Changing the legal form of the company - Tax impact
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When creating a business, the entrepreneur chooses a legal form that corresponds to their business project. This form is not definitive and the entrepreneur may decide to change it later in order to adapt to its current activity.
The tax consequences of the transformation vary depending on the initial legal form of the company and the new form chosen:
- it is tax neutral when changing:
- from a capital company to another form of capital company;
- from a partnership to another form of partnership;
- there is a tax impact when changing:
- from a capital company to a partnership;
- from a partnership to a capital company.
Who is concerned
The transformation of a business mainly concerns:
- a person who began their activity as a sole trader and would like to transform their business into a company in order to limit their liability or go into business with new investors;
- shareholders or partners of a company that has already been formed that can be reorganised and change its legal form in order to best adapt to new operating requirements.
How to proceed
Capital company => partnership
This transformation may have tax implications for:
- the company;
- the partners or shareholders.
At initial company level
The transformation of a capital company into a partnership is regarded as a termination of the business.
The tax consequences arising from this transformation are therefore the liquidation of the company, in particular regarding taxation of the liquidation proceeds (including the realised capital gains).
The unrealised capital gains constituted by the capital company can no longer be subject to corporate income tax after the legal transformation. They are therefore taxable at the initial company level at the time of transformation.
At capital company partner / shareholder level
At the time of transformation:
- if the partner is a natural person: the rules concerning the transfer of company shares of an opaque company become applicable. A distinction must therefore be made as to whether it involves a speculative profit or a significant interest;
- if the partner is a sole trader or a partnership, the capital gains are subject to income tax.
If the capital gains are reinvested in equivalent replacement property or reinvested in the business' fixed assets, the taxpayer can request a capital gains transfer (700F) in order to defer taxation. This exemption will expire in the event of a future sale or termination.
- if the partner or shareholder is a capital company:
- the operation is exempt when the preferential conditions of the parent-subsidiary directive are met;
- otherwise, the operation is taxed as a dividend distribution.
Capital company => capital company
In principle, this transformation is tax exempt.
The newly formed company takes over the accounting of the former company. Thus, the loss carryforward and tax credits to which the company was entitled before its transformation are maintained by the new company.
For shareholders, the share holding periods continue.
However, the transformation operation becomes taxable when transforming into a tax-exempt capital company (a SICAV, for example).
Sole proprietorship (Entreprise individuelle) / partnership => capital company
The transformation of a sole proprietorship / partnership into a capital company is the tax equivalent of a business transfer, with regard to the taxation:
- of operating profit, and;
- of the profit on transfer/termination (including realised capital gains).
Changing the business's legal form also, and above all, affects unrealised capital gains. The tax authorities consider that the assets belonging to a partnership constitute a contribution to the newly formed capital company.
If the capital gains are reinvested in equivalent replacement property or reinvested in the business' fixed assets, the taxpayer can request a capital gains transfer (700F) in order to defer taxation. This exemption will expire in the event of a future sale or termination.
Example: a partnership generates a capital gain by selling a lorry; this company may use the sum corresponding to the capital gain to purchase another lorry (equivalent replacement property) or to reinvest in the business' fixed assets. In such cases, taxation is transferred to the new asset or investment, and deferred until the future sale/termination.
It is possible to transfer only part of the unrealised capital gains when:
- the person/entity making the contribution on behalf of the partnership (initial company) is a resident taxpayer (natural person or capital company);
- the capital company benefiting from the contribution is fully taxable and resident in Luxembourg. However, the contribution need not necessarily involve a business located in Luxembourg, as tax neutrality also applies to businesses located abroad (European Union or non-EU State);
- the capital company benefiting from the contribution must choose:
- to either maintain the book values assigned on the date of the contribution by the contributing business. In this case, the company benefiting from the contribution will be deemed to have acquired the assets contributed on the date on which they had been acquired by the person/entity making the contribution;
- to either maintain the book values assigned on the date of the contribution by the contributing business. In this case, the company benefiting from the contribution will be deemed to have acquired the assets contributed on the date on which they had been acquired by the person/entity making the contribution;
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 define an intermediate value between the going concern value and the book value assigned by the person/entity making the contribution. 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 percentage has to be applied to all assets in B's invested net assets.
The tax capital gain relating to the land will therefore be 30% x 200 = 60.
Sole proprietorship (Entreprise individuelle) / partnership => partnership
No taxation is triggered by this transformation.
The business manager's assets are transferred to the partnership. Whoever contributes his business remains the owner thereof in the new company.
Who to contact
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
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.
Related procedures and links
Procedures
Links
Legal references
-
Loi modifiée du 10 août 1915
concernant les sociétés commerciales
-
Loi modifiée du 4 décembre 1967
concernant l'impôt sur le revenu
