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Tax aspects of company succession
The tax implications in the context of a business succession arrangement depend essentially on the legal form of the company and the chosen implementation. In the frequent case of the sale of a corporation to a third party, the focus is regularly on achieving a tax-free capital gain, whereby certain aspects must be taken into account in this regard.
n the case of internal family arrangements, i.e. when the business passes from ownership to children, it must be determined whether this transfer is to be implemented gratuitously, i.e. in the form of a gift or an advance inheritance, for consideration as a sale or in the form of a mixed gift. In the case of a traditional succession outside the family, the company is usually sold to the current management or to a third party.
If a corporation is sold as part of the succession, the so-called share deal (sale of the shares in the company) is generally preferable to the so-called asset deal (sale of the assets and liabilities of the company followed by the liquidation of the company) for tax reasons (see below).
On the other hand, it is in the interest of the buyer to finance the transaction in a tax-efficient manner. Ideally, the financing costs of a leveraged succession can be amortised with future ordinary profits of the acquired company. Furthermore, in order to generate future depreciation potential, the buyer is interested in acquiring the assets of the company at market value, which is only possible in an asset deal.
In the case of the sale of a corporation (AG or GmbH), the shares or ordinary shares in the company are transferred (share deal). As a rule, the entrepreneur holding the shares as private assets realises a tax-free private capital gain. In particular, the so-called indirect partial liquidation remains reserved: Within 5 years after the sale, no substance may be withdrawn from the sold company that was already available at the time of the sale and was distributable under commercial law as well as not necessary for business operations. If such a withdrawal of substance occurs, the tax administration may reclassify the tax-free capital gain as taxable investment income at the expense of the seller. If the corporation is not an operating company but a real estate company, the seller usually owes real estate gains tax at the location of the real estate.
If hidden reserves are realised in an asset deal, they are subject to profit tax at the level of the corporation selling the assets and liabilities. In the context of a subsequent liquidation, a liquidation dividend is taxed as income for the shareholder (partial taxation possible with a participation rate of more than 10%).
If the legal form of the enterprise is a sole proprietorship or a partnership, its assets and liabilities are sold, which leads to a de facto liquidation of the partnership enterprise. The capital gain from the sale is subject to income tax as well as social security contributions. Privileged taxation of hidden reserves in the event of definitive cessation of self-employment must be examined on a case-by-case basis. Since the high taxes and social security contributions are not desirable in this scenario, it should also be examined at an early stage whether the business should be converted into a corporation with a view to succession. This opens up the possibility of realising a tax-free private capital gain if the business is sold after 5 years have elapsed since the conversion.
The business succession can be financed by own funds, borrowed funds or by means of a mixed form. If the acquisition is made by means of an acquisition holding company, the interest on the debt is in fact not taxable, but it is possible to finance a vendor loan through ordinary profits of the sold corporation. Succession planning should not be underestimated from a tax perspective. Every succession plan has its own peculiarities that need to be analysed in detail. There is potential for tax savings with early planning. A tax ruling, in which the tax administration confirms the tax consequences that will arise upon implementation of the planned transaction, leads to the desired legal certainty for the parties.
This article has already been published in CORE-Newsletter 31 of June 2022.
