The Planning and Process of Generational Change of a Company Involving Transfer With Tax Succession Inter Vivos

Abstract

Denmark has a large percentage of small and medium-sized private enterprises which is owned by the managing directors of the company. These firms often stay within the family where the sons or daughters tend to inherit the business. As many as 17,000 businesses will undergo generational changes over the next 10 years, where the process of succession can be complex if not planned and executed at the right time. To incentivise the practice of succession within the family, the Danish taxation laws allow for this succession in a personal business and in regards to shares in a company.
The process of succession can involve tax succession within the family as well, with the transferor avoiding taxation and leaving the deferred tax to the transferee. Succession involving transfer with tax succession often involves part of the transfer being a gift, where the burden deferred tax can be deducted as a compensation. The valuation is important, as the deferred tax and taxation in relation to the gift is based upon the value of the firm. The compensation can either be 22 % of the capital gains, or the deferred tax may be deducted in the valuation of the firm, which will be the higher number of the two, therefore the one most preferred to use as compensation. The valuation has lost legal certainty since the valuations are based upon guidelines whereas the Danish treasury will test the valuations given from the guidelines, therefore leaving the burden of proving the valuation to the citizens. Furthermore the Danish government has suggested a proposal to lower the tax rate of gifts that will affect tax succession. The execution of the succession can be rectified by completely gifting the transfer price, full remuneration, or a combination of these, the latter being the most preferred model. The change in the tax rate can potentially alter the models used in successions involving transfer with tax succession, where lowering the tax rate will create a vacuum for successions involving transfer with tax succession until the year 2020 where the tax rate will reach 5 %. Protective rules - such as the money-bin-rule - should be placed to protect against aggressive tax planning, with the purpose of lowering the tax is to incentivize the succession of the active business to the next generation. This could lead to the preferred model being rectified by completely gifting the transfer price.
The thesis is centred on a case, which demonstrates practical use of legal rules for succession and the valuation of a small business. Here one will find that there exists no universal proposition when deciding on the most advantageous model concerning how to finance succession. To find a good model for succession one must decide which party should benefit, although this has to be done with the consent of both parties.