Business takeover - Fiscal implications
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Rather than setting up a new business, an entrepreneur may decide to take over:
- either the goodwill of an existing company. In such cases, the buyer may need to pay VAT or registration fees on the transfer of ownership of certain assets;
- or equities or company shares in:
- a capital company: this has no tax impact for the buyer who only buys shares in the company which, meanwhile, retains ownership of its assets;
- a partnership: in this case, as the assets of the company are transferred to the partners, the transaction is treated as a purchase of goodwill and may result in the payment of VAT or registration fees.
Who is concerned
Any person wishing to avoid the start-up phase of a new business may decide to take over an existing business by purchasing:
- either the goodwill alone.
In such cases, the buyer directly acquires all of the tangible movable assets (equipment, tools, merchandise) and intangible assets (lease rights, name, brand, client base, etc.) from the seller.
The buyer therefore takes over the assets only, without any liabilities, with the possible exception of certain contracts included in the goodwill (employment contracts, lease agreement, procurement contracts, etc.); - or equities or company shares in a company.
In this case, the buyer acquires only the legal ownership of the equities or shares in the company, which then remains the owner of its own assets and liabilities.
The buyer therefore indirectly acquires both the assets and liabilities (i.e. all the company's assets, commitments and debts).
In general, the buyer will require the seller to sign an asset and liability guarantee covering the whole of the statutory limitation period in respect of tax and corporate matters.
At the time of the sale, the seller will, in principle, be taxable on the capital gain made on the sale.
How to proceed
Purchase of a business
Tax definition of goodwill
From a legal standpoint, goodwill is indivisible and refers to all tangible and intangible items acquired as part of the takeover (merchandise, furniture, client base, etc.), namely:
- any items shown on the business' balance sheet which may be split off and then valued and depreciated separately (merchandise, patents, furniture, etc.);
- and the cost of purchasing the client base and the clientele related to the business location.
From a tax standpoint, goodwill refers solely to the difference between the purchase price of the business and the sum of the costs of acquiring the various items on the balance sheet.
From this standpoint, goodwill, or business assets, therefore corresponds solely to the cost of purchasing the client base and the clientele in relation with the business's location.
VAT and registration fees
In the event of acquiring all the goodwill in its entirety:
- the transaction is VAT-exempt as the buyer in a certain sense continues the existing business activity. The buyer takes over the rights and obligations of the business in terms of VAT (e.g. any settlement of deductions relating to capital goods);
- however, certain goodwill items (e.g. the transfer of the lease agreement) may be subject to pro rata registration fees.
In the event of acquiring only part of the goodwill, i.e. only certain items (e.g. lease rights):
- the buyer may be liable for VAT on the purchase price of these items taken separately;
- in such cases, no registration fees are due.
Income tax
When a sole trader or company sells its goodwill, the seller is taxable on any capital gain made on the sale.
The buyer, however, does not pay tax at the time of the takeover (excluding any registration fees or VAT).
The buyer may be liable for capital gains tax on the subsequent sale of the goodwill or of the company owning the goodwill.
Example: a limited liability company (société à responsabilité limitée - SARL) with capital of EUR 1,000,000 sells its goodwill to another SARL for the sum of EUR 3,000,000. The selling company in this case makes a capital gain on the sale subject to corporate income tax.
If the owners of the acquiring company decide to resell the business after 5 years for an amount of EUR 3,500,000 (it is assumed, for simplicity's sake, that the company made neither profits nor losses during the 5 years), they can:
- either sell the company shares, making a capital gain on the sale of EUR 3,500,000 (sale price) – 3,000,000 (initial investment) = 500,000 (capital gain);
- or keep their company which then sells its goodwill and receives the proceeds of the sale (even if they are subsequently distributed to the partners), making a capital gain on the sale of EUR 3,500,000 (initial investment) – 1,000,000 (own capital) = 2,500,000 (capital gain).
These capital gains are then subject to tax.
Depreciation of goodwill
When starting up a business, goodwill cannot be shown in the assets side of the balance sheet. Only the various assets of which it consists can be shown there.
However, when acquiring an existing business, goodwill can be shown on the balance sheet. In principle, it is depreciated over 5 years (under accounting law) or 10 years (under tax law).
The business can choose whether to align its accounting depreciation with its tax depreciation and/or adjust the duration of depreciation if justified.
Example: the business manager pays EUR 1,000,000 for goodwill consisting of merchandise (EUR 200,000), a lease (EUR 50,000) and equipment (EUR 250,000).
From a tax standpoint, the goodwill therefore amounts to EUR 1,000,000 – (200,000 + 50,000 + 250,000) = 500,000.
