KPMG’s Global Family Business Tax Monitor: Tax regimes impacting family business succession and growth

Tax regimes impacting family business success & growth

KPMG Enterprise releases Global Family Business Tax Monitor: Comparing the impact of tax regimes on family businesses.

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The KPMG report concludes that while tax regimes around the world vary greatly, in general, countries are supporting and encouraging investment and growth in family businesses, with low tax liabilities for the transfer of businesses to the next generation upon retirement or inheritance. Where tax is due, various mechanisms exist allowing for payments to be diminished or deferred.

The report, a sequel to the 2014 KPMG European Family Business Tax Monitor, also examines how a higher tax burden may influence a business to relocate.

“Although advanced economies placed a higher tax burden on family business overall, there were also more extensive and generous exemptions there than in countries with emerging markets,” says Christophe Bernard, Global Head of KPMG Enterprise, Family Business. “One impact might be that in countries where the tax burden is overall highest, family businesses may consider the option to relocate to a neighboring country with lower exemptions which could impact local economies.”

Other findings of the KPMG report include:

Tax regimes around the world vary greatly (from €0 to over €4.5 million for transfer of family business through inheritance, and from €0 to over €5 million for transfer of family business on retirement; for a business valued at €10 million), generally, countries are supporting and encouraging investment and growth in family business:

  • With low tax liabilities for the transfer of business to the next generation either upon retirement or inheritance or by decreasing the tax burden, the governments appear to encourage family members to keep their assets and business within the generations and to grow and develop it. Through inheritance, 25 out of 42 countries impose no tax or a tax below €1 million for a family business valued at €10 million, among them 14 impose no tax, and; on retirement, 21 countries impose no tax or a tax below €1 million for a family business valued at €10 million, among them 10 impose no tax.
  • Through mechanisms that allow for payment to be paid in instalments or deferred (countries imposing heavy tax burdens, in general, provide extensive and generous exemptions for assets that are treated as part of the business).
  • While several higher tax and lower tax countries are geographically adjacent to each other, this poses an interesting dilemma for business owners in relation to potential relocation. Sometimes the great variety in tax regimes is even between the neighboring jurisdictions such as the EU countries and North America.
    • Despite the fact that family businesses often have strong geographic roots and tend to be committed to ‘giving back’ to their local communities, governments need to consider that unfavourable tax policies may influence a business to relocate impacting the government’s local economic growth.
    • Family business owners should ensure that they weigh this against a whole host of other factors (for example, availability of appropriately skilled workforce and treatment of the family’s non business assets).
  • The exemptions and reliefs are often complex, although generous in nature. Tax burden can change dramatically while reliefs and exemptions are applied (through inheritance: eight additional countries impose no tax after exemptions are applied, with the biggest reduction of over €4.5 million; on retirement: nine additional countries impose no tax after the exemptions are applied, with the biggest reduction of €3.6 million; for a business valued at €10 million).
    • Exemptions and reliefs often require complex upfront structuring and compliance with certain rules:
      • A number of countries have conditions that have to be met for the exemptions to apply, including a minimum period of time that the shares should have been held by the donor prior to the gift and how long the business should be continued post-transfer.
    • Families should think through their approach and timing of business transition well in advance. By being prepared, families can ensure they understand and, where relevant, qualify for all exemptions and reliefs available. Lack of timely preparation may cost them a considerable sum or even put the ongoing ownership of the business at risk.
  • The difference in tax treatment of inheritance and retirement transfers may impact considerably on family’s attitude and the owners’ decisions about when to transfer the family business.
    • In most of the countries, after the exemptions are considered, the difference between tax levy on retirement or during inheritance is minimal of < €5,000, though sometimes it may be up over €2 million for a €10 million business:
      • When the tax is higher on inheritance (three countries only), a careful consideration should be given to advanced succession planning.
      • Conversely, ten countries apply a higher tax on the transfer of business on retirement than on inheritance. As a result, these countries appear to prefer assets remaining in the hands of the older generation for as long as possible. This may be frustrating for the next generation and act as a constraint on business growth.
    • While tax considerations should not drive the decision about when is the right time to pass the business on, for many, it is one of the key aspects to take into consideration.
    • While from a tax perspective, it may be more beneficial to transfer the business to the family members on inheritance rather than during the owner’s lifetime, this can lead to the younger generation feeling frustrated that they do not ‘own’ the business they are working to help grow. Balancing the need for the older generation to retain ownership, while the younger generation runs the business may require tact and compromise from both sides.

Methodology

The Global Family Business Tax Monitor is based on the findings of 42 countries who undertook a taxation review on two scenarios for a Family Business valued at €10 million. The Monitor has explored the effects taxation can have on the transfer of the business to family members upon inheritance and as a lifetime transfer (on retirement). The 42 countries engaged in the study are: Australia, Austria, Belgium, Bosnia & Herzegovina, Brazil, Canada, China, Croatia, Cyprus, Czech Republic, Estonia, Finland, France, Germany, Greece, India, Ireland, Isle of Man, Italy, Jamaica, Japan, Jordan, Latvia, Lithuania, Luxembourg, Malta, Mexico, Netherlands, Norway, Pakistan, Poland, Portugal, Senegal, Serbia, Slovakia, South Africa, Spain, Sweden, Switzerland, Turkey, UK, USA.

About KPMG Enterprise

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About the KPMG Enterprise Global Center of Excellence for Family Business

From the boardroom to the kitchen table, KPMG Family Business advisers share practical advice and experienced guidance to help you succeed. To support the unique needs of family businesses, KPMG Enterprise manages a global network dedicated to offering relevant information and advice to family-owned companies. We understand that the nature of a family business is inherently different from a non-family business and requires an approach that considers the family component.

For more information, please contact:

Lisa Foster

Head of Integrated Communications, Global Tax

KPMG International

+1 416 777 3649

lcfoster@kpmg.ca 

KPMG is a global network of professional services firms providing Audit, Tax and Advisory services. We operate in 155 countries and have 174,000 people working in member firms around the world. The independent member firms of the KPMG network are affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. Each KPMG firm is a legally distinct and separate entity and describes itself as such.

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