Vins et spiritueux

Vins et spiritueux
La lettre n°5
May 2014
Summary
Editor’s message
2
Newsflash
3
New definition for
agricultural earnings
5
Inheritance issues
7
Legal documentation
on sale and purchase
of vineyards
10
Cognac: bouncing back
after the Chinese crisis 16
Editor's message
by Arnaud Agostini, Partner
It's a pleasure for me to present the fifth Wines and Spirits
Newsletter.
The articles in this issue cover a range of topical issues
and ongoing discussions.
As ever, topical issues include news from the tax front. We
discuss accounting aspects of the poor 2013 harvest, for
example, and changes to French wealth tax rules.
There are changes to French social security rules, too,
with a new definition of agricultural earnings creating
a broader base for contributions.
Other articles cover inheritance, specifically the
advisability of making provisions for gifts and estate
division, and requirements on legal deeds for the sale and
purchase of vineyards.
This issue's coverage of economic news continues with an
article on emerging markets.
I hope you enjoy your read!
Newsflash
An end to tax
exemption for
agricultural
buildings?
For some months French tax offices have been
asking vine growers to submit declarations
under which certain wine-making buildings
would be liable to tax on built-up property,
although this has not been claimed as
official policy by the tax authorities.
Note that under Article 1382 - 6 of
the Code Général des Impôts (French
tax law), farm buildings are exempt
from tax on built-up property.
The administration's current position is
based on a somewhat ambiguous statement
from the former finance minister, Mr.
Moscovici, before the French Senate, in
reply to a question from a senator: "The
property tax exemption for farm buildings
does not apply to sales activities. This is
to ensure fair competition between vine
growers and other wine-selling businesses."
Vins et spiritueux – La lettre N°5
In applying this principle, the tax authorities
appear intent on applying built-up property
tax to buildings "intended for storing
wines more than three years old".
This would mean the storage of wines
more than three years old would be
considered a commercial rather than an
agricultural business. Obviously, this
position is highly debatable, as regards
both the principle set out by Mr. Moscovici,
and the tax authorities' interpretation
of it, resulting in the assumption that
premises for storing wine more than three
years old are now liable to the tax.
We would therefore advise vine growers
who receive demands for built-up property
tax on such buildings, or requests to
declare such buildings for the purpose
of such taxation, to contest taxation
or refuse to submit the declarations,
claiming exemption under Article 1382.
Note that contestation deadlines for
this kind of tax are very short: by
31 December of the year following
that for which tax was demanded.
3
NEWSFLASH
Impact of poor
harvest in 2013
As we know all too well, vineyards
across the country suffered very
poor harvests in 2013. The question
therefore arises of accounting practice
in the light of these poor yields.
Bear in mind that the costs of a
wine-making business are fairly
constant, regardless of harvest
volume. So what are the options?
• One solution, if all the conditions are
met, is to book a provision at market
price below cost price, if it is
considered that the harvest value is
above the probable value that the
business might reasonably expect at
the end of the financial period.
• An alternative solution is to book for
under-capacity wastage. Here, we start
by considering a normal production
capacity, determined as the mean
value of the last five harvests,
excluding the lowest and highest
outrider values. If the yield is below
this figure, the business can consider it
has suffered a waste of production
factors. For example, if the harvest
was 12 hectoliters per hectare in 2013,
compared with the mean value of
36 hectoliters, determined as above,
the business has wasted two thirds of
its fixed production costs.
Under this reasoning, we can consider
that the harvest value should be
determined in the light of just one
third of the business's fixed costs rather
than total fixed costs, thus enabling
the business to directly book the
economic loss arising from low yield.
Note, however, that this solution is
subject to conditions; specifically,
the low yields must not be caused by
crop-care practices, and the mean
value must be calculated correctly.
We therefore advise you to check
with your accountant to determine
whether these conditions apply. It is
important that this solution not be
seen as a tax-reduction opportunity but
as a requirement of good accounting
practice that has tax implications.
Change in wealth
tax rules
commercial or agricultural businesses
and declared as assets for wealth tax
assessment purposes should be taken at
book value rather than at market value,
this being an exception to the general
rules applicable to duties payable.
The disappearance of this article will
therefore have negative consequences,
unless it can be considered that shares
in a company owning the stocks of
wines or spirits form a business rather
than a personal asset, in which case
they are exempt from wealth tax.
Note also that the tax authorities have
been known to contest application
of Article 885 T for previous years,
on the grounds that it concerned
individual businesses only, and
not taxpayers holding shares in
a wine-making company.
Arnaud Agostini
Partner
The disappearance of Article 885 T
from the French tax code (Code Général
des Impôts) went largely unnoticed in
France's 2014 finance bill, a change
which is nevertheless significant for
those required to declare shares in a
wine-making business as a personal
asset in their wealth tax declaration.
Article 885 T specified that stocks of
wines and spirits held by industrial,
Check out the eAlerts from Landwell & Associés* on
http://landwell.fr/, under the eAlerts section
* Landwell & Associés (French law firm member of the PwC international network)
4
Vins et spiritueux – La lettre N°5
Wider base for social security
contributions: a new definition
of agricultural earnings
Article 9 of the 2014 French law on social
security financing (loi de financement
de la sécurité sociale – LFSS) extends the
scope of social security contributions
to some revenues of members of
farm corporations. The new measure
came into force on January 1, 2014,
but includes phase-in measures.
The scope of social security contributions
is also extended to shareholders
who are members of the manager's
family but not involved in the work
of the agricultural business.
Principle
• "Social justice", by countering the
optimization in social security
contributions that was afforded by forming
a farm corporation, illustrated by the
skyrocketing number of farm corporations,
which accounted for 45% of agricultural
businesses in 2010, compared to just 10.1%
in 1988.
Along the lines of the 2013 measures
applicable to self-employed earnings
in non-agricultural sectors, the LFSS
law for 2014 extends the scope of social
security contributions payable on selfemployed earnings in the agricultural
sector to include investment income
(dividends, etc.) of heads of agricultural
businesses, their spouses, civil partners,
and children under the age of majority.
