Tax implications if your sole proprietorship is discontinued
Anyone thinking of converting their sole proprietorship into a company in order to escape the progressive rates and benefit from the recently reduced rates should take into account a possible valuation of cessation gains.
The transformation of a sole proprietorship into a company is usually done in two ways:
(a) the entrepreneur sells his assets to the company;
or
(b) he makes a contribution of his sole proprietorship to a company. In both cases, there may be a potential taxation of cessation gains.
1. Taxable object
Cessation gains are defined fairly strictly by the legislator. It concerns gains obtained or established on assets used for the professional activity by virtue of or on the occasion of the cessation of the activity. Both voluntary and forced capital gains are targeted.
Voluntary realised gains (i.e. resulting from a sale, exchange, contribution etc.) are taxable at the time of their realisation (the date on which a claim which is certain and of a fixed amount arises). It should be noted that realised cessation gains following a sale of business assets under a suspensive condition, are only taxable at the time of realization of that condition.
Forced capital gains arise when the termination is the direct result of a loss or other event beyond the entrepreneur’s control (e.g. in the event of death). Forced capital gains are taxable on the date of their effective receipt (with the exception of those established for stocks and orders, which are taxed at the time the debt is established).
Established capital gains include (unrealised) capital gains already expressed in a deed or in writing, drawn up before, on or after the cessation of the professional activity (e.g. capital gains expressed in a declaration of inheritance). These capital gains are taxable on the date of their (notarial or private) adoption.
2. Tariff
The valuation regime for cessation gains has been changed since 1 January 2018. As from tax year 2019 (linked to a taxable period starting on 1 January 2018), cessation gains may be taxed separately at a rate of 10.00% in the personal income tax. A condition is that the capital gain is acquired or established (a) as a result of the cessation of the activity from the age of 60, (b) as a result of death or (c) as a result of a forced definitive cessation. For capital gains realised on intangible fixed assets, the separate rate of 10.00% applies only and to that extent provided that the so-called “4 x 4 rule” is complied with. The capital gain obtained or ascertained may not exceed the jointly taxable net profit obtained in the four years preceding the termination.
Example:
The owner of a sole proprietorship A (65 years of age) decides to completely cease his activity and transfers his clientele to entrepreneur B. He realises a capital gain of 100. His company had a total net profit of 90 for the tax years 2014, 2015, 2016 and 2017. As a result, the capital gain obtained will be taxed in the amount of 90 at 10.00 %. The remaining part (100-90) is taxed progressively.
From now on, the valuation regime can be summarised as follows:
Materiële vaste activa moet zijn:
Financiële vaste activa moet zijn: Financial fixed assets
| Assets | Condition (*) is fulfilled | Condition (*) is not fulfilled |
Intangible fixed assets
|
10.00% Progressive |
33.00% Progressive |
| Tangible fixed assets | 10.00% | 16.50% |
| Financial fixed assets | 10.00% | 16.50% |
| Other assets (in particular: stocks, contracts in progress and trade receivables) | 10.00% | Progressive |
(*) Cessation gains realised (a) following cessation of activity from the age of 60, (b) following death or (c) following compulsory permanent cessation.
3. Conclusion
The reduced rate of corporation tax (29.58%) may encourage entrepreneurs to cease their sole proprietorship or to transfer it to a company. This transaction may be accompanied by an exceptional valuation of the capital gains on the cessation. However, the rates applicable to these cessation gains are more favourable than the normal liquidation rate for corporate income tax (30.00% withholding tax).
Justine Bouckaert
Published in VOKA – “Ondernemers West-Vlaanderen”, edition 4, March 2018
