Are you a partner or shareholder in a company and wondering about the possible tax implications of selling your business?
AKCEAN can support you throughout the entire transfer process, so that you can approach it with peace of mind. We anticipate tax issues and work with tax specialists who analyze the specifics of each transaction and its tax implications.
Type of ownership
The way in which a company’s shares are held, whether directly or indirectly via a holding company, gives rise to different tax treatment at the time of sale.
Tax, when applicable, is determined on the capital gain corresponding to the difference between the sale price and the amount of the initial investment (acquisition or subscription price). Completion costs, i.e. the fees paid to the various advisors involved in the transaction, can generally be deducted from this capital gain.
Taxable capital gain = realization price – cumulated acquisition or contribution price – realization costs
The following are some of the tax provisions that apply in Luxembourg, Belgium and France to the sale of securities issued by a normally taxable capital company. Companies benefiting from a total exemption, transparency or translucent tax regime are not covered (e.g. civil companies, general partnerships and limited partnerships). This information is provided for information purposes only, is not exhaustive, and does not constitute advice or recommendations of a legal nature for which AKCEAN, its directors or employees may be held liable.
In order to determine the rules applicable to your particular situation, the services of a qualified professional (lawyer or tax advisor) are strongly recommended.
LUXEMBOURG
Transfer of shareholding by an individual shareholder
For Luxembourg tax residents, taxation on the sale of securities (shares, stocks, etc.) depends essentially on the length of time the securities have been held and the level of participation in the company’s capital:
- The shareholding has been held for more than 6 months and represents more than 10% of the company’s capital (at any time during the 5 years prior to the year of sale): the applicable tax rate is half of the overall rate (i.e., a maximum rate of 22.89% from €220,788), plus a 1.4% contribution to long-term care insurance. The maximum tax rate is therefore 24.29%. A ten-year allowance of €50,000 (doubled for spouses and partners taxed collectively) may be applied. However, this allowance is reduced by the amount of allowances granted over the previous 10 years for the sale of other companies or real estate.
- The shareholding has been held for more than 6 months and represents less than 10% of the company’s capital: the capital gain is tax-exempt.
- The shareholding has been held for less than 6 months: the capital gain constitutes a speculative profit, taxable from €500 and subject to the ordinary overall rate (maximum rate of 45.78% from €220,788) plus the 1.4% contribution to the long-term care insurance scheme, i.e. maximum taxation of 47.18%.
Disposal of an interest held by a holding company: application of the parent-subsidiary regime
The parent-subsidiary regime is the transposition of a European directive on the tax regime applicable to parent companies and their subsidiaries. It applies to most Luxembourg holding companies holding interests in companies normally subject to income tax in Luxembourg, the European Union (in a corporate form included in the list annexed to the Parent-Subsidiary Directive) or in countries with comparable taxation systems.
Capital gains realized on the sale of eligible holdings held by a Luxembourg holding company are exempt if the following conditions are met:
- Level of holding: at least 10% of the subsidiary’s share capital OR Acquisition price of at least €6,000,000.
- Minimum holding period: 12 months.
If these conditions do not apply, the capital gain is taxed in accordance with standard local income tax conditions, including the contribution to the Employment Fund and the local business tax (24.94% in Luxembourg City for the standard corporate tax regime).
It should be noted that, prior to their disposal, the value of eligible holdings is eligible for wealth tax exemption, which is not the case for the cash flow generated by the disposal proceeds (unless reinvested in tax-exempt holdings).
Management of the cash flow from the sale proceeds will depend on the manager’s objectives and personal tax level. This involves a trade-off between professional income paid by the structure, subject to non-liberal withholding tax on salaries and social security contributions, and dividends subject to the 15% non-liberal withholding tax.
This income will then be taxed at the income tax rate if the taxpayer is required to file a tax return. For dividends paid by a Luxembourg or EU company, the half-base is applicable (50% allowance on the taxable dividend) and the 15% withholding tax will be deducted from the balance of tax payable.) The maximum tax rate on dividends is therefore 23.59% (i.e. half the overall maximum rate of 47.18%, including the contribution to long-term care insurance). Also noteworthy is the exemption of €1,500 from the first tranche of income from movable property (or €3,000 for a married or partnered couple filing jointly)
BELGIUM
Transfer of a shareholding by an individual shareholdere and tax exemption
Capital gains realized by an individual shareholder are taxable when they result from abnormal or speculative transactions. By way of exception, transactions relating to the normal management of private assets consisting of real estate, portfolio securities and movable property are tax-exempt in Belgium. It is important to verify the condition of normal management of private assets, in view of the increasing number of controls in this area.
In the case of earn-outs or mechanisms involving future capital gains, the tax authorities may consider the earn-out or subsequent capital gains as professional income, subject to personal income tax.
Belgian holding company – Exemption from corporate income tax on capital gains on shares
The parent-subsidiary regime allows for the exemption of capital gains when the transferred company is subject to a normal tax regime and the following conditions are met:
- Level of holding: at least 10% of the subsidiary’s share capital OR Purchase price of at least €2,500,000.
- Minimum holding period: 12 months.
If these conditions do not apply, the capital gain is taxed under Belgian corporate income tax (25%).
The executive may continue to receive professional income from the holding company, as well as dividends, subject to the 30% withholding tax (except for the reduced rate of 15% applicable under certain conditions to eligible SMEs).
