Generational Change in Danish Limited Liability and Joint-stock Companies

Abstract

This thesis was written as an end to the study Can.Merc.Aud at Copenhagen Business School. The purpose of the task is to describe how a generational change can be carried out, and what opportunities there are to restructure the company tax-free before the actual generational change is carried out. A generational change is often referred to as the process where the older generation stops, and the new generation takes over. A generational change can take several years, and it is important that the planning phase take into account whether the company has the right structure for the future. According to Danish law, there are several options for a tax-free restructuring. In connection with a generational change, it is often seen that the restructuring models, share exchange or demerger are used. In the case of a share exchange, a holding company is created between the owner and the operating company, and a demerger is suitable if the company consists of several business areas where a split is desired. Since a restructuring may result in a holding requirement for company shareholders, where shares may not be transferred for a period of 3 years after the restructuring, it is important that the generational change process starts in time. A generational change must take place for trading values, and since there is no market price for unlisted shares that have never been traded on the open market, the Danish Tax Authorities have prepared a model for the valuation of companies when traded between related parties. There may be circumstances which results in that the schematic model does not give an approximately true picture of the company's value, and in such a situation the models cannot be used. If the schematic model cannot be used, the ordinary valuation models must be used instead, such as e.g., the discounted cash flow model (DCF). A generational change between related parties in descending order can take place by succession. In the case of succession, the outgoing owner is exempt from taxation, as the tax liability is taken over by the incoming owner. If a generational change between related parties happens according to the rules of succession, a gift element is often involved. In the case of a gift, a requirement to pay gift tax arises. The gift tax is for now 15 % but has been subject to changes on several occasions over the past 6 years. Financing a generational change can be a big challenge. There are several options, and some of them requires more planning than others. It is also therefor important to start the planning in time. The thesis ends with a case, that illustrates how a general change can be carried out in practice. The possibilities are many, and the solution in the case is just an example of a possible solution.