Termination of activity of sole proprietorships / partnerships - Tax impact

The termination of activity of a company consists in stopping its economic activity.
For a partnership, the termination of activity will entail its dissolution / liquidation.

The termination of activity:

Once the taxable profit has been determined (operational profit and profit from the termination/transfer of the business), the partners/entrepreneur must pay personal income tax.

Who is concerned

In the event of a termination of activity of a sole proprietorship or a liquidation of a partnership, the tax on profits from the transfer/termination must be paid by:

  • the entrepreneur in the case of a sole proprietorship;
  • the partners in the case of a partnership.

Unlike a permanent termination of business activity, a temporary termination of business activities does not generate any taxation.

Example: a business operator who is forced to temporarily stop his business activity during a period of convalescence.

Preliminary steps

The trader (natural person) who stops his activity must report the termination of activity to the bodies & administrations where he is registered.

A company that stops its business activity or whose manager/director leaves the company must also report the termination of activity to the bodies & administrations where it is registered and proceed with the dissolution of the company.

How to proceed

Calculating the taxable profit

The definite termination of activity of a sole proprietorship/partnership is subject to the same tax scheme as in the case of a transfer/transmission of a sole proprietorship.

The business operator is taxed on:

  • operating profit or current profit, i.e.:
    • profits realised between the close of the last financial year and the day of the business transfer;
    • profits that have not yet been taxed due to the reinvestment of capital gains mechanism;
  • capital gain or profit from the transfer/termination, i.e. the transfer price of the business including the revaluation of invested net assets.

Taxation

The taxation of operating profits is determined by tax base

Operating profits are subject to personal income tax.

Capital gain is taxed at half the global rate by the Luxembourg Inland Revenue (ACD).

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