Basing a family business in Cyprus or Poland instead of Denmark or France could significantly alter the tax burden on the next generation following succession, according to new analysis released by KPMG and European Family Businesses.
According to the report, European Family Business Tax Monitor, seven out of 23 European countries impose no tax when a business is transferred to another family member through inheritance. This figure rises to 13 when countries that apply tax exemptions on inheritance are taken into consideration.
The findings were based on the tax treatment of a hypothetical family business worth €10 million.
Countries that do not tax on inheritance of a family business following the death of an owner are Cyprus, Luxembourg, Poland, Romania, Slovakia, Slovenia and Sweden. When exemptions are taken into account this list also includes the Czech Republic, Germany, Hungary, Italy, Portugal and the UK.
Contrast this with Denmark, which taxes inheritors approximately 15% with or without exemptions, or France, which taxes heirs 8.4% when exemptions are taken into account – or 42% without exemptions.
The report said family business transfers generate no cash and funds to foot the tax bill may be diverted from other business activities such as reinvestment or growth strategies. The report said this puts family businesses in countries that have no succession tax at a competitive advantage to their counterparts elsewhere in Europe.
The tax treatment for intergenerational business transfers can vary depending if it happens at the previous generation’s retirement rather than their death.
When it comes to succession at retirement, Denmark and Malta take the highest tax cut – when exemptions are taken into account – at 15% and 5% respectively. When exemptions are not included France and the Netherlands top the list, both taxing approximately 42%.
The list of countries that do not charge tax when succession takes place at retirement remains largely the same, except Luxembourg is not included, taxing next gens 1.8%.
The report said countries that tax next gens more favourably if they takeover the business after their parents’ lifetime, rather than during it, could cause retired family business leaders to hold on to control for tax reasons. The report said this could be frustrating for the next generation and constrain business growth.