A targeted, well-planned sale process is necessary for a successful approach when selling a firm.
Family-owned enterprises are being put up for sale more frequently these days. This is a result of both the conducive investment environment and the challenges in transferring firms to the next generation. What kind of tax ramifications the sale would have for the sellers is a crucial consideration in such transactions.
While the transaction may occasionally be made tax-free, a private individual selling their stake in the company may still be liable for up to 34.5% in taxes.
Holding structure is still a viable option
The transfer of shares to a holding company before the transaction is a time-tested strategy for reducing an individual’s tax obligation resulting from the sale of a business. Because the holding company is now the seller in this scenario, the sale can be completed without incurring any taxes.
This option might be particularly appealing if the company’s private owners wish to reinvest the sale revenues in other businesses or initiatives rather than using them to buy things to meet personal needs. However, a private individual will still owe 15% in personal income tax if they want to take money from the holding company.
Selling as a private individual
If a private person owner decides to sell their ownership interest in the company directly, the proceeds will be taxed in accordance with the capital gains regulations. This means that a 15% personal income tax must be paid on the difference between the venture’s sale proceeds and its purchase costs. But because the devil is in the details, it’s preferable to be explicit about what counts as income and what counts as an acquisition expense for the aforementioned guideline.
The complex rules on revenue
The sale price, as established on the day of signing the sale contract, represents the proceeds from a sale. If the sale price is paid in multiple installments, the taxpayer must divide the tax among these installments in proportion. In other words, the seller must add up the purchase price installments to determine the total income and then divide it by the percentage of the full price that each received buy price installment represents. However, what if the item’s final selling price is unknown? It is common for a percentage of the sale price to be contingent on the future success of the firm being sold. At this juncture, difficulties begin to emerge.
Contractual payment
In the simplest case, if certain contractual requirements are later completed, the seller will receive a set payment. In this instance, the seller only needs to estimate the income under the presumption that the requirements will be satisfied. If it turns out that this is not the case and the next installment of the purchase price is not due, the extra tax paid when the first installment was made can be retroactively refunded through a self-revision.
However, if the future conditional payment is not a definite sum, the answer becomes more challenging. In many sales and purchase agreements, the seller is entitled to a predetermined portion of the company’s earnings generated in the years after the transaction. Even if we believe that the condition will be satisfied in these circumstances, it is difficult to predict the maximum sale price and the associated tax liability at the time the contract is signed.
How much taxes be saved on acquisition costs
The overall cost incurred by a private individual to acquire a shareholding, whether as a purchase price or as a capital contribution made at the establishment of the firm, is known as the acquisition cost of a shareholding. If the owner later invests more money in the business (through a capital increase, for example), this sum also counts toward the acquisition cost.
