Gift and inheritance tax: the family company
August 2022 – The legislator supports the anchoring of the family company in the family by means of special advantageous tax regimes applicable in the event of donation and death. The continuation of these advantageous regimes is dependent on a series of conditions, some of which must still be met many years later.
Advantageous tax system
The donation of a family business is not subject to any gift tax.
The transfer of a business by death is taxed at a rate of 3% if the business is transferred to the direct heirs or partner, and at a rate of 7% in all other cases.
There are certain preconditions to be met. For example, they must be family businesses with a real activity; real estate companies are therefore excluded.
But there are also other conditions that must continue to be met after the donation or transfer by death. For example, the real economic activity must be continued for at least three years and there is a capital maintenance requirement.
Capital maintenance
The condition of maintenance of capital is one that is sometimes overlooked. Under the old Companies Code, it was clear that after donation or death, the share capital could not be reduced as a result of distributions or repayments. However, the new Companies and Associations Code, which has been in force since 1 May 2019, also allows for companies without capital. The capital maintenance requirement therefore had to be adapted to this new reality.
Public limited companies still have a share capital under the new Companies and Associations Code. Therefore, nothing changes for these companies. As under the old legislation, the capital of a public limited company may not decrease as a result of distributions or repayments during the three years following the death or donation.
In a limited liability company - whether it is a converted limited liability company or a new limited liability company - the capital maintenance condition, on the other hand, no longer refers to the company's capital, but requires that for three years the company's equity capital is not reduced by distributions or repayments to an amount lower than the amount of the contributions made up to the time of the death or the deed of gift, as shown in the annual accounts.
This is based solely on the annual accounts. This means that the equity could be reduced to an amount below this limit in the course of the financial year, provided that it is brought up to date by the end of the financial year, when the annual accounts are drawn up.
The concept of "equity" is also broader than the concept of capital, so that a distribution of taxable capital is possible if it is offset by a corresponding increase in equity.
Three years
The three-year period is also no longer the same. The annual accounts of the company are used to establish whether there has been a decrease in equity compared to the date of death. This means that the equity must remain at least at the same level in the three annual accounts after the death or donation.
It should also be noted that only a decrease in equity as a result of a distribution or repayment of equity is taken into account. If the equity of the company decreases as a result of losses, this has no impact on the exemption or reduction.
Sanction
If the conditions for the exemption (in the case of a gift) or reduction (in the case of death) are not met or cease to be met, the exemption or reduction is in principle not granted or is lost entirely.
This is not the case in the event of a reduction in equity capital: there is 'only' a proportional loss of entitlement to the advantageous scheme. It follows that the amount of the distribution or reimbursement will be taxed at the normal rate, insofar as the equity is thereby reduced to an amount below the limit.
Liquidation reserve
Many entrepreneurs build up savings in their company for their pension. These savings, better known as liquidation reserves, also benefit from a special tax regime. It must be taken into account that this liquidation reserve is not part of the contributions, but of the equity capital. If this reserve is distributed, it may happen that the equity capital is reduced to an amount lower than the amount at the time of the donation or death. In that case, the exemption or reduction will effectively be lost.
