Intergenerational transfer of a business

Transferring a company’s business to the next generation is often a process that takes years. It is important to understand the relevant areas of law in detail, including taxation, corporate law and inheritance rights.

Intergenerational transfer of a business refers to a situation where a company’s ownership is transferred to another family member or close relative. 

Intergenerational transfers differ from normal business acquisitions by the various tax breaks that it may afford, with certain conditions. Intergenerational transfers also usually involve smaller selling prices and the donation of assets to a successor.

If made incorrectly, the intergenerational transfer of a business may have sizeable negative tax consequences. For this reason, it is not insignificant how the change in ownership is accomplished.

Planning the intergenerational transfer of a business is a broad issue

The key to a successful intergenerational transfer is finding a suitable successor or successors. For this reason, planning should begin well in advance, years before the actual transfer will take place. 

Once a suitable successor or successors are found, more concrete plans can be made on practical matters, such as: 

  • what are the future shares of ownership,
  • how will any additional financing be arranged,
  • what will the tax consequences be, 
  • when will the change be announced publicly to customers and other stakeholders. 

Even before the official change in ownership, tax consequences can be lowered by means of distributing dividends or share issue, changing the company’s legal form or partnership agreement, demerger, or purchase of shares. 

Tax rules on intergenerational transfers are fairly uniform regardless of whether the company is a limited liability company or a partnership (limited partnership or general partnership). 

Intergenerational transfer of a business - documents and ground rules 

In an intergenerational transfer, the contents and terms of all relevant documents should be carefully reviewed. In addition to the deed of sale or gift, the articles of association or partnership agreement must also be updated. 

The articles of association can, for example, agree on a right of redemption of shares or secure the company’s existing assets if no separate shareholders’ agreement has been made between the shareholders. 

If the company has several shareholders, it is useful to draw up a shareholders’ agreement. The shareholders’ agreement is free-form and voluntary, which means that its content and structure depend on the needs of the company and shareholders. The shareholders’ agreement can be used to address in advance any circumstances that could lead to future disagreements between shareholders.

As part of an intergenerational transfer, the last will and testament, power of attorney and prenuptial agreement should also be updated. 

If a part of the shares’ purchase price is financed with a loan, the promissory note must specify the loan’s repayment schedule, interest rate, penalty interest and possible collateral, among other information.

Intergenerational transfer of a business – tax regulations

The tax liabilities of companies undergoing an intergenerational transfer have been relieved by a number of provisions of inheritance and gift tax and income tax law. The law affords tax benefits for business owners, regardless of whether the plan is to sell or continue the business with a successor. 

Taxation depends on the method of giving away ownership; in other words, whether the company is sold, gifted or given as inheritance to the successor. If the business is transferred with a sale, the purchase price is highly important. 

In the worst scenario – if the intergenerational transfer of the business is not planned and carried out with sufficient care – taxes must be paid based on the fair value of the company’s share capital. Often, this sum is much higher than the shares’ balance sheet value. 

It should also be noted that tax authorities will not grant gift tax and inheritance tax reliefs or payment term extensions automatically, but these must be requested separately. A tax relief should be requested when the company’s intergenerational transfer is made as a gift, inheritance or gift-type transaction. Any requests must be submitted to tax authorities before a tax decision is made on the gift or inheritance.

If the intergenerational transfer is made as an inheritance or gift, you can also request an extension on the payment term for the tax from the Tax Administration when requesting the tax relief.

Depending on the situation, the successor in an intergenerational transfer may be fully exempt from taxes or liable to pay inheritance tax, git tax or transfer tax.

If the shares are gifted or received as inheritance, the tax authorities will grant a tax relief to the successor upon request. If, on the other hand, the shares are transferred by a sale, it is important to determine the fair value of the share capital. If the purchase price is no more than 75 per cent or any tax reliefs are applied at a rate of no more than 50 per cent of the shares’ fair value, a gift tax must be paid for the difference of the fair value and the purchase price. 

