When you sell the shares in your private limited company to your son or daughter as part of a business transfer, those shares must be valued. The difference between the transfer price and the (tax) acquisition cost results in a capital gain on which you pay income tax (Box 2, income from a substantial interest).
Adjustment to the transfer price
But what if, in retrospect, the transfer price turns out not to have been set correctly? Article 4.29 of the Income Tax Act 2001 provides for this. If the transfer price is increased, the difference is treated as an (additional) capital gain. If the transfer price is reduced, a negative capital gain arises (a loss on a substantial interest).
Unprofessional?
The Gelderland District Court has ruled in a case in which such a loss of substantial interest is claimed. In 2005, the father sold 100% of the shares in his private limited company to his son for €1.25 million. The father paid income tax on the gain arising from the substantial interest. In 2014, the father and son agreed that the purchase price would be reduced to €1 million. In connection with this, the father claimed a loss of €250,000 in Box 2 of his 2014 income tax return.
The Tax and Customs Administration maintains that the reduction in the purchase price stems from the family relationship. Third parties acting in a commercial capacity would not have agreed to this reduction. The purchase price was determined in 2005 by a chartered accountant and agreed with the Tax and Customs Administration at the time. It is therefore unlikely that this purchase price was not correctly determined. The father and son argue that an error was made at the time regarding the valuation of the pension liability, but the court does not consider this likely.
It appears that, in this case, the father and son have underestimated the burden of proof resting upon them. They have produced nothing more than an addendum to the contract of sale. There is no detailed calculation of the purchase price, and no further documents have been exchanged. At the hearing, they stated that the reduction in the purchase price was based on an estimate. It goes without saying that, in business dealings, the fact that the business activities of the acquired private limited company have fared less well since the takeover is not a valid argument for reducing the purchase price.
Move on
It is possible to pass on the capital gains benefit in the context of a substantial interest. However, this is only possible if and to the extent that the shares are gifted (or the purchase price is waived).
The key condition is that the private limited company (BV) operates, either directly or indirectly, a substantive business. If the private limited company (BV) only operates a substantive business in part, you may only pass on the capital gain for that part. Another condition is that, during the 36 months preceding the gift, the recipient must have been employed by the private limited company whose shares are being gifted.
Pass-through means that the transferor does not pay income tax on the capital gain. The transferee must then continue to use the tax-based acquisition cost of the shares as it stood for the transferor.