Generational transfer and taxation
Examine carefully the taxation issues concerning a generational transfer well before the process itself. A well-planned generational transfer may reduce the tax consequences for your company. In a generational transfer, the retiring owner may have to pay taxes on capital gains. The successor may have to pay taxes on gifts, inheritance and capital gains. You should use expert assistance in taxation issues when planning a generational transfer.
Start finding out about the taxation issues well in advance, even years before the generational transfer itself. You can use the expertise of your bookkeeper, the Finnish Tax Administration, legal experts or your regional business development company.
Taxation issues in a generational transfer are on a case-by-case basis. However, usually the most advantageous option is to donate or transfer your company to the successor as an advancement over a period of several years.
You can influence the tax consequences incurred by your successor by for example changing the form of business, articles of association or the partnership agreement of your company in advance. Other methods include the distribution of dividends, division of the company into smaller companies and private placement. The company may also acquire own shares from the retiring owner.
In generational transfers, you can also use different types of tax relief benefiting both the retiring owner and the successor. The relief depends on such factors as the sector in which the company operates, form of business, sales price, length of the ownership and whether the parties are related to each other. The parties may be eligible for full or partial tax relief.
In most generational transfers, you have to pay taxes on capital gains.
However, you do not need to pay any capital gains tax, if all of the following conditions are met:
- you sell at least ten per cent of the shares of your company
- you have owned the shares for at least ten years
- the successor is your child, grandchild, sibling or half-sibling, or the child or adopted or foster child of your spouse alone, or one these and his/her spouse together.
If there is more than one retiring owner, each of them must sell at least ten per cent of their shares so that no individuals need to pay capital gains taxes. The requirement for tax relief is not met if all retiring owners sell a total of ten per cent of the company's shares.
If you are a private trader, you are not eligible for tax relief and you have to pay taxes for capital gains. However, before the implementation of taxation, you can ask the Finnish Tax Administration to divide the income over several years. This reduces your yearly tax burden.
As a successor, you may have to pay taxes on gifts, inheritance and capital gains.
However, you may not need to pay gift tax, if the following conditions are met:
- you are the retiring owner’s child, grandchild, sibling, half-sibling, adopted or foster child, or the child of the retiring owner's spouse
- the sales price is at least 75 per cent of the fair market value of the company’s shares.
You may be granted relief for gift or inheritance tax if all the following conditions are met:
- you receive at least ten per cent of the company's shares
- you are continuing the business operations
- the business operations have never been interrupted
- the taxes total at least EUR 850
- you have submitted a written request for tax relief to the Finnish Tax Administration before the implementation of taxation.
- If your receive the whole company as a gift, you are not eligible for relief for gift tax.
If you sell shares after the generational transfer you will have to pay capital gains tax on them. Note that if you sell the shares less than five years after the generational transfer, you will also have to pay the taxes not collected from the retiring owner plus a 20 per cent tax increase.