In an intergenerational transfer, any tax liabilities concerning value added tax and transfer tax must also be investigated. Transfer tax is applied to sales of shares. The amount of tax is 1.6 per cent of the purchase price of company shares. No transfer tax need be paid for the sale price of a general partnership or limited partnership.

Generationsväxlingen i ett företag kan också genomföras inom familjekretsen genom att skänka aktier i företaget till den som tar över. Då aktierna skänks, behöver överlåtaren inte betala skatt på överlåtelsen.

För försäljningssituationer finns det en särskild bestämmelse om generationsväxlingar som då den tillämpas innebär att överlåtelsevinsten på aktier är skattefri för överlåtaren.

Förutsättningarna för skattefrihet är:

  • säljaren säljer en andel om minst 10 % av aktierna i ett aktiebolag eller andelarna i ett personbolag och
  • säljaren har ägt dessa aktier eller andelar i minst 10 år och
  • köparen är antingen för sig eller tillsammans med sin make/maka barn (även adoptivbarn eller fosterbarn), bröstarvinge, syster, bror, halvsyster eller halvbror till säljaren. 

Skattefriheten gäller inte försäljning av ett företag som verkat i firmaform. Då en firmaföretagare säljer sitt företag, bokförs försäljningen som en normal affärstransaktion, vars vinst beskattas på samma sätt som företagets vinst normalt beskattas.  

Intergenerational transfer of a business - qualifying period

When using various forms of tax reliefs, keep in mind that they are subject to a five-year qualifying period: If the successor has received the business as an inheritance or gift and relinquishes ownership before five (5) years have passed from carrying out taxation, the successor must pay the amount of tax relief in arrears as well as a punitive tax increase of 20 per cent. Voluntarily dissolving a limited liability company is considered equivalent to selling the company. 

The tax relief is not revoked, however, if the ownership is transferred by inheritance. Corporate merger and demerger transactions and exchanges of share will also not result in punitive measures. 

Intergenerational transfer of a business - other heirs

If the owner passing on the business has several children, the intergenerational transfer should be planned to also take the position of other heirs into consideration. All direct heirs have the right to at least their legal portion. The business owner is free to bequeath he remainder of the inheritance to one of the children who will carry on the business. 

If the business owner passing on the company has, while still living, gifted the company’s shares to one heir, other heirs have the right to demand that the recipient of the gift pay a share of their legal portion. In other words, the successor of the business must pay their siblings compensation for the shares they were gifted. 

If the intergenerational transfer is not made while the business owner is still living, all of the heirs will inherit the company’s shares. In this case, when the estate is distributed, each heir is entitled to a portion of the shares corresponding to their legal portion. 

In such situations, it may be that the heir planning to continue the business does not receive at least 10 per cent of the company’s share capital when the estate is distributed. If this happens, the tax relief on inheritance tax and the extension in payment term do not apply. 

When distributing the estate, all parties involved may agree that the heir who plans to continue the business receives at least 10 per cent of the company’s shares. The distribution of assets can be balanced by bequeathing other property to heirs other than the successor.  

In addition to the legal portions of children, the widow’s marital right must also be taken into account, provided there is no prenuptial agreement. If the widow owned fewer assets than the deceased, s/he is entitled to an adjustment. In this event, a part of the company’s shares may be given as adjustment to the widow.

The principle of equal inheritance may be departed from by a testamentary disposition. The last will and testament may, for example, order that the successor of the business receives a sufficient portion of shares to ensure the right to the inheritance tax relief.

A testamentary disposition may also grant the heir who continues the business control of the company’s share capital. This is often an effective way to ensure that the business can continue as before. 

An important function of the last will and testament is also to exclude the spouses of heirs from a right to the inheritance.

Intergenerational transfer of a business - careful planning is key

A poorly planned intergenerational transfer may result in conflicts between family members and relatives, unnecessary financial burdens for both old and new owners, and, at worst, termination of the company itself. 

Transfers of business to the next generation are often processes that last years. Professionals can provide valuable expert assistance in the various areas of law involved, including taxation, company law and inheritance rights. In this way, the transfer can be smooth without any unnecessary expenses.