Transferring a family business to the next generation

21.2.2019

Transferring the business share of a built-up company to a family member is only one part of the transaction. Successfully handing over of a company is a matter of carefully setting up corporate and family relationships.

It is usually easier for the founder to build a prosperous business than to transfer its management to his descendants or family members. At the same time, the family business is and always has been the foundation of a society’s prosperity. This is especially true in German-speaking countries, even though some family businesses have become global players. Each transaction has its tax implications, but in this case these may not be the most important consideration. The more successful the enterprise, the greater the value of the business, and the more that can go wrong. In preparing for such transactions, we therefore together define the target status, the degree of involvement of family members and existing executives in company management, the strategy for their remuneration, and profit sharing. We discuss the issue of the establishment of a family holding company and a family constitution and, finally, the setting of an annuity for the outgoing founder.

At the start of the process, the founder of an enterprise is often only thinking of ensuring continuity in business management and transfer of business share. The actual transfer of the business share to a limited liability or joint stock company is simple and after completing a time test of five years after the acquisition of the business share, the income from the transfer of the share is exempt from income tax. Similarly, when gifting a business share to one’s offspring, such non-cash income is exempt from income tax. The complicated thing is adopting a solution that will work for a long time in the whole family as well.

When creating a joint venture with children, it is necessary to realise that the profits paid are currently in the Czech Republic and, in the foreseeable future, will also be subject to a 15% withholding tax for natural persons. On the other hand, when creating an appropriate family holding structure, the payment of the share of the profit from the subsidiary to the parent is usually exempt from income tax. The creation of a parent company also allows those offspring who will not personally participate in the management of the successfully established subsidiary to participate in the company, allowing the inheritance of the holding and the future participation in the profits of the enterprise to the extent determined by its founder. It is important to advocate before the tax administrator that the main objective of the business structure was not to reduce the taxpayer’s tax obligations, but to organise family assets, transfer business shares to new shareholders, and change leadership and the decision-making process in the business.

When preparing an optimal solution, we also usually consider the use of a special form of trustee fund ownership that may be appropriate for the management of family assets. It has proven to be a good solution in cases where the offspring cannot or do not want to participate directly in the management of the business and of family assets. Trustee funds are described in detail in Trust Funds: Opportunities and Risks co-authored by a partner in our Plzen office.




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