Tax-Free Business Transformation

Tax-free business transformation

What is a tax-free business transformation?

A personally owned business can be transformed into a company (typically an ApS or A/S) without triggering taxation upon the transformation. In a taxable transfer, the owner must be taxed on the business’s retained profits as well as gains on assets, including the business’s calculated goodwill at the time of transfer. This can be an advantageous solution for business owners who want to operate in corporate form.

Conditions for a tax-free business transformation

To carry out a tax-free business transformation, the following conditions must be met:

• The owner must be fully tax liable in Denmark.
• The business must have a permanent establishment in Denmark.
• All assets and liabilities in the business must be transferred to the company. There must be no carved-out assets.
• Assets, including goodwill, and debt must be valued at market value.
• Deferred tax must be recognised.
• The owner must not have a negative capital contribution account under the business scheme at the time of the transformation.
• The value of the business is transferred as shares/ownership interests in the company. The owner must not receive cash in connection with the transformation.
• The transformation must be completed no later than 6 months after the end of the financial year used as the basis for the transformation – usually 1 January in the year of the transformation.
• If there is an intercompany/current account (excess contribution) or amounts set aside for later withdrawal, this must be settled before the transformation.
• An approved auditor must provide a statement regarding the company’s capital position.
• There is a statutory requirement to submit corporate law as well as tax law documents to the Danish Tax Agency no later than 1 month after the filing deadline.

Advantages of a tax-free business transformation

• No taxation of retained profits or gains on assets.
• Opportunity to limit personal liability through the corporate form.
• Opportunity to bring in additional co-owners without tax consequences.

Disadvantages

• Can be complex to carry out and requires legal and financial advice.
• Increased requirements for financial reporting and administration as a result of operating in corporate form.
• If all conditions are not met, even by mistake, the owner will become taxable on the business transformation.

Contact us today

SkatteInform can help assess whether the owner can meet the above conditions and carry out a tax-free business transformation. We can also assess whether a business transformation is appropriate in the specific case. We can provide the necessary statements, as we are a state-authorised audit firm. You can also contact us via the contact form below.

Disclaimer

As the above is for guidance only, we do not accept liability for dispositions that may be made on the basis of the above without prior individual advice. We do not accept liability for errors and omissions above.

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