EU: Family Business Transfers
26 May 2014
Posted by: Author: Anthony Pace
Author: Anthony Pace (KPMG Malta)
Comparing the impact of tax regimes on family businesses
Businesses across Europe are increasingly aware of the impact of tax on their business strategy and Family Businesses are no different. Indeed, the range of taxes applicable to Family Businesses and their stakeholders mean the possible impacts and complexities are magnified. While much of the focus is on how taxation affects competitiveness, a country's tax regime can have a far wider impact, not least on succession, but also the future growth of Family Businesses.
European Family Businesses (EFB) and KPMG have joined forces to review tax regimes across 23 European countries and their impact on Family Businesses. The comparison of countries' tax systems is complex as all have differing tax exemptions and reliefs in operation. The range of reliefs and exemptions countries offer can mean the effective tax rate can be significantly different to the headline rate.
In this first report, we compare the tax impact of participating countries on Family Business transfers, through inheritance and retirement. Our study has found that overall the burden of taxation on succession, specifically on passing a very simple Family Business from one generation to the next as a result of inheritance or retirement, can vary significantly dependant on the country of operation. In this study, we shed light on the fiscal regimes of the 23 countries, enabling a comparison of the tax impact on Family Businesses.
In the current environment it is important that the tax strategy underpins the wider commercial and business objectives. Tax is likely to be high on your agenda and, regardless of your role in your Family Business, understanding how different countries tax business succession could impact your future strategy.
We hope that you enjoy reading this first survey, which we hope will bring some transparency to the possible effects of the differing tax regimes upon one of the key concerns of Family Businesses – preparing for and dealing with succession.
Family business succession through inheritance
We asked tax experts from KPMG member firms in each country to consider the following facts:
John Smith has owned his Family Business, Oakwood, for over ten years. He invested €1,000,000 to establish the company and has worked hard over the years to build it. The current balance sheet is shown below. The business is now valued at €10,000,000 on an arm's-length, third-party basis (which includes €5,000,000 of goodwill). All assets in the company are used for the purposes of the business.
John's wife, Sarah, died in 2010 and he has one son, David, who is 35 years old. Unfortunately John died in early 2013 and his will passed the business to David, who intends to continue the business for the next 20 years or so.
What is the tax impact of John's death?
Tax due on inheritance
Tax due without exemptions and reliefs
Figure 1a provides an overview of tax levied across the 23 countries surveyed, excluding any exemptions and reliefs available. The range of €0 in Cyprus, Luxembourg, Poland, Romania, Slovakia, Slovenia and Sweden, to over €4m in France demonstrates the stark contrast across Europe. No less than 13 of the 23 countries have been rated 'green', as they would impose taxes of less than €1m. These countries may be seen as 'green', however a tax levy of over €250,000 represents a large amount for this size of organisation.
Four countries are flagged 'red' as they impose taxes of more than €3m. These red flagged countries may have been traditionally expected to have more favourable tax regimes, namely France, Ireland, the Netherlands and the UK.The tax landscape does however change dramatically when you introduce country-by-country tax exemptions and reliefs.
Tax due with exemptions and reliefs
As demonstrated in Figure 1b, when exemptions and reliefs are available, qualification criteria met and applied to the business, the landscape changes dramatically. Those countries receiving a green, amber and red status changes from Figure 1a. When applying reliefs and exemptions to the case study, the number of countries which impose no tax increases from 7 to 13 with the Czech Republic, Germany, Hungary, Italy, Portugal and the UK joining the list.
The impact that exemptions can have on tax levied is further demonstrated by a further five countries – Belgium, Finland, Ireland, the Netherlands and Spain – reducing their tax bill to below the €500,000 level. The exemptions and reliefs are not only complex but wide in their application, as are the taxes. Taxes levied include personal income tax, inheritance tax, real estate transfer tax, duty on documents and transfer levies. If this wasn't complicated enough, there are some geographies, such as Belgium, where different regimes are present within the country leading to some regions having their own approach within a country's tax regime. Across the border in the Netherlands, the position is complicated by the ability of families to defer payment of part of the tax. In our example, this reduces the tax payable to €220,676. This is not strictly speaking an exemption as the tax may become payable at some point in the future, but in practice can reduce the tax bill significantly. This only goes to illustrate how complex the position can be!
To view survey in full click here.
This article first appeared on mondaq.com.