The value of a company or a business depends on several factors: supply and demand, market parameters, the accounting value of the company, the sector of activity, .... but also the tax authorities who also have their say.
In this article, we will focus on the constraints specific to the valuation of holding companies from the point of view of the tax authorities, based on the guide available here: valuation of holding companies by the tax authorities
A preliminary point of clarification for holding companies of listed companies, they must submit to the I.F.R.S. accounting standards. As for unlisted companies, they can choose to submit to the application of these standards but there is no obligation.
Why prepare consolidated accounts?
The French Commercial Code provides that any commercial company that exclusively or jointly controls one or more enterprises must prepare consolidated financial statements. The same applies to any company that exercises significant influence over one or more companies. The preparation of consolidated financial statements has been mandatory since December 31, 1985 for listed companies.
A company may exercise sole control over one or more businesses in a number of ways, for example:
- indirect or direct ownership of the majority of the voting rights in the controlled company.
- Possession of a right to exercise a dominant influence over it with a supporting contract.
With regard to joint control, it is referred to when control of a company is shared by a limited number of shareholders or partners. In this case, all decisions are taken with the agreement of all stakeholders.
Significant influence is considered to exist when a company directly or indirectly owns at least 20% of the voting rights of a company.
How to determine the consolidation method?
There are usually 3 consolidation methods. Each method is based on the control exercised by the parent company over its subsidiaries.
Consolidation of companies under exclusive control
Companies that are exclusively controlled by a parent company are fully consolidated. Full consolidation consists of integrating all the elements of the accounts of its subsidiaries into the accounts of the parent company. Numerous restatements must be made upstream, such as the elimination of transactions between consolidated companies.
Consolidation of jointly controlled companies
Companies that are jointly controlled are proportionally consolidated. This type of consolidation consists of including in the accounts of the consolidating company the percentage of its interest in the accounts of the consolidated company. This type of consolidation is done after restating the information and eliminating the accounts and transactions between the consolidated company and the other consolidated companies.
Consolidation of companies under significant influence
Companies under significant influence are accounted for by the equity method. This method consists of substituting the share of equity for the book value of the shares held in the consolidated companies.
Company valuation and tax administration: How to value companies?
There are a number of different company valuation methods recommended in the guide drawn up by the tax authorities. Each of the tax authorities' valuation methods must be implemented after analyzing the company's characteristics and studying the economic sector to which it belongs.
Enhancing the value of the group's assets
It is important to look at the asset value of the group. The total amount of equity is generally a flat value.
This method applies in particular when the company's interest lies solely in its assets, justifying that the asset-based approach be favored. It is commonly accepted that the value of these companies corresponds to their asset value less a so-called holding discount intended to take into account
- the illiquidity of fixed assets;
- the latent taxation on these assets;
- possibly the absence of control of the holding company over the participations.
Case of overlapping holding companies
In the case where the same company is held by a holding company, itself held by a holding company, etc., from two levels of interposition, regardless of the
The value of the head holding company may not be discounted by more than 40% of its asset value. Indeed, intermediate companies are not subject to any particular discount when they are pure passive holding companies.
Valuation based on the company's profitability
Tax-holding valuation is based on profitability or productivity value or return on investment in relation to a defined panel, which may be a stock exchange, a group of similar companies, etc. This type of tax-holding valuation enables the company to be valued in relation to its competitors on the market. This type of valuation enables the company to be positioned in relation to its competitors on the market, and must meet the standards set out in sheet 2 of the tax authorities' guide.
Valuation company tax administration: what does XVAL propose?
XVAL consultants will use three methods to evaluate a company in order to obtain a weighted average valuation.
This practice used by XVAL proves to be efficient and meets the expectations of the tax authorities. Among the methods used, in terms of valuation holding tax authorities, we can mention in particular the valuation by the method of multiples on the basis of a justified panel.
Even if this method of valuing companies seems simple and easy to apply, it requires an in-depth study of the accounts and operations of the company to be valued and a detailed justification of the panel of companies selected for comparison in order to justify the valuation to the tax authorities.
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