Tax-free conversion of form of company
Privately-owned businesses have the opportunity to convert their privately-run business into a company, i.e. to form a limited partnership or a limited-liability company.
Often it proves to be advantageous to make use of the rules in the law on tax-free conversion of a company, whereby the tax-payment obligation in the event of a sale that is liable to taxation is transferred to the sum for the acquisition of the shares and thereby to the company.
Conversion of the company’s form on a tax-free vs. taxable basis
The purpose of performing a tax-free conversion of a privately-owned business’s form into a limited partnership or a limited-liability company is to reduce the liquidity with regard to taxation that may apply and that becomes due for payment in connection with sale or cession to a company.
The principal taxes potentially payable in this context relate to goodwill, capital gains on real estate and equipment in relation to the book value, as well as capital gains from the amount of saved-up surplus that may be on the account, which can also give rise to a large tax obligation when a business’s existing company-form arrangements are discontinued.
These taxes can often prove to be large amounts. By applying the law on tax-free conversion of the company’s form, these tax payments are deferred; the latent tax is not charged by the tax authorities but rather is deducted from profit in the statement of accounts relating to the sum used to acquire the shares.
Conversely, if the statement of accounts shows that the latent tax payments do not amount to a significant sum of money, it is appropriate to consider whether the conversion of the company form should be made on a taxable basis instead; this means that assets and liabilities are transferred to commercial values, and what may prove to be a smaller tax demand is taken into account.
A tax-free conversion of a company’s form can be made with retroactive effect, meaning that no later than 30 June it can be implemented so as to be effective as of 01 January of the same year.