Individual holders are sometimes unaware that capital losses incurred upon cancellation of shares may not be tax deductible. The finance law for 2021 has just added a possibility for them to be entitled to such a deduction. It gives us an opportunity to review the matter at stake.
First, let’s remind that in the event of a sale of shares, capital losses are to be offset against capital gains of the same type realised over the same year or the next ten years. Thus, capital losses reduce capital gains’ base for the computation of income tax, social taxes and reference taxable income.
Conversely, in the event of a cancellation of shares, capital losses were to be offset in the sole situation where the company the shares of which were cancelled was under business rescue proceedings. The finance law for 2021 adds a new possibility for taxpayers to offset their capital losses.
For the record, where equity of a joint-stock company (SA, SAS, SNC) or a SARL becomes less than half of its share capital, the French Commercial Code calls for shareholders’ action.
They may go for an early dissolution of the company. In this case, the law does not provide for any tax deduction of losses resulting from dissolution.
If they do not take the dissolution route, the Commercial Code requires that equity shall be rebuilt up to half the share capital within the next two years following the one during which losses were recorded. If, within this time span, equity has not been rebuilt, the company’s share capital must be reduced to the extent of a minimum amount which is the amount of losses that could not be offset against reserves. Within this framework, a company’s recapitalisation may be carried out right after its shares have been cancelled (an operation known in France as a “coup d’accordéon”).
The new possibility for deduction set by the finance law for 2021 specifically applies in such circumstances: capital losses resulting from a reduction of capital through the cancellation of a company's shares becomes offsetable, under the same conditions as capital losses resulting from a sale of shares. Yet, the capital must be reduced to nil. Where the capital reduction is incomplete, resulting capital losses remain non-deductible.
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