If you transfer your business, you will always have to deal with the tax authorities. These are the five most important tax terms you need to know before the business sale.
Throughout the sales process - from initial preparation to closing the deal - tax issues play an important role. Choosing the right structures will save you a lot of money. The pitfall of selling entrepreneurs is that they often think about the tax aspects at too late a stage, sometimes even just before signing the contract. Your tax advisor then has few options left to set up the right tax structure or otherwise reduce the tax burden.
When you sell your business, the Tax Office comes around the corner. This is because this government agency treats the business transfer as business termination (cessation) on your part. There is no clear answer to the question of how much you ultimately have to remit to the Tax Office. But these are the five most important tax terms you need to know when you sell a business.
#1 - Strike profit
Strike profit is the difference between the book value of your business and its actual value at the time of transfer or business termination. The cessation profit is part of your income in the year of cessation. From the cessation profit you may still deduct the cessation deduction (maximum 3,630 euros). You must pay income tax on the eventual cessation profit.
#2 - Income tax
The income tax to be paid depends on the legal form of your business. When selling a sole proprietorship, partnership, general partnership or limited partnership, you will owe income tax at the Box 1 rate (up to 49.5%). With a limited liability company, you pay income tax at the box 2 rate (26.9%).
#3 - Retirement reserve
As a business owner for income tax purposes, you may annually reserve a portion of your profits for your old-age provision. That reserved portion is called the retirement reserve. Forming a retirement reserve does not mean that you are actually setting aside money; it is a reservation of a portion of profits. The reserve allows you to defer taxation on that part of the profit. So this gives you a short-term tax advantage.
#4 - Transfer tax
Often immovable property, such as a building, business space, retail space or office, is part of the business assets. These come into the hands of a new owner. The buyer will have to pay transfer tax on the value of the property. If the new owner is the one who contributed the property to the company, he does not have to pay transfer tax. Keep in mind that VAT may also be due.
#5 - Extra annuity premium deduction
You can use part of the cessation profit to pay annuity premiums. You will then be entitled to an additional annuity premium deduction. The amount of the deduction depends on your age and on the situation at cessation, but can be up to 474,517 euros.
We place another general note: always engage a tax advisor to assist you with tax issues during the business sale. This expert is up to date on current developments in the tax field, has experience in taxing various scenarios and knows which knobs to turn to reduce the tax burden.