The business depreciates this expense over 5 years. The annual tax-deductible depreciation charge is therefore 500,000/5 = EUR 100,000.
If the commercial profit before depreciation is EUR 300,000 the first year, the taxable commercial profit will then be EUR 300,000 - 100,000 = 200,000.
Purchase of equities or shares in a company
Acquisition of an opaque company (SA, SARL, SECA)
An opaque company (SA, SARL, SECA) has a distinct legal personality from that of its partners/shareholders.
If partners/shareholders sell equities or shares which they own in the company, the company nevertheless continues with its business as usual, this change of hands having no impact on its balance sheet, contracts and tax liability.
The seller, however, is subject to tax on any capital gain made on the sale.
The new partner/shareholder is not liable for tax at the time of the acquisition but may be subject to tax on the subsequent sale of the shares.
Example: a sole partner sells his/her shares in a SARL with capital of EUR 1,000,000 for the sum of EUR 3,000,000. The commercial and tax balance sheets of the company remain unchanged. On the other hand, the company will have a new partner who has spent 3,000,000 to purchase the shares (ownership rights) of the company.
If the new business manager decides to resell the business after 5 years for an amount of EUR 3,500,000 (it is assumed, for simplicity's sake, that the company has made neither profits nor losses during the 5 years), he/she can:
- either sell the company shares, making a capital gain on the sale of EUR 3,500,000 (sale price) – 3,000,000 (initial investment) = 500,000 (capital gain);
- or keep the company which then sells its goodwill and receives the proceeds of the sale (even if they are subsequently distributed to the other partner), making a capital gain on the sale of EUR 3,500,000 (sale price) – 1,000,000 (own capital) = 2,500,000 (capital gain).
These capital gains are then subject to tax.
Acquisition of a transparent company (SENC, SCS)
A transparent company has a distinct legal personality from that of its partners but is not taxable as such. It is the partners who are subject to tax in respect of the profits which they derive from it.
If partners sell equities or shares which they own in the company, the company nevertheless continues with its business as usual, this change of hands having no impact on its balance sheet, contracts and tax liability.
The seller, however, is subject to tax on any capital gain made on the sale.
The buyer may be liable, as if it were a purchase of goodwill:
- for the registration fees or VAT due on the immovable assets or the lease agreement held by the company acquired;
- and, subsequently, for tax on the capital gain made at the time of the subsequent sale of shares in the company.
Example: the business manager purchases all of the partnership shares of a SCS at a price of EUR 1,000,000. The SCS is the owner of a building located in the city of Luxembourg with a market value of EUR 1,500,000.
The sale of partnership shares will involve the payment of a 10% registration fee on EUR 1,500,000, i.e. EUR 150,000, because of the transfer of the economic ownership of the building.
Acquisition of a business by its managers/employees through a holding company
Rather than selling the business to a third party, the shareholders/partners may propose to one or more managers/employees of the company that they acquire it through a holding company financed by a bank loan:
- the acquiring managers set up a holding company (SOPARFI) whose purpose is the purchase of the company to be acquired;
- the buyers contribute their own capital to the holding company;
- this holding company (and not the buyers) borrows the remaining funds from a bank and purchases the shares of the existing business;
- the lending bank may take an equity holding in the company which it then resells to the managers;
- profits made by the company acquired are repaid to the holding company in the form of dividends in order to repay the bank loan (capital + interest);
- tax consolidation then enables the existing company to deduct the holding company's bank interest payments from its own profits.
This "leveraged management buy-out" technique thus enables employees and managers to repurchase their company by financing the acquisition through the future profits of the business.
Use of this financial technique does not allow any financial aid from the State.
Who to contact
Luxembourg Inland Revenue (ACD)
-
Luxembourg Inland Revenue (ACD)
- Address:
- 33, rue de Gasperich L-5826 Hesperange Luxembourg
Please consult the above website to find the competent department.
Registration Duties, Estates and VAT Authority (AED)
-
Registration Duties, Estates and VAT Authority (AED) Registration Duties, Estates and VAT Authority (AED)
- Address:
-
1-3, avenue Guillaume
L-1651
Luxembourg
Luxembourg
B.P. 31, L-2010 Luxembourg
- Phone:
- (+352) 247 80 800
- Fax:
- (+352) 247 90 400
- Email address:
- info@aed.public.lu
- Website:
- https://pfi.public.lu
Related procedures and links
Procedures
Links
Legal references
-
Loi modifiée du 4 décembre 1967
concernant l'impôt sur le revenu
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Loi modifiée du 12 février 1979
concernant la taxe sur la valeur ajoutée
