Transfer of a sole proprietorship or partnership - Tax impact
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The transfer of a business consists in the transfer of all its assets or shares to a third party.
When a sole proprietorship is transferred, the business assets change from being the private assets of the transferring entrepreneur to being the private assets of the transferee.
The transparency of the transfer of partnership shares makes it similar to the transfer of a sole proprietorship as the partnership's assets also change from being the private assets of the transferring partners to being the private assets of the transferees.
Once the taxable profit has been determined (operating profit and profit from the termination/transfer of the business), the transferring partners/entrepreneur must pay personal income tax.
Who is concerned
If the transfer of a sole proprietorship or partnership is carried out in exchange for consideration, the tax on profits from the transfer must be paid by:
- the entrepreneur in the case of a sole proprietorship;
- the partners in the case of a partnership.
Prerequisites
Preliminary steps
Traders (natural persons) wishing to transfer their business must report the termination of activity to the bodies and administrations with whom they are registered.
Where applicable, the manager/administrator who is leaving the company must notify their departure to the various bodies where they are registered.
How to proceed
Transfer in exchange for consideration
If a sole proprietorship or partnership is transferred in exchange for consideration, the entrepreneur or partners pay tax on:
- the operating profit (current profit);
- and the profit on the transfer of the business (capital gains) made at the time of the transfer.
Operating profit
The business must calculate its operating profit for the period from the end of the last financial year to the transfer date.
These earnings must include any tax-exempt capital gains, i.e. capital gains on the transfer of real estate assets that have been reinvested, resulting in the tax on these gains being temporarily differed.
If the operating result for the financial year in which the transfer takes place is negative after accounting for losses carried forward, the current operating loss will be offset against the profit made on the transfer.
Transferors and transferees are jointly liable for payment of:
- of the communal business tax (ICC);
- and VAT.
Profit arising from the sale of a business
The profit on the transfer is calculated by deducting the adjusted value of the invested net assets of the business on the transfer date from the transfer price.
| Profit on the transfer = transfer price - invested net asset value adjusted on the transfer date |
Calculating the profit on the transfer allows any unrealised capital gains to be disclosed.
If the capital gains include gains on real estate (land or buildings), the taxpayer may revalue these assets by applying the ratios corresponding to the inflation rates for the financial years concerned to the:
- purchase price or cost price of the property;
- amortisation and deductions for depreciation according to the ratios applicable to every year included in the amortisation period.
The taxpayer may then request a tax exemption for capital gains on these real estate assets up to their revalued amount.
| Revaluation = adjusted book value – net book value. |
Taxable profit on the transfer
| Taxable profit on the transfer = profit on the transfer – any tax allowances |
In certain circumstances, the taxpayer may benefit from tax allowances applicable to the realised profit on the transfer, namely:
- an allowance of EUR 10,000 or a proportional share of that amount, depending on whether the transfer (or termination of activity) relates to the whole business or to an autonomous part or fraction thereof;
- or an allowance of EUR 25,000 if the profit on the transfer or termination of activity includes capital gains made on real estate.
Example:
A business transferred in exchange for consideration on 15/05 of year N for a transfer price of EUR 800,000 has the following characteristics:
- Book profit between 01/01 and 15/05: EUR 150,000
- Invested net assets at 15/05: EUR 400,000
- Capital gains on buildings previously subject to tax exemptions: EUR 150,000
- Property: net book value at 15/05: EUR 131,000, adjusted value: EUR 146,000
Operating profit = book profit at 15/05 + tax-exempt capital gains on buildings
= 150,000 + 150,000 = 300,000
Profit on the transfer = transfer price – (invested net assets at 15/05 + inclusion of tax-exempt capital gains on buildings) – tax exemption of capital gains from inflation on real estate
= 800,000 – (400,000 + 150,000) – (146,000 – 131,000) = EUR 235,000
Taxable profit on the transfer = profit on the transfer - tax allowance (as a property is included)
= 235,000 – 25,000 = EUR 210,000
Personal income tax
The entrepreneur must mention the following in their personal income tax return:
- current operating profit:
- under business profit;
- or in the category agricultural or forestry profit;
- or in the category profit from the exercise of a liberal profession;
- and the profit on the transfer (capital gains) in the category extraordinary income.
Capital gains realised at the time of the transfer/termination of activity are taxable at half the overall rate.
Free transfer
The free transfer of a sole proprietorship or partnership has tax implications for both the transferor and the transferee.
Former owner (transferor)
As a free transfer does not increase the former owner's ability to pay taxes, they benefit from a tax deferral meaning that:
- the transferor only pays tax on the current profit made up until the transfer date, based on the ordinary tax scale;
- they cannot revalue their fixed assets or benefit from transfer tax allowances.
They transfer unrealised capital gains to the transferee without paying tax, whether the transferee is a spouse or third party and whether these capital gains are derived from fixed or current assets.
If the result of this transfer is negative, the former owner may deduct the losses they have incurred from their overall income as special expenditure. They may carry forward these losses if they are not offset by other net income during the financial year.
Only the transferring owner may deduct the loss they have incurred.
However, in the case of transfer through inheritance, the successor may defer the losses incurred by the deceased if, at the time the loss was made, the two parties were subject to joint taxation (spouse or children).
New owner (transferee)
The transferee continues the activity undertaken by the transferor. Their opening balance sheet will show the invested net asset values and any tax-exempt capital gains as they appear on the closing balance sheet of the former owner.
The initial asset values will serve as a basis for the calculation of:
- tax-deductible depreciation;
- any capital gains from a subsequent transfer.
In such cases, the transferee may need to pay VAT or registration fees on the transfer of ownership of certain assets.
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.
