Towards a level playing field for family business taxation in Europe

GEEF, the organisation representing owner-managed and family businesses throughout Europe, is concerned about the difficulties which entrepreneurs encounter when transferring their business from one generation to the next or when the business is sold to a third person. For this reason, an extensive benchmark study has been conducted to give an overview of relevant taxation situation in the GEEFcountries: Finland, France, Germany, Italy, Portugal, Spain Sweden and the UK. There are three capital reasons why the transfer of ownermanaged and family businesses in Europe is an important issue for the coming years:

1. Over 60% of the 17 million businesses in Europe are family businesses. They are important employers in Europe, representing more than 100 million employees. Their contribution to national GNP lies between 40 and 65%.

2. A very large number of companies will face a transfer of ownership within the next decade, partly due to demographic trends. The European Commission Communication on the transfer of SMEs of 1998 stated that about 1, 500, 000 enterprises were at risk in the years to come because of the poor conditions on transition, which would compromise the continuation of those businesses.

3. A major preoccupation of entrepreneurs today is the tax imposed on the transfer of family businesses. Inheritance, gift and capital gains taxes are of particular concern to GEEF members and are the reason why so many transfers of family businesses run into difficulty.

Identifying best practices and comparison of taxes
Smooth transition of businesses is in the interest of economic prosperity in Europe and is a highly significant issue for Europe's competitiveness. The EU has taken a great interest in the issue of competitiveness. By means of the EU Action Plan to Promote Entrepreneurship, the European Commission has undertaken benchmarking studies to identify best practices on the support to business in Europe. The results of the studies will provide comparative tools for improvement in this area.

The EU Action Plan is part of Commissioner Liikanen's policy for a 'Europe of Enterprise'. The Commissioner has stressed the need for national authorities to create the conditions for an appropriate framework for entrepreneurship. His plan focuses on four key tasks:

- Tracking progress on the national political scene;
- Identifying main indicators to evaluate performance, process and existing practices;
- Adoption of improvement measures by the Member States; and
- Development of an annual evaluation system of the adopted measures.

The differences in national legislation on the transfer of businesses, and family businesses in particular, highlight the best cases against which the other countries will be benchmarked. The results of the GEEF study are highlighted below.

International tax comparison
International comparisons of taxes reveal marked differences among countries, reflecting their individual histories, social and economic structure, and national philosophies, as well as the ad hoc way in which hard-pressed governments have responded to the exigencies of the moment.

An overall comparison, including all aspects of the taxes, would be a highly complex exercise. However, it is possible to identify the governments with the best practices by comparing criteria, which determine the amount of tax due. The comparison of the maximum rates gives a first impression on the policies of the different governments. Furthermore, a comparison of those maximums with the rates of relief available for businesses identifies the countries with the best practice.

A wide range of practices might give certain countries competitive advantages and persuade family firms to transfer their business to other EU jurisdictions with less disruptive rules and better business support measures.

Relevant tax identification The transfer of business is taxed in different ways, depending on the nature of the transfer and the moment of the transfer. Transfers generally occur via three vehicles: inheritance tax, gift taxand capital gains tax. Inheritance taxis a tax imposed on the privilege of inheriting something, paid by the recipient. The moment of transfer happens upon the death of the giver. Gift taxis a graduated tax assessed against a person who gives money or an asset to another person without receiving fair compensation; a significant amount of each gift is tax-free. For gift tax, the moment of transfer occurs during the life of the transferor. A capital gainis the amount by which an asset's selling price exceeds its initial purchase price. A realised capital gain is an investment that has been sold at a profit; an unrealised capital gain is an investment that has not been sold yet but would result in a profit if sold. For capital gains, the moment of transfer takes place upon disposal of the business.

Maximum tax rates differ widely, but give an indication of the government's policy (or non-policy) in supporting the transfer of businesses. The UK and Spain have the lowest maximum rates for inheritance and gift tax (<40%). These rates are considerably lower than the rates applied in the other countries, especially France, Italy and Sweden.

Typical relief rates on the inheritance (and gift) taxes for the transfer of business allows us to identify the countries with good supporting measures for the transfer of business. The countries with the lowest maximum rates (UK and Spain) also provide the largest rate of relief.

Inheritance tax
Inheritance taxes within the GEEF countries vary according to the criteria (taxable base, valuation of items belonging to the base and tax rates) and the way these criteria are applied in calculating the inheritance tax. In every country the criteria have different rules, making inheritance taxes difficult to compare. However, some indications may be found by comparing the maximum and minimum amounts of base, valuation and rate.

Most of the countries lower the burden of inheritance tax on business assets (except Portugal) and provide possibilities for business relief and exemptions. The UK and Spain are the countries with the best practice; the UK provides 100% relief under certain conditions, while Spain provides a 95% tax reduction.

Gift tax
Gift tax is often imposed as a way to prevent the evasion of inheritance tax. Therefore, gift tax rates are usually the same as inheritance tax rates.

Most countries determine their gift tax rate for the cumulative value of gifts within a certain period of time. This accumulating period is mainly used to prevent abuse from lower tax bands. The accumulating period and the applied rates on the amounts vary from country to country. For instance, France, Sweden and Germany have a ten year period; the UK has a seven-year period; Spain and Finland have a three-year period; and Portugal and Italy have no special provisions with regard to an accumulating period. Of course, countries with shorter periods and/or lower rates are more advantageous for businesses and people than countries with longer periods and/or higher rates.

Capital gains tax
Comparing capital gains tax is a delicate exercise. In addition to the general differences in national legislation on taxation, there is a lack of agreement on the basic nature of the tax. Different practices are applied throughout the GEEF countries. However, there are three identifiable categories of capital gains taxes: a separate tax on capital gains (Italy, since 1991; Portugal; and the UK); taxed within the income tax, comprehensively including long-term gains (Finland; France; Spain; and Sweden); and taxed within the income tax, with special provisions mainly confined to short-term speculative gains (Germany).

Capital gains taxes relevant to the transfer of family businesses are mainly longterm. Therefore the taxes levied on long-term gains are of the most concern. Short-term gains, mainly due to speculative transactions, are considered irrelevant.

The disposal of business can benefit from relief or exemptions. This relief depends once again on the national legislation. Therefore, each country's provisions are quite different and have a different impact on transactions.