Vins et spiritueux – La lettre N°5
According to the French minister
of agriculture, the extended scope
addresses two objectives:
• Economic; the main aim of the extended
scope is to finance measures on the
retirement of agricultural workers.
5
WIDER BASE FOR SOCIAL SECURITY CONTRIBUTIONS:
CONTRIBUTIONS A NEW DEFINITION OF AGRICULTURAL EARNINGS
How it works
Application date
In application of Article L.731-14 of the
French Farming and Fishing Code (Code
Rural et de la Pêche Maritime), amended,
the following earnings are now liable
to social security contributions:
The new system applies to social
security contributions payable for
periods from January 1, 2014 onwards,
on income received in 2013.
Companies covered by
corporation tax
Share of investment income above
10% of equity and share premium,
and shareholder current account
payments received by the manager
of the business or family members
(spouse or civil partner and dependent
children under the age of majority).
Companies covered by
income tax
Profit exceeding 10% of equity and
share premium, and shareholder
current account payments received
by family members of the manager
of the business not involved in
work of agricultural business.
The scope of the CSG-CRDS tax has
also been changed to exclude earnings
now liable for CSG tax on capital
income (at a global rate of 15.5%).
For companies paying corporation
tax, amounts now included under the
scope of social security contributions
remain considered as dividends for the
purposes of calculating income tax1.
At the same time, in farm corporations
paying corporation tax, the
fixed-rate base for self-employed
taxpayers receiving investment
income has been discontinued.
However, interim measures for 2014
(and 2015 under certain conditions)
include a partial deduction of 25% on
new revenues taken to determine the
scope of social security contributions.
In addition to this new system, new
legislation will also specify the
nature of assets taken into account
for determining share capital, and the
methods to be used for accounting
for payments to shareholder current
accounts (which appears to conflict
with the application of the new
system from January 1, 2014.)
corporation solely on considerations
regarding social security contributions.
Clearly, cases should be examined
on their specific characteristics, and
this examination should include
the distribution of profits.
The question arises as to whether only
revenues distributed and paid as the
result of a collective decision should
taken into account, by assimilation with
the fiscal notion of earnings received.
Comments from MSA (the agricultural
social security organization) on
the matter are eagerly awaited.
Julien Tayeg
Manager
Impact
It is too early to gauge the effect that the
new measures will have on the behavior
of farm businesses. Some will doubtless
be tempted to adopt the form of an SAS
(simplified share company), a move that
would enable the chairman or managing
director to claim employee status, thus
avoiding social security contributions
on dividends. Others might opt to
proceed with a capital increase in
order to slip under the 10% threshold
and thus remain outside the extended
scope of social security contributions.
We do not consider either solution
to be perfectly satisfactory; it would
be unwise to base decisions on
the legal status, share capital or
dividend distribution policy of a farm
L’actualité
sociale n°79
1. As dividends, they remain subject
to a flat-rate, at-source but nondefinitive taxation at 21%, allowable
against progressive-rate income
tax after deduction of 40%.
Paie et gestion sociale
1er trimestre 2014
Sommaire
Ce qui change au
1er janvier 2014
Check out this quarterly publication from PwC:
Social Security News, on http://expert-comptable.
pwc.fr/fr/, under "Your situation" (French)
6
Vins et spiritueux – La lettre N°5
1
La réforme des retraites
16
Les modifications du travail
à temps partiel
20
Inheritance issues:
gifts inter-vivos and
testamentary distribution
Inheritance complications are further
exacerbated when the estate includes
a vineyard, inherently difficult to split.
Settlement can prove long and tiresome
in the event of conflict between heirs.
Whether the farm is run as an individual
business or a company (GFA, SCEA,
etc.), unless specific arrangements have
been made beforehand, the death of
the farmer automatically gives rise to a
situation of indivision, or joint ownership
among heirs (children, spouse), of either
the property itself or the shares left as
inheritance. In the event of family discord,
this situation frequently leads to deadlock
in the management of the business.
Parents are therefore strongly advised
to make full inheritance arrangements
themselves beforehand, to minimize the risk
of family discord in the future and ensure
the best possible conditions for the property
to be taken on by their descendants.
The two preferred methods for easing
inheritance difficulties are gifts inter
vivos and testamentary distribution,
referred to jointly under the generic
French term of libéralités-partages, in
French civil law (Code Civil) since 2006.
In both cases, the person bequeathing
the estate governs distribution of their
assets among the heirs, in the former case
(gifts inter vivos) during their lifetime,
in anticipation of the inheritance,
and in the latter case (testamentary
distribution) posthumously.
Vins et spiritueux – La lettre N°5
Gifts inter vivos
Gifts inter vivos are a very effective
method for making advance
arrangements for inheritance among
heirs, at least for part of an estate.
It nevertheless assumes a good degree of
family consensus; parents will typically
use this mechanism to divide part of their
estate among their children, with each
accepting the conditions set out in the deed.
Because the assets specified in the deed
are already distributed, there will be no
need to include them in the inheritance
settlement, as would in principle be
the case for ordinary gifts, with all the
attendant uncertainties arising from
re-valuation of the assets concerned.
This is therefore a true settlement
mechanism, at least for part of the estate,
since it cannot be challenged subsequently
except by an action in abatement filed
by an heir claiming jeopardy to their
reserved portion of the estate.
Even under this eventuality, the gifts inter
vivos mechanism is robust since, if all
the heirs took part in the deed and if the
deed does not specify a usufruct reserve
on a sum of money, the assets specified
will be taken at their value at the date of
the deed for the purposes of determining
the reserved portion and the disposable
part of the estate, rather than being
revalued at the date of death of the donor,
as would be the case for ordinary gifts.
7
INHERITANCE ISSUES: GIFTS INTER-VIVOS AND TESTAMENTARY DISTRIBUTION
Gifts inter vivos thus offer maximum
security and stability in the
transmission of an estate consistent
with the donors' wishes.
