Tax Reform 2005 - what now?
- Take advantage of the capital gains tax exemption
- Incorporate the operations that will possibly be sold well in advance
- Make sure that the shares belong to the fixed assets of your business
- Plan the selling of unprofitable operations carefully, since capital loss from shares is usually not deductible
- Personal dispositions – consider the time of transfer
- Sell the property this year, if you have owned it more than ten years
- Sell the property next year, if you have owned it less than ten years
- Observe that dissolution losses are non-deductible
- Due to the reform, dissolution and merger are parallel arrangements in taxation
- Note that this regulation does not apply to dissolution of partnerships or limited partnerships
- Plan the ownership of shares and distribution of dividends
- Plan the ownership of listed companies carefully in case you hold less than 10% of the share capital
- You can still use a holding company to own shares at a privately held company
- Distribute at least the entire capital income dividend in 2004
- Compare the tax expenses of the dividend, which will be distributed in the year 2005, with the present expenses, and consider distributing an additional dividend
- Structure the ownership of family enterprises so that you can take advantage of the personal tax exempt dividend of 90.000 EUR in the future
- Be careful in transactions between the owner and the company – tax consequences of hidden dividend will become more seve
Main Content Of Reform
The government has on the 19th of May given its bill on reforming the corporate and capital income taxation. The bill involves 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 rate for capital income 28%.
The taxation of dividends will be completely reformed: the imputation system for 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 of 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 the 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%.
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 a 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 is more than 10%.
The taxation of capital gains from personal property will be reformed regarding property that has been owned over ten years, the acquisition cost presumption, which is reduced from the realisation price, will be decreased from 50% to 40
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.