Generational transfer refers to the transfer of company shares or a farm to the successor of the business or agricultural activity. A generational transfer is usually carried out either as a gift or as a gift-like sale, in which case the successor pays a price lower than the fair market value of, for example, the shares. The successor can also pay the full price for the shares or farm, but in this case the transaction is usually considered as a business acquisition instead of a generational transfer. In a generational transfer, the recipient/buyer often is a close relative of the donor/seller, but this is not required.
Shares in an unlisted limited liability company or a general partnership or limited partnership engaged in business activities can be transferred to the next generation in a very tax-efficient manner since there is a tax relief available for such situations. The relief from the payable inheritance tax or gift tax is at least 60 percent, but in many cases the tax savings can be even more substantial.
GENERATIONAL TRANSFER - TAX RELIEF IN GIFT AND INHERITANCE TAXATION
When the owner gives shares in a limited liability company or a general or limited partnership as a gift, tax relief regulation may apply. The same regulation can be applied to inheritance taxation when a company is transferred to a successor as inheritance or through a will. The recipient of the gift or the legatee does not have to be a related to the donor.
If the object of the gift or inheritance is shares, and the tax relief is applied, gift tax or inheritance tax is not paid on the fair market value of the asset. Instead, shares are valued based on net worth (general or limited partnership) or the benchmark value (limited liability companies) of the shares. In addition, a 60 percent deduction is made from this value to determine the taxable value of the asset. If, for example, the benchmark value of the shares is 100,000 euros, the value used in gift or inheritance taxation would be only 40,000 euros.
In order for the relief to be granted, the gift, inheritance or bequest must cover at least 10 percent of the company's entire share capital. In addition, it is required that the recipient of the gift, inheritance or bequest continues business activities with the received funds.
Gift taxation can also be reduced in situations where a generational transfer is carried out with a gift-like sale. A sale can be considered to be gift-like if the compensation paid by the buyer is lower than the fair value of the asset.
GENERATIONAL TRANSFER – TAX RELIEF IN INCOME TAXATION
Generational transfer tax relief can also apply in the context of income taxation, more precisely to the taxation of capital gains. The seller does not have to pay tax on capital gains if the object of the sale covers at least 10 percent of the company, and the recipient of the transfer is a close relative (e.g., child, grandchild, or sibling) of the seller. In addition, the seller must have owned the shares for more than 10 years.
AGRICULTURE AND FORESTRY
The regulation on tax relief can also be applied to generational transfers of farms engaged in agriculture or agriculture and forestry. Similarly, to shares, the taxable value of the assets included in the transferable operations is 40 percent of the asset value. Tax savings can be significant.
The relief provision of the Income Tax Act regarding the tax exemption of capital gains may also come into question when realty belonging to agriculture or forestry is sold to a close relative referred to in the provision.
FISCALES HELPS IN ALL GENERATIONAL TRANSFER MATTERS
We assist our customers in all tax issues relating to generational transfers. The process is best started by going through the customer's situation and goals, after which we plan and implement a tax-efficient and appropriate generational transfer together with the client.
In many cases, the fulfilment of the conditions for tax relief is open to interpretation. Interpretive situations can be related, for example, to the nature of the company's activities, such as the fulfilment of the requirement to continue operations or conducting business activities as required by law. In addition, a company may also include assets other than those directly related to the business, in which case it will need to be decided whether the relief can be applied to the company's assets as a whole. Because of this, applying for a preliminary ruling is in many cases an important part of implementing a Generational transfer.
We carry out generational transfers from start to finish, which includes planning, the preliminary ruling application process and, depending on the situation, the preparation of deeds of sale, gift deeds, testaments, and tax-related documentation.
In connection with the generational transfer, it is a very opportune time to ensure that all other tax matters of the entrepreneur and their family are in order as well.