• the donors are free to stipulate
usufruct rights for themselves,
and full transfer to the surviving
spouse
Another advantage is that, especially
since the 2006 reform of inheritance
law, this has been an especially
efficient and far-reaching method,
addressing a wide spectrum of family
situations and donor wishes.
• the 2006 reform enabled legators
to skip a generation and, with the
agreement of their children,
make gifts inter vivos directly to
their grandchildren. In this case,
distribution operates by blood
line rather than by head; the
assets given to a grandchild are
drawn from the portion reserved
for his or her parent, thus
preserving the disposable
portion
Without making any claims to
comprehensive coverage of such a
vast and complex subject, we should
at least list the following points:
• spouses can combine their assets (both
individual and joint), making for less
complicated distribution among their
children. This can even apply to
children of one spouse only, though
naturally to a lesser degree since they
can only receive gifts from joint assets
or from their own father's or mother's
individual assets
• one or more children can be given
larger parts of specific assets to be
shared (e.g. a vineyard or shares in a
wine-making business), in exchange
for a cash sum to be paid to the other
children, under conditions specified
freely in the deed
• assets can be shared unevenly among
the children, within the limit of the
disposable portion of the estate, if
required in the light of a particular
family context or for reasons to do
with the estate
• the deed can make allowance for gifts
made to one or more children in the
past, to rebalance inheritance among
the heirs or proceed with a different
distribution, under the assumption, of
course, that all parties agree to the
new arrangements
8
• legators can make gifts inter vivos
to all presumed heirs, and not
just their children, as was the
case before the 2006 reform.
This can even apply to a third
party, who can be left a business
The gifts inter vivos mechanism
offers a wide range of options
and substantial flexibility.
It is clearly well suited to family
hand-down of a wine-making
business, and will prove all
the more efficient if the business
in question has been structured to
facilitate a workable split between
those children who work in the farm
business and those who do not.
Such a structure might take the form
of a GFA (agricultural property group)
owning the vineyards and buildings,
and letting them on a long-term lease
to a farm corporation. In this case, the
parents could leave shares in the farm
corporation to children who work in
the farm business, and leave shares
in the GFA to the other children.
A balance along these lines could avoid
the need for an heir working in the farm
business to pay a cash compensation
to their siblings in exchange for the
inheritance, or at least minimize the
amount of such compensation.
Most importantly, gifts inter
vivos will only work if there is
family-wide agreement on the
arrangements specified, which
are binding and irrevocable.
Vins et spiritueux – La lettre N°5
INHERITANCE ISSUES: GIFTS INTER-VIVOS AND TESTAMENTARY DISTRIBUTION
Testamentary
distribution
who (except by renouncing the
inheritance altogether) will be bound
by the conditions set in the will
governing the assets left to them.
In the absence of family agreement,
or if the legators prefer to retain
possession of their assets during
their lifetime, they will probably
opt for testamentary distribution.
This is an effective way for legators
to posthumously impose their
inheritance wishes on their heirs,
Unlike gifts inter vivos, the will can be
changed at any time, as circumstances
change, or revoked altogether.
As with gifts inter vivos, testamentary
distribution avoids the risk of the
legators' assets falling into joint
ownership, and the resulting
uncertainties of possibly conflictive
distribution among the heirs.
The difference is that here, the
family consensus required for
the former method is replaced by
constraint, since heirs are basically
required to "take it or leave it".
Philippe Laval
Director
Lundi 2 décembre 2013
LA LETTRE
GESTION DE
PATRIMOINE
Sommaire
OComment optimiser la transmission
au conjoint survivant ? p.1
OPlus-values immobilières :
état des lieux d’un chantier
trentenaire en éternelle
reconstruction p.3
O La rémunération d’un dirigeant par
l’intermédiaire de sa holding patrimoniale p.4
O De la réforme du régime d’imposition
des plus-values de cession de valeurs
mobilières ou de droits sociaux par
les chefs d’entreprise p.5
O Le report d’imposition à l’épreuve
Check out the Asset Management Newsletter drawn up by
Landwell & Associés* for Option Finance, at
http://www.landwell.fr/, in the Publications/Newsletters
section (French).
du futur régime d’imposition
des plus-values de cession de titres
par les particuliers entrepreneurs p.8
O Stock-options et mobilité internatio-
nale : le dénouement ? p.10
O Avoirs étrangers non déclarés
par des résidents fiscaux français :
urgence pour les contribuables
concernés ! p.11
Supplément du numéro 1247
du 2 décembre 2013
Comment optimiser
la transmission
au conjoint survivant ?
U
n constat s’impose tout d’abord : la
situation successorale du conjoint
survivant, jadis réduite à la portion
congrue, s’est fortement améliorée au cours
de ces dernières années, avec les réformes successorales du 3 décembre 2001 et du 23 juin
2006, et la loi «TEPA» du 21 août 2007.
Ses droits légaux (en l’absence de dispositions
testamentaires ou de donations entre époux)
ont en effet été fortement étendus.
Ainsi par exemple, là où, en présence d’enfants, le conjoint survivant ne pouvait, avant
la loi du 3 décembre 2001, prétendre qu’à un
quart en usufruit de la succession de l’époux
prédécédé, il peut aujourd’hui opter soit pour
l’usufruit de la totalité de la succession soit
pour un quart en pleine propriété (en présence
d’enfants non communs aux deux époux, le
conjoint survivant ne peut cependant recueillir
que le quart en pleine propriété).
De plus, depuis la loi TEPA de 2007, le conjoint
survivant est totalement exonéré de droits de
succession.
Pour autant, les techniques traditionnelles
d’optimisation de la transmission au conjoint
survivant que sont les donations «au dernier
vivant», les régimes matrimoniaux ou l’assu-
* Landwell & Associés (French law firm member of the PwC international network)
Vins et spiritueux – La lettre N°5
9
rance vie n’en conservent pas moins tout leur
intérêt, si l’on souhaite renforcer davantage
les droits de son conjoint après le décès.
