Business Transformation: Taxable or Tax-free?

Andreas Selmer Skovdal

Student thesis: Master thesis

Abstract

The purpose of this thesis is to provide an insight and understanding of the topic business transformation and the opportunities for transformation of a personal business into a capital company – whether it is a taxable or tax-free transformation. Several business in Denmark starts out being a personal business and after some time with growth and stability, it could be an advantage to continue the business as a capital company. The thesis elaborates some of the main differences between managing your business as a company or a personal business. Both opportunities to manage a business have pros and cons. A personal business gives the owner the opportunity to draw losses from the business in other incomes, and you do not have to publish an annual report. On the other hand, you are personally liable for the whole business with all of your fortune, which you are not with a capital company as you only are liable with your contributions to the company. The transformation to a company can be complex and is possible by the either one of two methods – the taxable or the tax-free. The thesis provides an insight in the demands and rules for both methods. The taxable transformation is equal to a sale of the business to an independent third party. The “sale price” for the business needs to be at fair market value. Therefore, this method could release a larger amount of tax of all realized profit. This method also gives the opportunity for the owner to receive a receivable in the new company. The tax-free transformation is based on the principle of succession. Here, the new company enters the tax position of the previous business. This method do not releases taxation, as there are no realized profit. The taxation is postponed until the owner sells the shares in the company. Only in certain circumstances, it is possible for the owner to receive a receivable within this method. This method needs to follow and fulfill the rules and demands of the Danish Business Transformation Act. For both methods all assets and liabilities needs to be valued at fair market value. This valuation are important and the basis for the calculation of the transformation. Afterwards, a fictional case company will be included to illustrate the theory of both methods by a practical example of a transformation. This will be used to elaborate certain rules and parts of the methods and to discuss pro and cons for both methods.

EducationsMSc in Auditing, (Graduate Programme) Final Thesis
LanguageDanish
Publication date2020
Number of pages84
SupervisorsSøren Bech