3 The tax claim resulting from a business transfer

The transfer of an unincorporated business leads for tax purposes to a termination. In economic sense the business will continue to exist. Tax is also levied in case the unincorporated business will be inserted in a partnership. A proportional part of the business will then be terminated. When it comes to a termination, hidden reserves will be reflected. Hidden reserves firstly arise because the valuation at the time of determination of the annual profit as a rule is accounted for at historical purchase value less depreciation while at the moment of termination the economic value has to be used. Apart from that, hidden reserves may arise in the assets and liabilities due to ‘good business practice calculation’ of the annual profit. Next to these hidden reserves, goodwill and fiscal reserves are accounted for in the taxable profit arising from the ending of the business. This taxable profit is settled at the progressive rate in box 1. The fact that the taxable profit arising from the ending of the business, and accrued during several years, will need to be settled in one amount at the progressive rate, could be considered unreasonable. Also as inflation profit could be included in the taxable profit. On the other hand, the taxpayer could defer the levy under a capital gains tax. In case of capital gains the taxpayer will benefit due to liquidity and interest advantages. In this study it has been calculated how taxation, with inclusion of an interest component, works out under a capital gains tax as well as under a capital appreciation tax. In this manner it can be judged whether the Government would need to offer facilities arising from a disturbing influence of a capital gains tax. The calculations show in any case that for taxpayers, which other profit falls within the fourth tax bracket a capital gains tax is more advantageous than a capital appreciation tax. As long as this is the case, I do not consider a Government facility necessary. A capital appreciation tax is theoretically for me the most desired system. For this reason there should only be room for a facility in case the capital gains tax is more disadvantageous for the taxpayer than a capital appreciation tax.

An individual can run the business also as an incorporated business. The business transfer can be shaped in a number of different ways. Only a transfer in whom a holder of a substantial interest sells his interest has direct consequences for the income tax levy. This will happen when the holder of a substantial interest sells a direct interest in an unincorporated business in which the enterprise is driven, as well when the interest in a holding company is transferred. The income resulting from selling the interest will be taxed against the proportional rate of 25%. This rate is based on the approximate equality of holders of a substantial interest with individuals who run a business as an unincorporated business. Taking into account the corporation tax raised from an incorporated business, the holder of a substantial interest faces a combined pressure of income tax as well as corporate tax of maximum 43.75%. A business transfer can also be shaped by letting the holding company sell the shares of the incorporated business in which the enterprise is driven, as well by letting the incorporated business sell the enterprise. The income tax claim will then rest on the interest in the holding company. This interest is then transferred at the time of death.

The transfer of an unincorporated business or a substantial interest following death does not only lead to income taxation, but also to inheritance taxation. If there is any gift, apart from income tax, also gift tax is levied. It is the transferee who is being taxed (art. 36 SW 1956). In the context of business transfer issues it is first of all relevant what the testator has arranged concerning the business transfer. By a statutory allocation every child will receive a monetary claim by law at the cost of the longest living parent, in accordance with the value of his inheritance, whereby every heir will inherit an equal share. The claim can only be called upon at the death of the longest living person. The longest living person is obliged to advance the inheritance tax due by the children with respect to the receivable on the (other) heirs of an estate due to unequal division of the estate (art 4:14 BW). By way of a will there can be a deviation from the statutory allocation. Thus usage may be made by way of a testamentary disposition (art. 4:115 BW), or legacy (art. 4: 117 BW) to allocate the company to a desired successor. The testator can make record in the will that the legatee has to include the value of the company in the estate. For the sake of the legatee this means that the value of his acquisition is zero, for which it relates to the business. After the acquisition a monetary claim remains from the estate on behalf of the legatee and the other heirs. This amount will be separately taxed by inheritance tax. When the testator has determined that the inclusion can remain unpaid, the other heirs will have a claim on the transferee of the business.

In a case where the testator owes income tax when deceased at the transfer of a business, the indebtedness is deductible. No appeal is possible with respect to this clause in case usage is made by a roll-over relief for income tax levy. In this case there is no question of a legally enforceable indebtedness. However, to prevent accumulation of income and inheritance tax, a different way of deductibility for a deferred tax claim can be considered (art. 20 SW 1956). Degressive percentages will then apply.

What has been acquired must be accounted for at economic value. The rate of gift and inheritance tax is dependant on the person who inherits and the amount of the taxed acquisition.