En effet, s’il est vrai que la motivation fiscale
a beaucoup diminué depuis la suppression
des droits de succession entre époux par la loi
TEPA, ces outils demeurent très performants
sur le plan civil et patrimonial.
Les libéralités entre époux
Ces libéralités, par lesquelles on donne ou
on lègue à son conjoint une quote-part ou
des droits dans sa succession (dans la limite
de la quotité disponible entre époux de l’article 1094-1 du Code civil en présence d’enfants) restent, malgré l’extension des droits
successoraux légaux du conjoint survivant
depuis 2001, un instrument privilégié de transmission.
Ainsi la «donation au dernier vivant» permetelle de majorer les droits successoraux du
conjoint survivant en lui attribuant la quotité
maximale entre époux permise par la loi, à
savoir un quart en pleine propriété et trois
quarts en usufruit, ou encore par exemple de
lui attribuer, en présence d’enfants non communs, l’usufruit de la totalité de la succession.
Clarifying the legal
documentation on sale and
purchase of vineyards
An article in the last Wines & Spirits
Newsletter mentioned the importance,
to sellers and buyers, of due diligence
prior to the sale and purchase of winemaking estates. We noted that whereas
this might appear obvious to buyers, it
might not always be the case for sellers.
Listing agreement
and property
description
Another important phase in the realestate transaction process concerns the
preparation of legal documentation:
buyers and sellers can be slow to realize
that this gives rise to a second, and hardly
the easiest, round of negotiations.
Listing agreement
Buyers and sellers should realize that
the purpose of legal documentation is to
set down in writing the intentions of the
parties concerned and the agreements
between them. Preparation of legal
documentation requires considerable
attention and skill, for these reasons:
It usually takes the form of a
contract between the seller and
a specialist intermediary.
• Anything in writing (including electronic
correspondence) can be binding, which
means both seller and buyer must be
careful in their correspondence with each
other right from the start, even if the
documents exchanged are not formal
deeds.
A listing agreement mandates an
intermediary, or agent, to seek a
purchaser for the property (and a
property search agreement mandates
an agent to seek a property).
The listing agreement is the first
important contract to be signed
by the seller, formalizing their
intention to sell the property.
Along similar lines, a buyer may also
sign a property search agreement
with an intermediary.
• Anything in writing must express exactly
what is intended, leaving no room for
interpretation: agreements are often
highly complex to state precisely in
writing, especially when they concern
price calculation methods.
• Anything in writing must be legally valid:
if a written convention proves legally
invalid, legal solutions must found to
replace the initial agreement.
Below we list the main legal
documents involved in the sale and
purchase of wine-making estates.
10
Vins et spiritueux – La lettre N°5
CLARIFYING THE LEGAL DOCUMENTATION ON SALE AND PURCHASE OF VINEYARDS
The listing agreement includes
the following details:
• Identification of the property on sale
• Price expected by the seller: Price of
land, buildings, equipment and brands,
and details on the basis for pricing
stocks. The price should be determined
with the assistance of the agent, and
should be realistic with respect to the
current market situation. Sellers will
very often tend to overestimate the
value of the property with respect to
actual market conditions. Under these
circumstances, it might prove delicate
for the agent to have the seller make a
downward adjustment, in which case
the property will be put on the market
at too high a price, and fail to find a
buyer. After a long wait, and successive
price reductions, the final sale price
may prove lower than that which could
have been obtained by setting a more
realistic price at the outset
• Limits of asset and liability
guarantee
• Exclusive listing clause: The listing
agreement must specify whether it is
exclusive or not. (Exclusive listing
agreements are commonplace for
wine-making estates)
• Agreement duration and renewal
conditions: The duration should be
sufficient to enable the agent to find a
buyer
• Agent's remuneration: The agent
may be remunerated in two ways
- Fixed remuneration may be set
regardless of the result, covering the
agent's expenses in the pursuit of
their allotted task
- The main remuneration will take the
form of a commission, paid on
completion of the sale as a
percentage of the sale price. The
basis for calculating this percentage
must be specified precisely (assets,
stock, business value, etc.), as must
the event triggering payment of the
commission (signature of final
deeds, lifting of suspensive
conditions, etc.)
Vins et spiritueux – La lettre N°5
• Resale right
• Special conditions
• Compulsory notes: Sale of a winemaking estate (through sale of assets
or shares in a business) must comply
with the stipulations of the "Hoguet
Law" on listing agreements for
real-estate sales
• Agent liability exemption clauses
Property description
Once the listing agreement
has been signed, the agent will
draw up a property description
addressing potential buyers.
This document will include general
information on the appellation and
the vine-growing region in which
the property is located. Where
relevant, it might also include a
rundown on the history of the
estate, if considered an important
aspect of the property's character.
11
CLARIFYING THE LEGAL DOCUMENTATION ON SALE AND PURCHASE OF VINEYARDS
Above all, the property
description will give technical
information on the vineyard.
Preparation of the property description
requires great care, because all the
information in it will be checked by
audits carried out by the prospective
buyer. Rather than embellishing the
real-life situation, the aim is to present
this situation in the best light.
Letter of interest
and firm offer
Buyers potentially interested in the
property will address a letter of
interest to the buyer or the agent,
expressing a wish to begin negotiations
and setting out conditions for
proceeding with the next stage.
Letter of interest
The letter of interest marks the start
of the buyer-seller relationship. In
this document, the buyer will ask the
seller for permission to proceed with
investigations prior to confirming
initial interest, and the seller will reply
to the letter, granting permission.
This is an important document
that must be drawn up carefully; in
particular, the buyer must make sure it
cannot be interpreted as a firm offer.
The seller's reply may take
one of two forms:
• the seller may accept the terms set out
in the letter of interest
• the seller may accept certain
conditions, and submit new terms for
acceptance by the prospective buyer
Once these arrangements have been
settled, if the buyer is still interested
they will submit a firm offer to the seller.
Alternatively, buyer and seller may
proceed directly with the preliminary
sale agreement on completion of
the letter-of-interest stage.
