted income deemed distributed taxable as such to the transferors (the client and his children) after a 25% increase.

- at the acquiring SCI: the depreciation linked to the temporary usufruct acquired, as well as the interest on the loan contracted to acquire the temporary usufruct, was no longer deductible up to the excess fraction.

The NR lawyers firm decided to abandon the strategy proposed at first instance and put forward as its main argument that the evaluation method used by the tax administration was erroneous and contributed to to undervalue the market value of the temporary usufruct (and therefore to overestimate the importance of the abnormal management act).

By several heavily commented judgments of April 1, 2021, the Nantes Administrative Court of Appeal granted the customer relief of nearly €200,000 (decision 19NT01569).

The evaluation of the temporary usufruct of SCI shares

In the event of acquisition for consideration of a usufruct, two methods are in principle possible to evaluate this usufruct: either the method mentioned in article 669 of the General Code of Taxes, i.e. that of economic evaluation.

Method mentioned in article 669 of the General Tax Code

To determine the value of the temporary usufruct, the tax administration referred to the scale of article 669 of the General Tax Code which provides in particular that the value of the usufruct established for 10 years is 23% of the full ownership value. In this case, to determine the value of the full ownership, the tax administration, quite logically, took the value mentioned in the inheritance declaration filed one year before.

However, this article is only applicable for the calculation of registration fees and land registration tax (therefore mainly in the case of donation of bare ownership or ;a usufruct for the calculation of gift taxes). On the other hand, in the event of a sale, if the parties are free to refer to article 669 to value the usufruct, recourse to this article is not imperative.

Indeed, the parties are completely free to value the usufruct in an economic way.

Economic evaluation method

To economically value a usufruct, simply remember that usufruct corresponds to the right to receive income from an asset during the duration of the usufruct if the usufruct is temporary or during the life of the usufructuary if it is life annuity. However, the value of the 10-year temporary usufruct cannot simply correspond to 10 years of predictable income. Indeed, we must keep in mind that a euro to be received tomorrow is worth less than a euro to be received today. This income must therefore be capitalized using a capitalization rate. This rate is supposed to correspond to the average rate of return of the asset to be valued.

Thus, if we take the example of a building worth €1,000,000 and which brings in 5% net per year, or €50,000, the temporary usufruct of 3 years of this asset can be valued as follows:

US = 50,000/(1+5%) + 50,000/(1 + 5%)^2 + 50,000/(1+5%)^3 = 136 €162

Another way to evaluate temporary usufruct is to consider that it is worth the value of the full ownership less the value of the bare ownership (since the full ownership is worth the value of the usufruct plus that of the bare ownership).

In this example, bare ownership corresponds to the right to become full owner of the building in 3 years (since when the usufruct ends in 3 years, the bare -owner will become full owner). Thus, to determine the value of bare ownership, it is necessary to determine what value must be paid today to become an owner in 3 years.

To carry out this calculation, it is again necessary to take into account the same capitalization rate (which is called the discount rate in the context of this new formula). So we have the formula:

NP = Full ownership/(1+t)^3 where t is the expected rate of return.

By taking the previous values, the bare ownership can be evaluated at 1,000,000/(1+5%)^3=863,838. The value of the usufruct is therefore 1,000,000 - 863,838 = €136,162.

Naturally, this explanation is deliberately simplified (the formulas must also take into account inflation in the price of the asset to be valued as well as that of rents).

In this case, the value of the full ownership did not pose a problem since it had been determined shortly before in the context of a declaration of inheritance. Apart from this specific case, the valuation of full ownership of shares in an SCI can sometimes be more problematic.

Decision of the Administrative Court of Appeal

The Administrative Court of Appeal confirmed the validity of this reasoning and upheld the client's claims (although slightly reducing the claimed rate of return).

Thus, the market value of the usufruct was, according to the Administrative Court of Appeal, significantly higher than what the tax administration claimed (and consequently, the act abnormal management was less important than what she claimed).

Therefore, the amount of income deemed distributed paid to the client and his children had to be reduced. Likewise, the deductible portion of depreciation and loan interest contracted by the acquiring SCI was considerably increased.

You can access the entire decision by clicking here.

Maître Nicolas Rozenbaum, tax lawyer, is at your disposal regarding any request for tax assistance, both in terms of advice and tax litigation.


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