Family businesses help drive the economy, accounting for the majority of global GDP and employment. Many families are intent on keeping their businesses in the family and passing them on to the next generation. Nothing new there, but uncertain times bring with them a whole new set of challenges. So, what are families up against? Well, for starters, the often complex tax regulations that can apply when transferring a family business.
The current state of play
Depending where they are domiciled, the tax complexity for family businesses can be enormous, and the burden will only grow as government budgets are stretched and the need for additional revenues becomes more acute. In many cases, a family looking to hand down its business to the next generation is eligible to claim exemptions or deductions, but the requirements can be onerous and require very thorough planning.
Louis Thomas, Head of Family Office and Private clients at KPMG Luxembourg shed some light on the local situation: “Despite COVID-19 budgetary constraints, there should still be no substantial tax hindrance for transferring business in “direct line” (i.e. to the children, whether as a donation, or through inheritance). This is however not true if the intention is to donate or transfer on death a family business to family members other than in direct lines, or to non-family members.”
Cross-border situations are set to increase in the future, according to Henri Prijot, senior partner at KPMG Luxembourg also involved in Family Office matters: “These days, family members are scattered around various countries and business places are opened in other neighborhood countries. There might, therefore, be cases where double taxation could arise, even though there are very few international treaties dealing with inheritance taxes.”
KPMG Tax Monitor
“Charting a path for the future”, KPMG’s Global Family Business Tax Monitor takes a deep-dive into the ever-changing tax environment for family businesses worldwide, gives insight into how families can best prepare for transitioning their businesses to the next generation, and examines the impact COVID-19 could spell for families.
In many countries, tax planning for the transfer of a family business must be part of an overall planning process, and the Tax Monitor provides a blueprint that encompasses establishing robust family governance (including a family constitution), and ensuring the next generation is prepared to assume control of the business.
The Tax Monitor is based on the findings of 54 countries, regions and jurisdictions that undertook a taxation review on two case studies, providing details on how their local tax regulations would apply to each case. The study explores the effects taxation can have on the transfer of the business to family members upon inheritance and as a lifetime transfer (on retirement).
Let’s take a look at some of the key findings:
- Taxes on transfer of a family business tend to be higher, with complex exemption requirements, in larger, developed economies. Families in emerging economies can face a challenging tax burden as well.
- Of the 54 countries and territories surveyed, 15 have an inheritance/wealth tax that applies for the intra-family transfer of a €10 million family business, and 16 have a gift tax that would apply for a lifetime transfer. Other taxes (e.g. capital gains and personal income taxes) are applied in some jurisdictions as well.
- Of the 10 countries with the highest GDPs, 6 (Brazil, Canada, France, Germany, US and UK) have taxes that apply both for inheritance and lifetime transfers, while 4 (China, India, Italy and Russia) have neither gift nor inheritance tax on transfer of a family business.
- The US has one the highest tax rates globally for transfer of a €10 million family business, by gift or inheritance, before exemptions. However, US families potentially benefit from a US$10 million (indexed for inflation) exemption, currently scheduled to sunset after 2025.
- France, Ireland, the Netherlands, Spain and the UK have the highest tax rates of countries surveyed in Europe for transfer of a €10 million family business at death, before exemptions, but taxes are reduced substantially by exemptions.
- In Asia-Pacific, South Korea stands out for having one of the highest tax burdens in the world for the transfer of a family business.
- China currently does not impose any gift or inheritance tax.
Why families must act now
While there are tax reliefs in most jurisdictions that can lessen the burden on families transferring their business, many of these are coming under increased scrutiny which could mean government policy changes in a number of jurisdictions, resulting in increased taxes. In the US, for example, families transferring a business currently benefit from a gifts and estates exclusion of US$11.58 million – the exclusion presently has effect until 2026, but there is the potential for the exclusion to be modified or eliminated. Similarly, families in the UK benefit from business property relief (BPR) in transferring a business, but there are proposals that could modify or remove this relief.
How has COVID-19 impacted family businesses?
The current global pandemic has undoubtedly accelerated the planning cycle for families who are left with an increased sense of urgency about protecting the future of their business. Time is of the essence and key decisions around transferring their businesses need to be made in just a few months.
It’s a different story here in Luxembourg though as senior partner Xavier Martinez explains: “Although the international context is moving rapidly on this topic, the Luxembourg authorities do not seem to be willing to change the currently favorable rules that apply to inheritance and donations made in favor of children (i.e. in direct line of succession).”
According to Tom McGinness, Global Head of Family Business for KPMG Private Enterprise: “The impact of COVID-19 is also prompting families to take stock of the sense of purpose and values of their business. Family businesses tend to take a long-term view and have a strong sense of community. Increasingly, families are considering the broader societal impact of their business and their role in addressing issues from climate change to inequality and education.”