Firm offer
A potential buyer will submit a firm
offer to the seller, confirming their
intention to proceed with purchase.
If the seller accepts this offer, buyer
and seller decide on the details in
order to proceed with signing a sale
contract. Submittal of a firm offer is
binding for the buyer, and acceptance
of this offer is binding for the seller.
The buyer's wording requires great
care here, since acceptance by
the seller will mark irrevocable
agreement to the terms set out.
Preliminary sale
agreement
The preliminary sale agreement is
undoubtedly the most important
document in a property transaction.
It forms a comprehensive account of the
agreements binding buyer and seller.
If the sale concerns both real estate
(land and buildings) and businesses,
the agreement may be expressed in
one document or two (one for the
real estate and one for the company
shares). If there are two documents,
they must be specified as indissociable.
A preliminary sale agreement will
include the following clauses:
• Detailed description of what is being
bought: company shares and/or real
estate
• Price, or method for determining final
price. If the price is not determined on
signature of the preliminary sale
agreement, it must be determinable at
this stage, or else the contract will be
considered invalid.
• Payment details, and guarantees of
payment installments if applicable
• Suspensive conditions, stipulated in
the interest of the seller or buyer. The
main suspensive conditions concern
the following points:
- the seller will need proof, prior to
signature of the final deeds of sale,
that the buyer has the funds needed
to pay the agreed price, refund the
current accounts and pay the duties
on the transaction
- the buyer will need to obtain all
relevant administrative authorizations
(authorization to farm, confirmation of
agricultural status, residence permit,
etc.). (Some such authorizations may
not be required for citizens of European
Union countries.) In addition, a
certificate from INAO may be needed to
confirm the land's AOC rights. And
the buyer will need confirmation of
property deeds for the real estate or
company shares, and confirmation that
the property is legally sellable (i.e.
not mortgaged or concerned by local
development projects, etc.)
- The transaction will need the
go-ahead from SAFER (a French
authority overseeing transactions
concerning farming land), along
with confirmation that SAFER will
not be exercising its preemption right
• General and specific conditions:
- pull-out by the seller
- interval between the signing of the
preliminary agreement and the signing
of the final deeds of sale
- conditions governing the seller's
move out of the house
• Key dates (lifting of suspensive
conditions, signing of final deeds,
transfer and use of property)
• Deposit and penal clause: on the
signing of the preliminary sale
agreement, the buyer is required to
pay a deposit securing the purchase.
This is paid into a special reserve
account, usually managed by a
solicitor (if the sale concerns real
estate) or a lawyer. It is usually set at
5% to 10% of the real estate value
• Impact of results of expert reports on
the property (lead, asbestos, termites,
energy performance, drainage, etc.)
• Details on how the costs of the
transaction are borne
• Other clauses as applicable
12
Vins et spiritueux – La lettre N°5
CLARIFYING THE LEGAL DOCUMENTATION ON SALE AND PURCHASE OF VINEYARDS
Asset and liability
guarantee
If the transaction concerns company
shares, the asset and liability
guarantee is one of the most
important transaction contracts.
With this contract, the seller
undertakes to bear responsibility for
the financial consequences of deeds
and events that took place before the
sale and which later prove to have a
negative impact on the company.
Content of asset and liability
guarantee
The guarantee contract will usually
involve negotiation, often difficult,
between the seller, eager to limit
their liability and the buyer, intent
on the widest-reaching assurance.
Careful preparation beforehand will
help the seller minimize risk exposure.
Specifically, the seller will gather all
relevant data for submitting to the
buyer, and immediately declare all
risk-prone situations in order to sidestep
the need for guarantees on these
matters, or to negotiate the best possible
conditions for specific guarantees.
Extent of guarantees, and claim
procedure
Guarantees can cover various points:
Declarations
• guarantee of declarations
The seller makes a number of
declarations on the company, its
accounts, its assets, compliance
with applicable regulations, etc., and
guarantees this data (with reservations
for specifically detailed exceptions).
Discussions are then held on the
scope of the declarations and on any
exclusions specified in appendices to
the guarantee contract or as a result of
investigations carried out by the buyer.
The seller should carefully reread
the guarantee contract to make
sure that it contains no inaccurate
declarations, and that it specifies all the
required exceptions to their liability.
• guarantee of assets
• guarantee of liabilities
• guarantee of net assets
• guarantee of clearly identified risks
Final deeds of sale
Once the suspensive conditions specified
in the preliminary sale agreement have
been lifted, seller and buyer can proceed
with signing the final deeds of sale.
These deeds are in principle fairly
straightforward and do not give rise
to further negotiations, since all the
sale conditions were specified in the
preliminary sale agreement, and the
guarantee contract has been negotiated
and appended to this agreement.
The guarantee ceiling often proves
one of the trickiest points in the
negotiation between seller and buyer.
The buyer will often demand a high
ceiling, based on the overall transaction
price, though if the transaction
includes real estate, the guarantee
is already covered under the sale.
The seller, on the other hand, will
want to negotiate a deductible.
• other guarantees as applicable
The guarantee contract will specify
the claim procedure and the means
offered to the seller by way of defense.
Guarantee limitations
The seller's guarantee is limited
in duration and in amount.
It is usually limited to periods from
one to three years, except for tax
and social security, for which the
statutory limitation periods apply.
Vins et spiritueux – La lettre N°5
The seller will also have to guarantee
post-transaction solvency in the
event of a claim against the liability
guarantee. This will typically involve
offering a bank guarantee, financial
security, escrow account, etc.
It is important that the main points in
the guarantee contract be negotiated
as early as possible. If this is left
to the final stages in the process,
the transaction may ultimately fail
despite agreement on the essential
points of content and price.
13
CLARIFYING THE LEGAL DOCUMENTATION ON SALE AND PURCHASE OF VINEYARDS
Deed of conveyance of
company ownership
Financial documents
The conveyance of company
ownership requires a written deed,
unless the operation involves a
simple sale of shares, in which case
transfer orders are sufficient. Even
so, the seller and buyer will sign a
deed specifying the conditions under
which the transaction is made.