FRANCE
The provisions set out here are those currently applicable at the date of publication of this article. In view of the announcement of the dissolution of the French National Assembly in June 2024 and the forthcoming legislative elections in France, these may be amended in the context of an amended finance bill.
Sale of shareholdings by individual shareholders
French tax residents can choose between taxation at the Prélèvement Forfaitaire Unique (PFU) of 30% without deductions, applied by default, or, as an option, reintegration at the progressive income tax scale with possible deductions:
- Prélèvement Forfaitaire Unique (PFU), also known as ” Flat Tax “: capital gains tax at a flat rate of 30%. Added to this is the exceptional contribution on high incomes, of between 3% and 4% for incomes in excess of €250,000. The maximum total tax burden is thus 34.0% with application of the Flat Tax.
- Progressive income tax scale: capital gains are taxed on the basis of several cumulative contributions:
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- Contribution Sociale Généralisée and Prélèvement Social (CSG): 17.2%, of which 6.8% can be deducted the following year;
- Income tax: maximum rate of 45% from €177,106 of taxable income; and
- Exceptional contribution on high incomes: between 3% and 4%. For a tax household subject to joint taxation, this contribution is structured in brackets: a first bracket at 3% applies to taxable income between €500,000 and €1,000,000, while a second bracket at 4% applies to income in excess of €1,000,000
Under the progressive income tax scale, the maximum total tax burden can reach almost 66% before allowances are taken into account. However, two non-cumulative capital gains allowances can, under certain conditions, reduce income tax when calculated.
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- Retirement allowance (held for at least 5 years, shareholding greater than 25%, retirement within 24 months of sale): Flat-rate allowance of €500,000.
- Proportional allowance for length of ownership (applicable only to companies owned or created before 31/12/2017):
- General case: 50% allowance if held for between 2 and 8 years; 65% allowance if held for more than 8 years; OR
- Specific case for companies created less than 10 years ago on the date of subscription or acquisition of the shares or units generating the capital gain: 50% allowance if held between 1 and 4 years; 65% allowance if held between 4 and 8 years; 85% allowance if held for more than 8 years.
Example (for information only)
Taxation of a capital gain of €1,200,000 on the sale of a company created more than 20 years ago by a married shareholder-manager, who acquired a stake in the company 7 years ago. For the year of the sale and for the following year, we assume that this couple’s income exceeds the maximum bracket of €177,106, leading to taxation in the maximum bracket of 45%, the rate used for simplification purposes. If the couple opts to be taxed at the standard rate, the capital gain would be taxable under the following conditions:
CSG tax = 17.20% x €1,200,000 = -€206,400
CSG gains N 1 = €1,200,000 x 6.8% x 45% = €36,720
Taxable capital gain = €1,200,000 x 50% general allowance for holding between 2 and 8 years = €600,000
Income tax = €600,000 x 45% maximum tax rate = -€270,000
Exceptional tax on high incomes = (€1,200,000 capital gain – €1,000,000 tax bracket) x 4% (€1,000,000 capital gain – €500,000 tax bracket) x 3% = -€23,000
Total tax = -206,400 36,720 – 270,000 – 23,000 = -€462,680, which represents 38.56% of the capital gain.
In this example, taxation according to the progressive income tax scale is less advantageous than Flat Tax, which results in taxation of -€383,000 (€360,000 flat tax €23,000 exceptional contribution on high incomes).
Sale of shareholding via a holding company partial exemption
In France, the parent-subsidiary regime allows partial exemption of capital gains realized by a company liable to corporate income tax when the company sold is subject to a normal income tax regime and the following conditions are met (excluding capital gains on shares in companies with a preponderance of real estate assets):
- Level of shareholding: i) securities qualifying as equity securities for accounting purposes, ii) shares acquired in execution of a public tender offer or public exchange offer by a company initiating the offer, and iii) securities qualifying for the parent company/subsidiary regime, provided that you hold at least 5% of the subsidiary’s voting rights, if these shares or securities are recorded in the accounts as equity securities or in a special subdivision of another balance sheet account corresponding to their accounting classification.
- Minimum holding period: 24 months.
If these conditions apply, the capital gain is tax-exempt, but a share of costs and expenses corresponding to 12% of the gross capital gain is subject to corporation tax at the standard rate (25%). If these conditions do not apply, the capital gain is fully subject to corporate income tax.
The executive may continue to receive professional income from the holding company, as well as dividends, which will be taxed either according to the Flat Tax at 30%, or according to the progressive income tax scale with a 40% allowance. It should be noted that the Flat Tax will be retained by the distributing company as a tax advance, which will either be in full discharge of income tax, if the Flat Tax is chosen, or will be a tax credit (for the portion corresponding to income tax) if the progressive tax scale is chosen.
Conclusion
When selling a company, it’s important to anticipate the tax implications, so as to optimize your tax situation at the time of sale. As each situation is unique, we recommend that you consult a professional tax advisor to find the solution best suited to your situation and needs.
A holding company can be set up without necessarily seeking exemption from capital gains tax under the parent company/shareholder regime. On the other hand, the holding company may be set up by transferring shares with a view to selling them “in the short term” (a so-called transfer transaction). In this case, the holding company will not realize a capital gain if it sells the shares for a price identical to their contribution value. The individual contributor will be subject to income tax on the capital gain, unless he or she benefits from a deferral or suspension of taxation under conditions that may vary according to the country of residence.
Taxation of capital gains in Luxembourg, Belgium and France
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Last update: June 25, 2024
