Intergenerational transfer of a business refers to a situation where a company’s ownership is transferred to another family member or close relative.
Intergenerational transfers differ from normal business acquisitions by the various tax breaks that it may afford, with certain conditions. Intergenerational transfers also usually involve smaller selling prices and the donation of assets to a successor.
If made incorrectly, the intergenerational transfer of a business may have sizeable negative tax consequences. For this reason, it is not insignificant how the change in ownership is accomplished.
Planning the intergenerational transfer of a business is a broad issue
The key to a successful intergenerational transfer is finding a suitable successor or successors. For this reason, planning should begin well in advance, years before the actual transfer will take place.
Once a suitable successor or successors are found, more concrete plans can be made on practical matters, such as:
- what are the future shares of ownership,
- how will any additional financing be arranged,
- what will the tax consequences be,
- when will the change be announced publicly to customers and other stakeholders.
Even before the official change in ownership, tax consequences can be lowered by means of distributing dividends or share issue, changing the company’s legal form or partnership agreement, demerger, or purchase of shares.
Tax rules on intergenerational transfers are fairly uniform regardless of whether the company is a limited liability company or a partnership (limited partnership or general partnership).
Intergenerational transfer of a business - documents and ground rules
In an intergenerational transfer, the contents and terms of all relevant documents should be carefully reviewed. In addition to the deed of sale or gift, the articles of association or partnership agreement must also be updated.
The articles of association can, for example, agree on a right of redemption of shares or secure the company’s existing assets if no separate shareholders’ agreement has been made between the shareholders.
If the company has several shareholders, it is useful to draw up a shareholders’ agreement. The shareholders’ agreement is free-form and voluntary, which means that its content and structure depend on the needs of the company and shareholders. The shareholders’ agreement can be used to address in advance any circumstances that could lead to future disagreements between shareholders.
As part of an intergenerational transfer, the last will and testament, power of attorney and prenuptial agreement should also be updated.
If a part of the shares’ purchase price is financed with a loan, the promissory note must specify the loan’s repayment schedule, interest rate, penalty interest and possible collateral, among other information.
Intergenerational transfer of a business – tax regulations
The tax liabilities of companies undergoing an intergenerational transfer have been relieved by a number of provisions of inheritance and gift tax and income tax law. The law affords tax benefits for business owners, regardless of whether the plan is to sell or continue the business with a successor.
Taxation depends on the method of giving away ownership; in other words, whether the company is sold, gifted or given as inheritance to the successor. If the business is transferred with a sale, the purchase price is highly important.
In the worst scenario – if the intergenerational transfer of the business is not planned and carried out with sufficient care – taxes must be paid based on the fair value of the company’s share capital. Often, this sum is much higher than the shares’ balance sheet value.
It should also be noted that tax authorities will not grant gift tax and inheritance tax reliefs or payment term extensions automatically, but these must be requested separately. A tax relief should be requested when the company’s intergenerational transfer is made as a gift, inheritance or gift-type transaction. Any requests must be submitted to tax authorities before a tax decision is made on the gift or inheritance.
If the intergenerational transfer is made as an inheritance or gift, you can also request an extension on the payment term for the tax from the Tax Administration when requesting the tax relief.