Guarantee contract
A guarantee contract, the terms
of which will have been agreed
on when the preliminary sale
agreement was signed, will be signed
at the same time as the deed of
conveyance of company ownership.
The seller and/or buyer may be
required to produce financial
documents in connection
with the transaction:
• financial guarantee submitted by
the seller to the buyer to cover
undertakings under the guarantee
contract
• guarantee submitted by the buyer to
the seller in the (highly
exceptional) instance of delayed
payment
These guarantees will usually be
produced by the guarantor's bank.
Paule Cathala
Director
Deed of real-estate sale
If the transaction includes realestate, then a deed of sale will
be signed accordingly. This must
take place before a solicitor.
For in-depth information on the wines and spirits sector
(including articles on brands), from PwC and Landwell &
Associés*, check out the previous issues of our Wines & Spirits
Newsletter on http://www.pwc.fr/ (Publications section).
* Landwell & Associés (French law firm member of the PwC international network)
14
Vins et spiritueux – La lettre N°5
The above discussion of the documents involved in the sale of a wine-making property
obviously makes no claims to offer a full analysis: it outlines the main contractual items
required in this kind of transaction, through to completion of the sale.
A full examination would have included, for example, details on the case of sales
mediated through SAFER, which require special deeds.
Our intention with this article is to draw the attention of sellers and buyers to the need
to pay careful attention to the content and scope of documents they exchange and
sign. This applies to all kinds of document (deeds, mail, email, etc.). Regarding deeds
in particular, legal skills are required, along with specific experience in the wines and
spirits sector.
You'll find more detailed explanations in our pocket guide Sale and purchase of
vineyards, available in French, English and Mandarin.
Vins et spiritueux – La lettre N°5
15
Cognac: bouncing back after
the Chinese crisis
Over a ten-year period, cognac exports
to China increased 20-fold to approach
the equivalent of 25 million bottles
in 2012, which represents 16% of all
export sales of this precious spirit. Like
other luxury goods marketeers, cognac
producers saw China as a new Eldorado.
For the 2nd Cognac Day, held on January
2013, the Chinese Ambassador to France
came especially to confirm Chinese
people's “love and passion” for Cognac,
describing it as an “extraordinary
product of great quality”.
Obviously, nobody expected this kind of
growth to go on forever. That being said, as
we've been seeing over the last few months,
the slowdown has been much more abrupt
than expected: exports of French cognac
to China fell by close to 20% in 2013 alone.
Several factors are to blame: changes in
regulations, a sudden shift in mentality
and behavior following changes in the
Chinese leadership, and concentration of
sales at the top (indeed, the very top) end
of the market. China's anti-corruption and
anti-ostentation law, voted in spring 2013,
inevitably damped down what had become
a fashion for consumption of super premium
XO cognac in China's most privileged
circles, as at extravagant banquets attended
by dignitaries and wealthy businessmen.
Such practices are much less commonplace
today, or at least much more discreet.
In this kind of niche we have seen sales
shrink by over 50% in a few months.
Turning point
Things hardly look better for 2014. New
anti-pornography measures, including
draconian control over "night-life", bring
further confirmation of the new Chinese
paradigm, drawing on discretion and
transparency after years of extravagance.
Cognac exports are therefore likely to suffer
for at least a few months more, especially
since some producers have continued
with exports despite shrinking sales,
building up reserves with intermediaries
which will take a certain time to clear.
All this doesn't mean the Chinese
opportunity has dried up altogether.
Rather, we should see the start of an
in-depth change in the structure of
cognac consumption in China. If they
are to seize new prospects opening
up, producers should realize that they
stand at a turning point today.
In addition to these changes, growth
has slowed down (to below 8%) and
customs restrictions, in retaliation for new
regulations on phthalates, have worsened
matters still, leading to a very difficult 2013.
16
Vins et spiritueux – La lettre N°5
COGNAC: BOUNCING BACK AFTER THE CHINESE CRISIS
Wider range
The rules of the game are about to
change. This spells opportunity for
the more agile players, who will be
taking a long-term approach to this
market and laying solid foundations
for growth. The advantage they have
today is that cognac has entered the
mainstream and is appreciated by a
growing portion of the population.
If, as we have seen, the Chinese
government's recent measures have
hit consumption, especially among
state officials and businessmen, the
Chinese market is nevertheless very
far from saturation, and eminently
accessible to cognac exporters, albeit
with a shift in model, since lower unit
margins will have to be compensated
by larger volumes. The market is there:
the Chinese middle class, already
accustomed to spirits (such as the local
baiju), discovered cognac through the
habits of the elite, especially in the south
(with whiskey being preferred in the
north). This middle class is growing
fast and getting richer. In 2012, 68% of
urban households were earning $9,000
to $34,000 per year. This percentage
will have risen to 76% by 2022. Of these
600 million people, more than half
will be earning more than $15,000 per
year (compared to just 14% in 2012).
Even with the new legislation, this
population will doubtless be consuming
luxury products, and French products
in particular, attracted by the brand
image of France, a country that attracts
increasing numbers of Chinese tourists,
who numbered 83 million in 2013,
up from 10 million in 2003. With
its upmarket positioning and strong
local-produce image, cognac meets
all the criteria; the outlook is bright.
As we mentioned, cognac exports to
China have so far been driven primarily
by top-end products, led by XO. To
reach a larger slice of the population,
producers will have to extend their
range, turning to younger cognacs
that reconcile luxury and affordability
for the middle classes. An example of
this "affordable luxury" approach is
the VS Distinction cognac launched
exclusively for the Chinese market
by Martell in October 2013. Close
segmentation and diversification
will help cognac producers win over
new customer segments and thereby
achieve a lasting foothold on the
Chinese market. But it will be more
important than ever to shrewdly
target the most promising segments,
understand consumer expectations
in each, and implement relevant goto-market strategies accordingly.
