5 Business transfer donation and inheritance tax

Business transfers due to death, or gift will be taxed by inheritance or gift taxes based on art. 1 SW 1956. In art. 35b SW 1956 up until 35f SW 1956 a mechanism has been implemented, to which, when it concerns a substantial company, a conditional exemption facility with regard to the entrepreneurial capital may be applied. On the basis of this facility the acquisition of the entrepreneurial capital up to an amount of € 1.028.132 will be conditionally exempted (going concern value). For the excess an exemption can be obtained of 83%. The remaining 17% will be classified as conserved value. For this amount an interest-bearing payment deferral can be obtained. Furthermore a conditional exemption applies in case of a contingent difference between the liquidation value and the going concern value.

The business transfer facility has the purpose of providing a solution for those situations whereby the tax claim could jeopardize the continuity of the company because resources would have to be withdrawn from the company. In this case a facility could be legitimate. This is however not the case where it concerns the facility by gift of an unincorporated business or a substantial interest. Also it applies here that it is a conscious choice of the transferor to donate. With regard to this there is no task for the Government. Only from a neutrality principle one could argue differently. The group of tax payers who are in the position to donate could wait with the transfer until the moment of death.

According to my opinion the conditional exemption facility related to the going concern value is contrary to the equality principle (art. 14 EVRM jo. Art. 1, First protocol at EVRM and art. 26 IVBPR). Acquirers of entrepreneurial capital and non-entrepreneurial capital have to be seen equally according to my view (assuming art. 1 SW 1956). There is no objective and reasonable justification of the unequal treatment of equal cases. This is however different when it concerns the conditional exemption between liquidation value and going concern value. By implementing a continuing requirement of five years the remedy chosen is proportional given the target. Offering a payment deferral of the remaining 17% taxation of the entrepreneurial capital I consider not to be contradictory to the equality principle. To grant payment deferral to prevent liquidity issues is in my view justified, especially at the time when interest is due. Whenever the judgement of the various judiciaries is kept in place regarding unequal cases, my viewis that the facility regarding the going concern value is still contradictory to the principle of equality. Unequal cases are obviously treated disproportionately unequally. This does not apply to other parts of the business transfer facility.

For the equality test the question is furthermore relevant whether the business transfer facility is in agreement with the ability-to-pay principle. The answer hereto relating to the conditional exemption between the difference of the liquidation value and the lower going concern value of the entrepreneurial capital is affirmative. When a taxpayer acquires a company and subsequently continues the company, his increase in ability to pay is determined by the going concern value. The liquidation value will not be realized. The condition is however that, as included in the current facility, exemption is linked to a continuing requirement. I consider the conditional exemption related to the going concern value not in accordance with the ability-to-pay principle. The exemption is not based on the nature of the capital, but is based on liquidity issues, which the company may encounter when the resources to pay taxes need to be withdrawn from the company. It is therefore not correct to offer a facility that provides exemption. Only a facility, which is offered on the basis of deferred payment, is appropriate. The current exemption facility is tempting taxpayers to behave differently from how they would behave without a facility. This creates a distortion. They will perhaps transfer the company at any other time in order to utilize the facility. The degree of distortion is determined by the level of conditional exemption. The higher the level, the more attractive it is to wait with the transfer until the moment the exemption can be utilized. It will then be the transferee who owes the taxation and applies the exemption, although also the transferor will be influenced by his decisions in case of a possible appliance of a facility. Every economic rational subject will attempt to transfer his capital to his successor(s) with the least amount of taxation possible. Taxpayers who would like to transfer will find other ways to transfer the interest, in case donation will not be possible. In order to continue to apply the facility in the future, it must be ensured that entrepreneurial capital will be there. Tax payers will find ways to satisfy this. There is a distortion if they would not do this without a facility. To consider that the business transfer can only be applied where there is entrepreneurial capital, I consider effective, as already mentioned with respect to transfer of substantial interest. The restrictions regarding the type of substantial interest possessed by the testator/donor may be withdrawn. Receivables on the (other) heirs of an estate due to unequal division of the estate I do not consider entrepreneurial capital. In my view it has been the correct choice of the legislator to offer only an interest-bearing payment arrangement.

From the Government’s point of view an exemption facility is effective. The liquidity issues are taken away when an exemption facility is applied. It is however too generous to grant a facility which leads to a tax exemption. This influences efficiency negatively. This however applies less to the payment arrangements, which are included in the facility, as these are interest bearing. This will lead to lower usage.