If a business or a substantial interest in a business is gifted, you may, subject to certain conditions, be entitled to an exemption from gift tax. You should also bear in mind that income tax is still payable on the business’s reserves. What is the net effect of this?
Exemption in the event of business succession
The exemption applies to the gift of a business or a substantial interest. Up to an amount of €1,063,479, the gift is fully exempt in 2017. If the value of the gift exceeds this amount, 83% of the excess is exempt and 17% is therefore subject to tax.
Conditions
There are, however, certain conditions, the most important of which is that the business must continue to operate for at least five years, or that the shares constituting a substantial interest must be held for at least five years. Please note: if these conditions are not met, you will still be liable to pay tax on the entire acquisition.
Tip: bear in mind the income tax payable. When making a gift, one should take into account the fact that income tax will eventually have to be paid on the company’s reserves. For shares, for example, this is set at 6.25% of the substantial interest claim. The court has recently ruled on how you should apply this allowance.
Apply on a pro rata basis
The allocation must be made on a pro rata basis between the exempt and the taxable portions of the gift. The taxpayer had allocated the claim in full to the taxable part of the acquisition, but this is not permitted. Please note! As the claim must also be allocated in part to the tax-exempt part of the gift, the taxable part is therefore increased and more gift tax is due.
An example to illustrate this:
Suppose the value of a block of shares is €3,000,000 and the cost price is nil.
The flat-rate substantial interest claim therefore amounts to €3,000,000 × 6.25% = €187,500.
The exemption under the BOR is therefore: (€1,063,479 + (83% of €3,000,000 – €1,063,479)) = €2,670,791.
This would mean that the taxable value for gift tax purposes is €3,000,000 – €187,500 – €2,670,791 = €141,709.
However, it follows from the recently published judgment that the deferred income tax liability must be allocated proportionally to the conditionally exempt and non-exempt portions of the gift.
The portion of the latency attributable to the taxable portion: ((€3,000,000 – €2,670,791)/€3,000,000) × 187,500 = €20,576.
The taxable gain therefore amounts to €3,000,000 – €20,576 – €2,670,791 = €308,633 (and not €141,709).
If you have any questions about calculating the business assets exemption in the event of a gift, please contact us.