Geographical
diversification,
for lower risks
To avoid overdependence on a single,
fluctuating market, cognac exporters
might also consider diversifying their
approach geographically. Different
types of market are open to producers
with different development strategies,
and there are two main criteria
to examine prior to investing:
• The degree to which a population is
accustomed to consuming spirits
provides a good advance indicator of
their propensity to take up cognac. (It
is easier to convert an accustomed
consumer to cognac than an
unaccustomed consumer to any kind
of spirit)
Vins et spiritueux – La lettre N°5
• Preferential target populations will be
wealthy, or becoming wealthy, and
ideally growing
We note three broad types of market:
1. "Developed" markets,
large consumers of VS
cognacs
Industrialized countries (Europe, United
States, Japan) have a limited or negative
demographic growth potential. For
example, the World Bank expects the
population of Germany to decrease by
0.2% per year through to 2030, and
the population of Russia to shrink by
0.3%. In most of these countries we
find a fairly slow growth in wealth since
standards of living are already high.
Purchasing power here is sufficient
to warrant the development of luxury
products such as cognac, and the
main market entry condition here is
the propensity of the population to
consume spirits. In the United States
(the world's biggest cognac importer,
at 50.7 million bottle equivalents in
2013), the UK and Russia, cognac shares
the stage with other spirits such as
whiskey and vodka. So producers must
find, or create, specific consumption
opportunities and identify appropriate
image-shift openings; cognac still tends
to have a rather jaded niche image
that could do with polishing up. In the
United States, for example, cognac is
consumed chiefly in cocktails, and
is especially appreciated by AfricanAmericans. It even figures prominently
in rap culture, just about as far away
as one could imagine from official
Chinese banquets. Addressing this
opportunity, market leader Hennessy
launched its Hennessy Black range in
2009, with an upbeat design targeting
night-life consumption. Over time, and
17
COGNAC: BOUNCING BACK AFTER THE CHINESE CRISIS
with innovations like this, Hennessy
has built itself a very strong position
in the United States (with a market
share approaching 60%), which is
especially valuable given the presentday uncertainties on Asian markets.
Developed countries, with their rich
elites and large middle classes, are also
ideal markets for VS cognacs (which
account for the bulk of exports) as well
as valuable targets for upmarket cognacs
addressing specific niches. To succeed in
these countries and meet demand from
across the whole consumer spectrum,
cognac producers need to field a
diversified product range, distributed
through appropriate, and possibly
multiple, networks, capable of reaching
each consumer segment. And they need
to innovate in order to stimulate interest
and new consumption opportunities.
18
Since populations are already familiar
with cognac, these markets are
accessible to all players, large and small.
And because the markets are generally
large, there is room for any player
capable of forging an individual market
identity and implementing an effective
marketing and distribution model.
Strong roots in these ground markets
can also help producers branch out
into other countries displaying certain
cultural similarities but perhaps less
accustomed to spirits. An example
comes from certain English-speaking
African countries, where cognac is
slowly gaining a foothold through
the exposure it gets from American
stars, especially rap artists. In the
cognac business as elsewhere,
opinion leaders are vital to success.
2. "Venture" markets, ideal
for large producers and
super-premium (XO)
cognacs
Cognac exporters may also turn
their attention to markets that are
less sure but hold high potential. In
some countries that do not have a
culture for consuming spirits (and
cognac in particular), strong growth
in population size and wealth might
lead us to expect a fast-growing
middle class with the attendant
development in cognac consumption.
These "venture" markets are chiefly
located in Africa, South America and
Central America. In Africa, the middle
class today is evaluated at just 17% of
the population (20% in South Africa),
but judging from the outlook for growth
in population size and wealth in certain
African countries, there would appear
to be strong potential for mediumterm growth, despite the over-frequent
climate of chronic political instability.
Vins et spiritueux – La lettre N°5
COGNAC: BOUNCING BACK AFTER THE CHINESE CRISIS
ostentatious consumption patterns,
the markets here are mainly for topend XO cognacs and major brands
of international renown. The next
stage will be to build loyalty among
these customers, gradually develop
cognac consumption as a normal social
practice, and then extend consumption
to other segments of the population
by offering a broader product range.
The key to success on these promising
markets will be to find openings
whereby to get people to know and
appreciate cognac. Demand here
has to be created virtually from
scratch. To start with, at least, this
might typically mean targeting the
wealthiest slice of the population,
whose members might be tempted
to imitate consumption patterns in
richer countries, and thus set a lifestyle
example for the growing middle classes,
among which wealth is growing.
Potential here is attractive, but risks are
high, because markets are often troubled
by political instability, and because
behavior and ethical standards among
the elite can be questionable, thus
raising fears of an eventual Chinesestyle scenario. For these reasons, these
"venture" markets are addressed chiefly
by the larger players, who can afford to
take the inevitable risks. Smaller players
will often make do with a minimum
commercial showing in the hope of not
missing the boat altogether when these
markets begin to realize their potential.
Along these lines, Martell, for example,
is today targeting Nigeria, where
consumption of spirits as an ostentatious
social status marker has grown among
a small portion of the population
that has benefited from oil wealth. A
similar pattern is seen in Angola.
On these markets, consumers are
few but often very wealthy. Because
price is an important factor in
In countries with lower population
growth and fairly low spirit
consumption levels, markets have lower
potential and therefore less investment
appeal to the bigger players, while
promising satisfactory opportunities for
smaller players. This market category
includes many European countries.
