by Family-owned businesses are the backbone of the European economy, accounting for more than 60% of all companies in the EU. They range from small and medium-sized enterprises (SMEs) to large multinational corporations, and they operate in various sectors and industries. However, family businesses also face specific challenges and opportunities when it comes to taxation, especially in the context of business succession and cross-border activities.
Business succession and inheritance tax
One of the main concerns for family business owners is how to pass on their business to the next generation in a tax-efficient way. Depending on the country, the tax burden arising from the transfer of shares in a family-owned company can vary significantly, both during the lifetime of the owner and upon death. According to a report by KPMG, some countries offer generous exemptions or reliefs for business assets, while others impose high tax rates or complex valuation rules.
For example, in Belgium, there is no inheritance tax on shares of a family-owned company if they are transferred to a spouse or a direct descendant, provided that certain conditions are met. In contrast, in France, the inheritance tax rate can reach up to 45%, although there are some reliefs available for business assets. In Germany, the inheritance tax rate depends on the degree of kinship and the value of the assets, but there are also exemptions for business assets if certain requirements are met.
The EU does not have a direct role in setting inheritance tax rates or rules, but it does oversee national tax laws in relation to EU business and consumer policies, to ensure that they do not distort competition or hinder the free movement of goods, services, capital and people within the single market. The EU also encourages member states to adopt business-friendly taxation and company law, and to coordinate their economic policies and corporate taxes.
Cross-border activities and corporate tax
Another challenge for family businesses is how to deal with corporate tax issues when they operate across different countries. Depending on their legal form and structure, family businesses may be subject to different tax rules and rates in each country where they have a presence or generate income. This can create complexity and uncertainty for family business owners, as well as potential double taxation or tax avoidance risks.
The EU has been working on several initiatives to harmonise and simplify corporate tax rules within the single market, and to ensure a fair and transparent taxation of multinational companies. One of these initiatives is the Common Consolidated Corporate Tax Base (CCCTB), which is a proposal for a single set of rules to calculate the taxable profits of companies operating in more than one EU country. The CCCTB would also allow companies to consolidate their profits and losses across the EU, and allocate them to each member state according to a formula based on sales, employees and assets.
Another initiative is the global minimum 15% tax on big business, which was adopted by the EU in December 2022, following an agreement between nearly 140 countries under the auspices of the Organisation for Economic Co-operation and Development (OECD). The aim of this deal is to stop governments from competing to lower their corporate tax rates in order to attract companies, and to ensure that multinational companies pay their fair share of taxes where they operate. The global minimum tax would apply to companies with annual revenues above €750 million.
Some General Considerations:
Succession Planning:
Family-owned businesses often focus on succession planning to transfer ownership and control to the next generation. EU member states may offer tax incentives or exemptions for intergenerational transfers, such as reduced or deferred capital gains tax or exemptions from inheritance or gift taxes. Understanding the specific rules and requirements for succession planning in the relevant country is crucial.
Estate and Inheritance Taxes:
In many EU countries, estate and inheritance taxes apply when assets are transferred from one generation to the next. These taxes can have a significant impact on family-owned businesses. EU member states have different thresholds, rates, and exemptions for such taxes. Proper estate planning, including the use of trusts, can help mitigate the tax burden and ensure the smooth transfer of assets.
Capital Gains Tax:
Family-owned businesses may encounter capital gains tax implications when selling or transferring shares or assets. The tax treatment of capital gains can vary among EU member states. Some countries offer tax reliefs or reduced rates for long-term investments or for qualifying small or medium-sized enterprises (SMEs). Understanding the rules and potential exemptions related to capital gains tax is essential for effective tax planning.
Tax Incentives for SMEs:
Many EU countries offer tax incentives or reliefs specifically designed for small and medium-sized enterprises (SMEs). These incentives may include reduced corporate income tax rates, deductions for research and development (R&D) expenses, investment tax credits, or exemptions from certain taxes. Familiarizing yourself with the available incentives in the specific jurisdiction can help optimize tax planning for your family-owned business.
Group Taxation:
Some EU member states allow for the consolidation of tax liabilities within a group of related companies. This can provide opportunities for tax optimization by offsetting profits and losses within the group. However, the rules and eligibility criteria for group taxation schemes differ among countries.
Value Added Tax (VAT):
Family-owned businesses must comply with VAT regulations when selling goods or providing services within the EU. VAT rates, thresholds, and reporting requirements can vary among member states. It is important to understand the VAT obligations, including registration requirements, filing deadlines, and any available exemptions or reduced rates.
Employee Incentives:
Family-owned businesses may consider offering employee incentives, such as stock options or profit-sharing schemes. The tax treatment of such incentives can vary across EU countries, including the timing and taxation of the benefits received by employees. Familiarity with the local rules and potential tax advantages can help design effective employee incentive programs.
Transfer Pricing:
If a family-owned business operates across multiple EU countries, transfer pricing regulations come into play. These rules ensure that transactions between related entities within the same group are conducted at arm’s length prices for tax purposes. It is important to comply with transfer pricing documentation requirements and ensure that intercompany transactions are properly priced in accordance with the relevant regulations.
