Family businesses face complex, shifting tax landscape
Family businesses face complex, shifting tax landscape
The KPMG Private Enterprise Global Family Business Tax Monitor compares tax implications for transferring a family business across 54 countries and territories.
- Taxes on transfer of a family business tend to be higher, with complex exemption requirements, in larger, developed economies; but 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 EUR10 million family business, and 16 have a gift tax that would apply for a lifetime transfer.
- In Romania, business transfer (i.e. transfer of the shares of the family business) through inheritance or donation does not give rise to a taxable event for the family members of the new generation. There may be some tax implications related to the transfer of real-estate that is not part of the business. However it is important that, despite the favorable Romanian tax legislation on transfers, the family should consider the tax implications in other jurisdictions as well, especially in the case of an international business or family members residing in different states.
- The US has one the highest tax rates globally for transfer of a EUR10 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 2026.
- France, Ireland, the Netherlands, Spain and the UK have the highest tax rates of countries surveyed in Europe for transfer of a EUR10 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. By contrast, China currently does not impose any gift or inheritance tax.
Family businesses help drive the global economy, accounting for the majority of global GDP and employment. But for families that want to keep their business in the family and pass it on to the next generation, there can be a multitude of challenges, especially in a highly uncertain environment like the one we are facing now. Often complex tax regulations can apply to transfer a family business and not only in one country. The KPMG Private Enterprise Global Family Business Tax Monitor compares tax implications for transferring a family business across 54 countries and territories.
René Schöb, Partner, Head of Tax & Legal, KPMG in Romania, says: "The challenges of the COVID-19 pandemic have emphasized the need for family businesses to pursue a strategy of innovation, focused on talent and technology. The future business environment could look fundamentally different for family operated businesses, from increased tax compliance complexity to customer expectations and market share, from talent management to succession planning. Leaders should focus on investing the time and resources required to prepare the business for the new reality and we are ready to provide the right guidance and support to create a better future.”
“Charting a path for the future,” the 2020 KPMG Private Enterprise Global Family Business Tax Monitor, provides in-depth perspective on the varied and changing tax environment for family business around the world, along with insight into how families can best prepare for transitioning their business to the next generation. The report highlights how the impact of COVID-19 could increase the pressure on families in the coming years.
“Depending where they are domiciled, the tax complexity for family business can be enormous and the burden is likely to grow as government budgets are stretched and the need for additional revenues becomes more acute,” said Tom McGinness, Global Leader, KPMG Private Enterprise Family Business, KPMG Private Enterprise in the UK. “In many cases, a family looking to pass its business to the next generation is eligible to claim exemptions or deductions, but as our report shows, the requirements can be onerous, require very thorough planning and are likely to tightened or modified in many instances.”
The Global Family Business Tax Monitor details the various tax treatments, across 54 countries, for the intra-family transfer of a family business. The survey shows that for a transfer of a family business valued at EUR 10 million, out of 54 countries surveyed, 14 have a specific inheritance tax that applies (15, if we also count the US that applies a wealth tax for family business inheritance), while 16 have a gift tax that would apply to lifetime transfers of the business. Of the 10 countries with the largest GDPs in the survey, six (Brazil, Canada, France, Germany, US, UK) have taxes that apply both for inheritance and lifetime transfers, while four (China, India, Italy and Russia) have neither gift nor inheritance tax on transfer of a family business. Other taxes, such as capital gains tax and personal income tax, are applied in some jurisdictions as well. In Romania, according to the current tax legislation, there are no taxes on inheritance or gifts when passing the family business to the next generation. (Some taxes may apply for real estate transfers, which are not part of the business). However, we strongly recommend an analysis of the tax implications in all impacted jurisdictions, especially in the case of an international business which operates in many countries or which involves family members who do not live in the same country.
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 and families need to be prepared for change. For example, in the US, families transferring a business currently benefit from a gifts and estates exclusion of US$10 million, with an annual inflation adjustment (US$11.58 million for 2020) – 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.
“Families with businesses and other wealth to manage are anticipating government policy changes in a number of jurisdictions that will result in increased taxes,” said Olaf Leurs, Tax Partner, KPMG Meijburg & Company, KPMG in the Netherlands. “The planning cycle for families has accelerated, even more so with the COVID-19 pandemic. Families have an increased sense of urgency about protecting the future of their business, and they should. Decisions on how or whether to transfer the business, which may have taken years in the past, in many cases now need to be made in a matter of months.”
Tax planning for the transfer of a family business needs to be part of an overall planning process and the Global Family Business Tax Monitor provides a blueprint to follow that encompasses establishing robust family governance, including a family constitution, as well as ensuring the next generation is prepared to assume control of the business.
In addition, “the impact of COVID-19 is also prompting families to take stock of the sense of purpose and values of their business”, said McGinness. “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.”
In terms of the impact on human resources, “technology is no longer an abstract notion. Accelerated by the need for mobility, technology has transformed the workforce of companies all over the world, challenging traditions in recruiting, training, well-being, retention, succession and much more. Talent risk is on top of the agenda for all business leaders that look to thrive in a post-pandemic world and applying the right knowledge and values can help family businesses expand their legacy across generations and mitigate the unique challenges they face in the war for talent,” concludes Mădălina Racovițan, Tax Partner, Head of People services, KPMG in Romania.
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