To build a balanced business portfolio
and effectively control market risks
here, cognac producers will need a
methodical approach to international
development. But that alone is not
enough. It is also important to realize
that some seemingly attractive markets
might well prove disappointing, for
various reasons beyond the control of
Segmentation of main cognac markets
3%
Population average annual growth rate 2010-2030 (%)
3. Protected niche markets,
a more natural and
accessible target for
smaller players
Nigeria
Size of bubble = Size of market (2010 population x
2010 consumption per capita)
Kenya
Angola
Guatemala
Color of bubble = Cognac penetration of spirits
market
Average
Low
2%
Very low
"Challenge" markets
United Arab Emirates
Honduras
India
Philippines
Venezuela
Australia
1%
Turkey
Laos
Nicaragua
Ecuador
Colombia
Mexico
Chile
United Kingdom
South Africa
Belgium
Netherlands
0%
Finland
Switzerland
Greece
Austria
Italy
Portugal
Roumania
Kazakhstan
United States
Canada
Argentina
Brazil
Spain
France
China
Thailand
Czech Republic
Poland
Hungary
Germany
Niche markets
Russia
Japan
Ukraine
Mature markets
Moldova
(1%)
1
2
3
4
5
6
7
2010 spirits consumption (liters of pure alcohol per capita)
Vins et spiritueux – La lettre N°5
19
COGNAC: BOUNCING BACK AFTER THE CHINESE CRISIS
the cognac producers themselves. India,
for example, despite its fast-growing
middle class and fondness for whiskey,
is still anything but an attractive
market for cognac, a product hit by
customs duties of more than 200%. In
Scandinavian countries and Canada
the distribution of alcohol is handled
by state monopolies. Because producers
are denied access to the end customer,
all they can do is develop opportunistic
referencing strategies (which can,
nevertheless, bear fruit). On markets
such as Ukraine and some Central
American countries, risks are high for
obvious reasons of political instability.
The challenge is to invest in the right
country with the right product at the
right time and the right business model.
In conclusion
Though current difficulties hardly spell
the demise of the Chinese market, they
do illustrate the kind of jolts that can
shake market during the transition
phase. Even with luxury products like
cognac, it is vitally important to be
able to analyze faint market signals
in order to anticipate the twists and
turns ahead, to adapt offerings and
models accordingly, and to remain
capable of an agile response under all
circumstances. Producers can learn
from developments in China to pursue
timely diversification in regional
coverage and product portfolios on
new markets and thus develop a
strong bounce-back capacity during
uncertainty-fraught transition phases
and pursue international expansion,
sidestepping the stumbling blocks of
similar crises in the future. This calls for
fine market analysis yielding workable
regional choices, and the development
of product offerings, customer
promises and business models closely
matched to these strategic priorities.
Sébastien Murbach and
Marion Simon
PwC Strategy & Operations
Vincent Nobileau
Partner PwC Cognac
2nd Cognac
Day
2013
For more information on Cognac Day visit our
website http://expert-comptable.pwc.fr/fr/vins-etspiritueux/journee-du-cognac/2013.
20
Vins et spiritueux – La lettre N°5
COGNAC: BOUNCING BACK AFTER THE CHINESE CRISIS
© 2014 PricewaterhouseCoopers. All rights reserved. This content is for general information purposes only, and should not be used as a substitute for consultation with
professional advisors. In no event shall PwC France or any member firm of the PwC network be liable for any consequences of a decision made on the basis of any
information contained herein.”
Landwell & Associés is a member of the PwC international network, of which each member is a separate legal entity.
is the brand under which these members conduct their activities.
Vinexpo Asia Pacific
(Hong Kong – 27-29 May 2014)
Landwell & Associés Bordeaux,
PwC Hong Kong and PwC
Shanghai organize a conference
at Vinexpo Asia Pacific on
the 28th of May, 2014.
Learn from the experts in the wine
business of Landwell & Associés
Bordeaux (legal firm and member of
the PwC network): the ins and outs of
a successful acquisition in France.
Meet our partners from PwC
Hong Kong and PwC Shanghai and
discover the strengths and resources
of an international network.
Benefit from the experience of
actors from Bordeaux and share our
knowledge of 30 years and of around
100 deals, on the key elements: succeed
in the first steps of the acquisition,
understand the process of an
acquisition, plan the post-acquisition.
If you would like to organize an appointment with our experts in
Hong Kong, between May 27th and 29th, please contact
[email protected] or [email protected]
22
Vins et spiritueux – La lettre N°5
Hong Kong Convention & Exhibition Centre
Key tips to succeed
in investing
in the French wine
and spirits industry
Wednesday 28 May 2014
from 11:00 to 13:30
Room 111/112
Les clés du succès pour réussir son
investissement en France dans le
secteur des vins et spiritueux
Mercredi 28 mai 2014
de 11h00 à 13h30
Salle 111/112
Contacts
Landwell & Associés Bordeaux
Arnaud Agostini
Paule Cathala
Stéphanie Verschave
Infos pratiques/
Practical Infos
Landwell & Associés Shanghai
Chengfei Yuan
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Vins et spiritueux – La lettre N°5
23
www.pwc.fr
Contacts
Landwell & Associés Bordeaux
Arnaud Agostini
Partner
+33 (0)5 57 100 720
[email protected]
Paule Cathala
Director
+33 (0)5 57 100 725
[email protected]
Philippe Laval
Director
+33(0)5 57 100 723
[email protected]
Julien Tayeg
Manager
+33(0)5 57 100 727
[email protected]
Stéphanie Verschave
Manager
+33 (0)5 57 100 726
stephanie.verschave@
fr.landwellglobal.com
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Laurent Gravier
Partner
+33 (0)5 57 100 799
[email protected]
François Miane
Partner
+33 (0)5 57 100 751
[email protected]
Guillaume Franc
Director
+33 (0)5 57 100 825
[email protected]
PwC Cognac
Vincent Nobileau
Partner
+33 (0)5 45 825 935
[email protected]
Jean-Marie Ordonneau
Partner
+33 (0)5 45 828 646
[email protected]
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Partner
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[email protected]
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Partner
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guillaume.morineaux@
fr.landwellglobal.com
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Partner
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Thomas Paulin
Senior Manager
+33 (0)3 80 282 730
[email protected]
Guillaume Tillier
Manager
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[email protected]
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Françoise Gintrac
Partner
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[email protected]
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Director
+33 (0)1 56 577 195
[email protected]
Thierry Charpentier
Senior Manager
+33 (0)1 56 575 812
[email protected]
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Nathalie Lefeuvre
Director
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nathalie.lefeuvre@
fr.landwellglobal.com
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Partner
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[email protected]
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Partner
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Partner
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Partner
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