Termination of activity of a capital company - Tax impact
The termination of activity of a capital company consists in stopping its economic activity and entails its dissolution/liquidation.
The company must:
- determine its operating result;
- pay corporate income tax on liquidation proceeds (realised capital gains and operating profit);
- distribute any liquidation surplus to its partners, without withholding tax being applied.
The partners must then pay:
- either personal income tax on profits received (natural person or transparent company);
- or corporate income tax on dividends received (opaque company).
Who is concerned
In the event of the termination of activity of a capital company, tax is paid:
- by the company on the liquidation proceeds;
- by the partners on the liquidation surplus.
Unlike a permanent termination of business activity, a temporary termination does not give rise to any taxation.
Example: a business operator who is forced to temporarily stop his business activity during a period of medical convalescence.
A company that stops its business activity or whose manager/director leaves the company must report the termination of activity to the bodies and authorities to which it is affiliated or with which it is registered and proceed with the dissolution of the company.
How to proceed
In the event of liquidation, capital companies and cooperative companies are taxed on the net profits realised during the liquidation.
Determining the liquidation proceeds
Unlike with partnerships and sole proprietorships, capital companies do not need to make a distinction between the operating profit realised during the year in which the dissolution takes place (current profit) and the profit realised on the termination of activity (liquidation proceeds) as both receive the same tax treatment.
For capital companies, liquidation proceeds include:
- the operating profit (current profit) realised during the current business year starting from the close of the last financial year to the dissolution of the company;
- the current profit realised between the dissolution and the liquidation;
- and the liquidation proceeds as such.
Calculating the taxable share of the liquidation proceeds
The liquidator must calculate the proceeds (profit) realised during the liquidation.
Liquidation proceeds = net liquidation proceeds to be distributed - net assets of the company at the time of dissolution.
The net liquidation proceeds to be distributed include:
- advance payments (on the liquidation surplus), if any, to the partners during the liquidation process;
- the proceeds distributed at the end of the liquidation.
The net asset figure to be taken into account at the time of the company's dissolution is indicated in the closing balance sheet of the financial year preceding the dissolution and is the same as that which was used to calculate corporate income tax for that year.
Adjustment: the liquidation proceeds are reduced by the amount of profits from the previous financial year distributed after the close of the balance sheet.
The amount of profits distributed is later reintegrated in the calculation of the liquidation proceeds and thereby ensures that all profits distributed after the close of the balance sheet are taxed accordingly.
Realised capital gain
The liquidation proceeds include capital gains realised during the liquidation process.
During the life of its business, assets held by a company may increase in value. The capital gain is deemed unrealised for as long as the property has not been processed (sold / transferred / transmitted).
During the liquidation process, all assets belonging to the company are transferred to the partners' asset base. The unrealised gains must first be 'realised' before each partner can receive his share of the actual profit.
The actual realised gain is the difference between the true value and the book value of the assets.
The capital gains from a termination/transfer are built up over several years of running a business. It would therefore be unfair to tax them over just one financial year.
For this reason, such capital gains are only taxed at half the global rate.
Real estate gains
If gains include a real estate gain (land or building), the taxpayer may apply for an exemption on the adjustment amount of the real estate gain (difference between the adjusted book value and the net book value).
In order to calculate the adjusted book value, the taxpayer must apply the ratios relating to the inflation rates for the financial years concerned to the:
- purchase price or cost price of the building;
- amortisation and deductions for depreciation according to the ratios applicable to every year included in the amortisation period.
The liquidated capital company is liable for corporate income tax on all liquidation proceeds (operating profit, current profit and liquidation proceeds including realised capital gains).
The liquidated company does not apply withholding tax on the liquidation surplus paid out. It is not treated as a distribution of dividends by the company distributing the surplus.
The taxpayer may also benefit from certain tax allowances on the realised profit from the transfer/termination of the company.
Taxation of partners/shareholders
The liquidation proceeds distributed:
- to a sole trader or a partnership are added to the operating profit;
- to a capital company are seen as the payment of dividends to the partners/shareholders who receive the payment.
Where the conditions of the parent/subsidiary directive are met, the dividend payment is tax exempt;
- in any other case (e.g. natural person), it is seen as a capital gain and falls under "other income" for tax purposes.
SARL LUX has had 2 partners for the past 2 years: Letz SA holds 60 % and Mr Smith holds 40 % of the shares.
SARL LUX is liquidated. The company distributes the liquidation proceeds of EUR 3,000 without applying withholding tax.
=> Letz SA is not taxable on the liquidation proceeds (3,000 x 60 % = EUR 1,800), as they are regarded as a dividend payment.
=> For Mr Smith, the liquidation proceeds of SARL LUX are treated as a capital gain. His gain (3,000 x 40 % = EUR 1,200) falls under other taxable income from a large equity holding.
Who to contact
Luxembourg Inland Revenue (ACD)45, boulevard Roosevelt
Please click on the link below to find the competent department.