KPMG Private Enterprise Global Family Tax Monitor: Large differences in tax paid for generational transfers

There are multi-million-euro tax variations for generational transfers of a family business across 57 jurisdictions, including Romania, which means that for many family businesses, maintaining prosperity in the long run depends on how well they plan for transfers of business assets and family wealth from one generation to the next.

This is the conclusion of the latest KPMG Private Enterprise Global Family Business Tax Monitor report. Thus, the report advises business families with footprints in multiple jurisdictions to monitor the fiscal system and its evolution and consider acting in advance. Romania, as well as other countries, such as Poland, Slovakia, Switzerland, New Zealand, and Australia, do not impose generational transfers, thus favoring the continuity of the business and the reinvestment of funds on the domestic market to support and develop the business.

With more and more globalized family businesses with geographically dispersed subsidiaries, inconsistencies in the tax treatment of transfers during the owner's lifetime (by gift) and/or at death (by inheritance) across jurisdictions can make succession planning more complicated and require tax planning. The 2023 edition of Private Enterprise Global Family Business Tax Monitor highlights, among other things, the wide discrepancies in the tax treatment of family businesses around the world and reflects the challenges they face.

KPMG Private Enterprise’s report found that globally, South Korea, France, the US and the UK impose the highest tax rates for the transfer of a family business valued at EUR10 million by inheritance, before any tax breaks are accounted for.

After exemptions, South Africa takes the biggest bite from family business inheritances valued at EUR10 million, followed by Canada and Japan. For inheritances of family businesses over EUR100 million, the most expensive jurisdiction from a tax perspective is South Korea after exemptions, with South Africa and the US coming in second and third.

For transfers during the owner’s lifetime (gifts) of family businesses valued at EUR10 million, Venezuela imposes the highest taxes globally before exemptions, followed by Spain, South Korea and France. After exemptions, South Africa and Japan come second and third behind Venezuela as the jurisdictions imposing the highest tax costs on business transfers by gift. These comparisons are similar for family businesses valued at EUR100 million before and after exemptions.

"Economic theory says, in general, that no taxation or taxation at a reduced rate might function as a method of attracting and retaining entrepreneurs and creating and adding value at a local level. Because lower tax burdens could encourage family businesses to continue operating, grow and reinvest profits in generating innovation and new jobs and attracting talent. That's why the location you choose to do your business matters a lot, from both a fiscal and legal perspective", says René Schöb, Partner, Head of Tax & Legal, KPMG in Romania.

"It is well known, in Romania, that the transfer of a business (of shares) by inheritance or donation is not considered taxable income when received by family members of the new generation.. However, while Romania’s fiscal legislation related to the transfer of a business is favorable, comprehensive fiscal planning also needs to take into account other factors. A family businesses transfer must also consider the legislation of other states in which the business and/or family members have economic activity, and especially evaluate the fiscal status of the beneficiaries, bearing in mind that some family members could be tax residents in another state", says Daniel Jinga, Associate Director, Tax, KPMG in Romania.

The report has been a go-to source for family business tax planning for almost a decade, comparing the widely different tax liabilities among jurisdictions on the transfer of family businesses through gifting during the owners’ lifetime (including on retirement) and through inheritance.

Also, the KPMG report shows that there are many jurisdictions where legislative changes in relation to business transfers are taking place. In Belgium, recent tax case law has confirmed that certain real estate activities that go beyond mere passive management of real estate may qualify as an ‘economic activity’. This would violate one of the basic requirements for applying one of the key conditions in applying the exemptions. In the Netherlands, the government’s 2023 Tax Plan includes reassessing the business succession scheme to exclude leased real estate, so it will no longer be taxed at the reduced tax rate. There is also a discussion taking place on the possibility of reducing the 83 percent exemption for gift and inheritance tax, which would increase the tax due when a family business transfers to the next generation. The outcome of this discussion will likely be included in the measured to be adopted in 2024.

In Japan, there has been a recent proposal for a comprehensive review of the current inheritance tax system to better integrate inheritance and gift and donation taxes. In addition, the proposal also includes adjusting the amount of deductions available for the transfer of family businesses. 

As René Schöb concludes: “Romania offers very favorable and stable conditions for the transfer of family businesses through donation and/or inheritance. However, at international level, this is an area which is under review. For example, in a study presented last July the European Commission recommended that member states should review the legal provisions on inheritances and donations. Consequently, family businesses need to follow legislative developments closely in all jurisdictions in which they operate or in which beneficiaries reside.”