Division / Partial contribution of assets – Tax deferral of capital gains

A division is an operation whereby an existing business or company is split into two or more separate and legally independent businesses or companies (resulting in the termination of the pre-existing business or company).

The partial contribution of assets is an operation whereby only an autonomous branch of a business is transferred to another new or already existing business (while the contributing business continues operation).

During a division or a partial contribution of assets, the contributing company transfers all or part of its assets to another legal entity.

The unrealised capital gains of the split-up company should, in principle, be disclosed and taxed according to the provisions governing the transfer of companies.

However, certain provisions provide for the deferral of the taxation of unrealised capital gains.

Who is concerned

In terms of commercial law, a division refers only to the operation whereby a capital company transfers all its assets (resulting in the termination of the company being divided) to 2 or more new or existing capital companies.

In terms of tax law, the company division scheme applies more generally to:

  • the division of a capital company (resulting in the termination of the company being divided);
  • the division of a sole proprietorship or partnership;
  • and the partial contribution of assets of a capital company (with survival of the split company).

How to proceed

Division of a sole proprietorship into a transparent company

From a legal point of view, this involves the transfer of the business manager’s assets to the partnership.

However, from a tax point of view, a partnership is simply the sum of the assets of each partner acting as business manager.

The person/entity making the contribution therefore remains the owner of the business that was contributed and the shares that they receive in return for this contribution are not taken into account when calculating taxes.

For this reason, the unrealised capital gains which exist, if applicable, at the time the contribution is made do not result in any taxation.

Division of any kind of business into an opaque company

Optional deferral of unrealised capital gains

In the event of the division (or partial contribution of assets) of a business into a resident opaque company, the natural person/legal entity making the contribution may opt to transfer all or part of the capital gains to the company, provided that the following conditions are met:

  • the natural person/legal entity making the contribution must be a resident taxpayer.
    However, the contribution need not necessarily involve a business located in Luxembourg, with tax neutrality also applying to businesses located abroad (European Union or non-EU State);
  • the company benefiting from the contribution must be a resident, fully taxable capital company;
  • the company benefiting from the contribution must:
    • either continue with the book values assigned on the date of the contribution by the contributing company. In this case, the company benefiting from the contribution will be deemed to have acquired the assets contributed on the date on which they were acquired by the contributing person/entity;
      Example:
      - in year 01, SA LUX1 acquires an interest in SA Lux;
      - in year 03, it contributes all of its assets to SA LUX2, maintaining the book values.

      => The interest acquired by SA LUX1 in 01 is deemed to have been acquired by SA LUX2 in 01.
    • or choose an intermediate value between the going concern value and the book value assigned by the contributing person/entity. In this case, tax neutrality will only partly come into play, with the person/entity making the contribution generating a profit on the transfer that is immediately taxable on the difference between the intermediate value used and the book value of the relevant asset.
      Example:
      - person A contributes his business B to SA LUX;
      - B has net assets of 1,000, and its going concern value is 1,700;
      - SA LUX values the assets contributed at 1,300.
      These assets include a building with a book value of 200 and a going concern value of 600.

      => A generates a taxable profit of 300 (= 1,300 - 1,000), i.e. 30 %.
      This unrealised capital gains disclosure percentage must be applied to all assets in B’s invested net assets.
      The tax capital gain relating to land will therefore be 30% x 200 = 60.

Taxation of company shares or equities issued to the person/entity making the contribution

In order to avoid a subsequent tax exempt transfer (sale) of the securities received in exchange for the contribution, tax law treats these securities as if they were the net assets of a commercial company.

The capital gain from the contribution will thus be carried forward to the date of transfer of the securities. The capital gain will be taxed under and in accordance with the rules for commercial profit without application of the rules relating to the transfer of a significant equity share.

The capital gain is determined by deducting the value used by the business benefiting from the initial contribution from the transfer price of the securities.

Capital gain = transfer price – initial contribution value


Example:
  • person A contributes his business B to SARL LUX;
  • B has net assets of 1,000 at the time of the contribution;
  • the following year he sells all of the company shares of the SARL in which he was a sole partner for 1,300.
=>  His capital gain from the sale is 300 (1,300 - 1,000)

Division of a capital company into another capital company

Deferral of unrealised capital gains tax

In the event of the division of a capital company resulting in the disappearance of the split-up company, the beneficiary company may be granted a tax deferral provided that the following conditions are met:

  • the contributing company must be a resident capital company in Luxembourg;
  • the company receiving the contributions must:
    • be a capital company resident in Luxembourg or a company established in an EU Member State covered by the mergers and divisions directive (normally capital companies);
    • and be fully taxable or taxable at a rate equivalent to that applicable in Luxembourg;
  • the book values of the assets and liabilities transferred must be maintained after the division;
  • the contribution must relate to the whole of the split-up company which is disappearing;
  • the division occurs with the handover of new equities of the companies benefiting from the contribution to the shareholders of the split-up company in proportion to the size of their shareholding.
    The company benefiting from the contribution may, however, pay a balancing cash adjustment provided that it does not exceed 10% of the nominal value of the securities issued;
  • in the case of a cross-border division (division of a Luxembourg company into 2 or more foreign companies), a permanent establishment must be maintained in Luxembourg.

The company benefiting from the contribution will be deemed to have acquired the assets contributed on the date on which they were acquired by the split-up company.

Taxation of shareholders of the split-up company

The treatment of shareholders of a split-up company is identical to that of shareholders of companies absorbed as part of a merger.

Exchange of equities - Exchange capital gains exemption

Under certain conditions, capital companies (whether resident or non-resident, fully taxable or otherwise) can exchange their equity shares for existing or newly issued shares in another company while benefiting from tax neutrality.

Conversely, the exchange of securities for cash or other assets does not benefit from tax neutrality.

It is, however, possible to obtain a balancing cash adjustment of 10% of the nominal value of the securities received.

Partial contribution of assets from a capital company to another capital company

Tax deferral of unrealised capital gains

A company that only transfers part of its activities and continues to operate the remaining part may be granted a tax deferral provided that the following conditions are met:

  • the contributing company must be a capital company resident in Luxembourg;
  • the company receiving the contributions must:
    • be a capital company resident in Luxembourg or a company established in an EU Member State covered by the merger and divisions directive (normally capital companies);
    • and be fully taxable or taxable at a rate equivalent to that applicable in Luxembourg;
  • the contribution must relate to an autonomous part of the business (the autonomous part must be independent and form an independent whole capable of operating on its own in conditions that can be classified as normal in the relevant sector of activity);
  • the contributing company must itself keep an autonomous part of the business (the tax-exempt partial contribution is therefore only possible for companies with at least two business lines).
    Example: a company with a meat cutting and packaging business and a shop selling packaged and cut meat products.

The contributing company may:

  • receive equities or company shares issued by the beneficiary company, in which case it shall be a spinning-off of activity;
  • or allocate these securities directly to its shareholders or partners (generally through a capital reduction by means of a redemption in kind and the subsequent contribution of the redeemed assets to a new company), with the split-up company thus becoming the sister company of the beneficiary company.

Taxation of shareholders of the split-up company

The treatment of shareholders of a split-up company is identical to that of shareholders of companies absorbed as part of a merger.

Exchange of equities - Exchange capital gains exemption

Under certain conditions, capital companies (whether resident or non-resident, fully taxable or otherwise) can exchange their equity shares for existing or newly issued shares in another company while benefiting from tax neutrality.

Conversely, the exchange of securities for cash or other assets does not benefit from tax neutrality.

It is, however, possible to obtain a balancing cash adjustment of 10% of the nominal value of the securities received.

Who to contact

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