Generational transfer and taxation

Tax planning for a generational transfer refers to choices made in advance to reduce the amount of taxes to the extent permitted by law. You should find out the tax consequences well in advance, preferably years before the actual generational transfer. You can get help for tax planning from an accountant, the Finnish Tax Administration, legal experts or business services in your region or municipality, for example.

In a generational transfer, taxation is always determined on a case-by-case basis. In some cases, taxation can be reduced by transferring the company or farm to the successor as a gift or through a gift-like sale in several instalments over a longer period, for example. However, this may not be the best solution for everyone, and the appropriate method depends on the company, family relationships and the financial situation of the parties.

The retiring owner can influence both their own and the successor’s taxation through advance planning. For example, they can change the company’s form of business, articles of association or partnership agreement in advance. Other methods include the distribution of dividends, division of the company into several companies and private placement. The company may also acquire its own shares from the retiring owner. These measures always require careful consideration.

In most generational transfers, the retiring owner must pay capital gains tax – a tax on the profit from the sale of an asset if they sell the company’s shares, partnership interests or immovable property that is part of their agricultural or forestry activities.

However, the transfer may be tax exempt if all the following conditions are met:

• The retiring owner sells at least 10% of the company’s shares, a partnership interest or immovable property that is part of their agricultural or forestry activities.
• The retiring owner has owned the shares, interests or agricultural and forestry properties to be sold for at least 10 years.
• The successor is the retiring owner’s child, grandchild, parent, sibling or half-sibling, spouse’s child or adopted or foster child – either alone or together with the spouse.

If there is more than one retiring owner in the limited liability company, each of them must sell at least 10% of their shares to be tax exempt. In other words, the requirement for tax relief is not met if all the retiring owners sell a total of 10% of the company’s shares. Similarly, if shares are transferred to two children, for example, each child must receive a separate share of at least 10%.

If the retiring owner is a private entrepreneur and sells their company assets to the successor, the sale is treated as the seller’s last transaction in income taxation. The sale price resulting from the transfer is recorded as business income for the tax year in question at the time of sale. In certain cases, the income equalisation procedure can be applied to one-off income that is taxed as earned income from the sale of business operations.

In a generational transfer, the successor must pay gift tax or inheritance tax depending on whether they receive the company or farm as an inheritance, gift or gift-like sale.

The successor may be granted generational transfer relief for gift or inheritance tax if all the following conditions are met:

• The gift or inheritance includes a company, farm or part thereof.
• The successor continues the business or agricultural activities with the acquired assets.
• The farm or company accounts for more than €850 of gift or inheritance tax.
• In the case of a company (limited liability company or partnership), the successor receives at least 10% of its shares or partnership interests.
• The successor applies for tax relief from the Finnish Tax Administration before taxes are levied.

If the successor receives the company’s shares, partnership interests or farm in a gift-like sale, they will not have to pay any gift tax if the conditions for tax relief are met and the purchase price is more than 50% of the fair value of the assets.

If the successor is granted tax relief for generational transfer, their gift tax will be partially or fully waived based on the relief.

In addition, if the successor

• sells the majority of the company’s shares, partnership interests or farm subject to the relief before five years have passed from the transfer, they must pay capital gains tax resulting from the sale. They must also repay the previously waived gift or inheritance tax and a tax increase of 20%.
• sells the asset subject to the relief after five years have passed from the transfer, the successor pays capital gains tax resulting from the sale, but they do not have to repay the previously reduced gift or inheritance tax or the 20% increase.