Tax Reform 2005: Change of Generation

Contents

• Tax Reform 2005 - what now?

• The Main Content of Reform

Tax reform 2005 - what now?

- Personal capital gain – take into account that the taxation will tighten

• Transfer the property this year, if you have owned it over 10 years

• Transfer the property next year, if you have owned it less than 10 years

- Prepare the transfer in advance and take advantage of the tax exemption of capital gains for the company

• Incorporate the operations that will be sold

• Make sure that the shares are part of the fixed assets

• Plan the selling of unprofitable operations carefully, because capital loss from shares is usually not deductible

• Note that de-merger losses are non-deductible; due to the reform, de-merger and merger are parallel arrangements in taxation

• Plan how you should own real estates assets

• Take into account that the expansion of the ownership base by a free bonus issue affects the calculating of the actual purchase price of the shares

• The gift taxation will lighten, because in the future gift tax would be imposed from the reduced capital tax value (40% from taxable value is taken into account instead of current 100% retroactively from the beginning of 2004)

• The business and the transferee must still fulfill the same prerequisites as before

• In 2004 distribute at least the entire capital income as dividend

• Compare the tax expenses of the dividend which would be distributed in the year 2005 with the present expenses, and consider distributing an additional dividend in 2004

• Plan the ownership structure of family enterprises so that you can take advantage of the personal tax exempt dividend of 90.000 EUR in the future

• Be careful with transactions between the owner and the company – the taxation of hidden dividend will become more stringent

• Plan the ownership of listed companies carefully in case you hold less than 10% of the share capital

The government has on the 19th of May given its bill on reforming the corporate and capital income taxation. The bill involved many changes, but the processing of the bill in parliament may still change the content of the reform.

According to the bill, corporate and capital income tax rates are differentiated, in a way that the tax rate for companies will be 26% and the tax base for capital income 28%.

The taxation of capital gains from personal property will be reformed regarding property that has been owned more than ten years, when the acquisition cost presumption, which is reduced from the realisation price, will be decreased from 50% to 40%. Moreover, bonus share issues will in the future influence the calculation of the real acquisition cost.

According to the bill, capital gains of companies from selling shares would be exempted from tax. The exemption would concern shares accounted as fixed assets and which have been owned for more than year. The ownership in the company, which is sold, has to be at least 10%. The exemption would not concern shares of housing associations or real estate companies.

Capital losses from share assets will become non-deductible. Even the possibility to write off the depreciation from the acquisition cost of shares will be abandoned. In addition, the right to deduct dissolution losses will be significantly limited. Different expenses relating to the improvement of the company’s condition without counter-performance, such as claim losses, group support and amortisation of debt would not be deductible, if the ownership in the target were more than 10%.

The taxation of dividends will be completely reformed: the imputation system of dividends will be abandoned and the dividends will become partially subject to double taxation. Dividends will be taxed differently, depending on whether they are received from listed companies or privately held companies.

70% of the dividends from listed companies will be regarded as capital income for the receiver. Therefore, the tax burden of dividends from listed companies will be 19,6% in the future.

Dividends from other than listed companies will be exempted from tax for receiver for such part which is under a 9% yield on the company’s mathematical value. The annual maximum amount of tax-exempted dividends will be 90.000 EUR per person. Of the amount exceeding the 90.000 EUR limit, 70% will be regarded as capital income, if the dividend remains within the said 9% yield limit. Of the dividend exceeding the net assets limit, 70% is regarded as income of the receiver. According to the transitional provision, taxable dividend income in 2005 is 57% instead of 70%, and tax exempt dividend 43% instead of 30%.

The multiple taxation of dividends will be prevented by the so-called chain taxation prohibition, according to which dividends that a company receives are usually not regarded as taxable income. However, the principal rule has exceptions regarding for example income from investment assets and dividends that a non-listed company receives from a listed company. Also dividends from listed companies can be tax exempt, if the ownership in the target exceeds 10%.

The taxation of the person, who continues the business, will be relieved so that the gift tax is based on the assets’ taxable value, of which only 40%, instead of the previous 100% is taken into account. The company’s assets will be determined in the same way as in the current regime. The conditions for the relief for change of generation are the same as in the legislation currently in force. The chance is meant to come into force retroactively from the beginning of 2004.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.