Transferring your business
- Gé Sletterink
- 16 Dec 2022
- 6 min
- Selling and takeovers
The time has come for your business to be formally transferred to its new owner. You might have already planned a celebration to mark the occasion. Before the formal transfer can actually take place, however, there are some formalities to take care of depending on the transaction type, such as settlement with the tax authorities. After the transfer, a new phase of life begins.
Business transfer through an asset/liability transaction
With eenmanszaken (sole proprietorships) or vennootschappen onder firma (general partnerships, vof), you do not have a choice, as these businesses are always transferred through an asset/liability transaction, regardless of the buyer’s intended legal form. If you own a besloten vennootschap (private limited company, bv), you or the buyer may choose to transfer the business through an asset/liability transaction.
Assets and liabilities
An asset/liability transaction involves transferring part of the business’s assets and liabilities to the buyer. You and the buyer first decide on which assets and liabilities to transfer. Bank balances, accounts payable and any other debts are usually kept by the seller. The purchase/sale agreement specifies exactly what will be bought/sold, including machines, inventory and stock, as well as other agreements regarding the transfer of warranty and service claims and telephone numbers and domain names known in the market.
When a business is legally transferred (in Dutch), all rights and obligations of its staff are transferred to the buyer. Employees keep the same terms of employment and their years of service. As the seller, you remain liable for the fulfilment of the obligations of the employment contract for one year after the transfer. Employees can hold you or the new owner accountable for keeping agreements made. The transfer in itself is not grounds for dismissal, but business reasons may be. To dismiss staff, you must follow a dismissal procedure.
Updating the Business Register
Report the changes* to your business to the Business Register. KVK will process the changes on the day of the transfer, as this is the day on which ownership formally changes hands. You can, however, submit the changes earlier.
Income tax implications
As the owner of an eenmanszaak or partner in a vof, you pay income tax on business profits. Selling or discontinuing your business is also known as ‘cessation’, and when you do so, you have to calculate the cessation profit. This is the difference between the book value of your business and its actual value. Cessation profit is part of your income in the year that you discontinued your business, which means you have to pay income tax on it. Some deductions do apply to the cessation profit.
Because of the cessation deduction (in Dutch), a portion of your cessation profit is exempt from tax. Depending on your situation, you may qualify for additional deduction of annuity premiums (in Dutch). With annuity, you deposit a sum of money with a bank or insurer, which is then paid out to you over a pre-agreed period of time or until your death. You pay taxes on the amount paid out.
If you previously set aside a retirement reserve fund, part or all of this fund will be released by discontinuing your business. The amounts on which you previously received a tax deferral are added to your profit, which means you will have to pay income tax on them. You can avoid this by purchasing an annuity. Find out more about retirement reserve funds. Please note, it is no longer possible to use this as of 1 January 2023.
If your business is being bought by a partner, family member or employee, you will not have to pay tax on (part of) the cessation profit, as you can transfer said tax to the buyer with the ‘pass-through scheme’. For more information about these schemes, visit the website of the Dutch tax authority (in Dutch).
Business transfer through an equity transaction
You can only transfer a legal entity whose assets have been split up into shares, such as a bv, via an equity transaction. Equity transactions must always be formalised by a notary* (in Dutch). With the transfer of all equity, the entire company passes to the new shareholder, effectively passing on all assets and liabilities, rights and obligations, staff, contracts, permits and the entire history of the company.
Updating the Business Register
After formalising the equity transfer, most notaries will also notify the Business Register of the changes*, but the buyer can also do so themselves. As a former owner, you are no longer authorised to do so after the transfer.
Tax implications of selling shares
Who owned the shares of the sold bv matters for tax purposes. If you owned the shares privately, you will receive the proceeds from the sale on your personal account. The amount you receive in excess of what you paid for the shares is called capital gains, on which you have to pay substantial holdings tax (in Dutch) in income tax box 2.
If you own a holding company that was a shareholder in the sold bv, you qualify for participation exemption (in Dutch), which means capital gains are not taxed. You can make a return on the proceeds in the holding company, with all profits made by the holding company being subject to corporate tax (in Dutch). If you are a shareholder and decide to pay out dividends from the holding company to yourself, the holding company will have to withhold dividend tax (in Dutch) on the distribution. Shareholders have to pay substantial holdings tax in income tax box 2, but you can offset the dividend tax withheld by the holding company against this tax.
Other things to arrange
You are not allowed to charge VAT (in Dutch) on the sales price of your business, as the buyer is taking your place. You remain personally liable for any VAT debts until the time of transfer. After registering the business transfer with the KVK, the tax authority will send you a letter about filing the final VAT return. You must file this final return for the period in which the business was transferred. Always file a VAT return, even if your VAT balance is zero.
Donating or bequeathing a business
If you want to donate or bequeath your business, the beneficiary will have to pay gift or inheritance tax on the value of the business. If the beneficiary wishes to continue the business, they can take advantage of the business succession scheme to pay less tax or no tax at all.
If you rented business space, the new owner of the business may be able to take over the lease of the business space by means of a process called substitution. The new owner will then rent the business space at the same price and with the same conditions.
Keep your records
After selling your business, you must keep the administrative records for at least 7 years, either physically or digitally. In the purchase/sale agreement, make arrangements with the buyer about who will keep the records. When selling real estate, such as commercial property, a retention period of at least 10 years applies.
New stage of life
The transfer marks the beginning of a new stage of life. You will finally have some time for yourself and will probably have a bit more space in your calendar. For some, this might be a welcome change. Others might be afraid they will feel an emptiness without their former business. It is best to think of it as a new stage of life, in which you could use your newfound free time to share your expertise with other starting entrepreneur as an advisor. Or you could start volunteer work. Try to prepare for this transition phase in advance and think about what you will do after the transfer. You can make this process easier by setting up a handover process together with the new management. Or you could agree to come on board as an advisor. This will make the transition more gradual.
You will also have to think about a financial plan. If all is well you should have significant assets after the transfer, as well as shares in an investment bv (PLC). In an ideal situation, you will have both income and assets. Sit down with an advisor to explore the best way to manage and safeguard both.
Your income can consist of:
- annuity payments
- profit distributions
- rent from real estate
- stock dividend
- interest on bonds
- interest on savings
- other income
You can adjust your income from these sources by using the various components differently. Or you can choose to push back or bring forward the date on which you start receiving pension, annuity, and profit payments.
When you dissolve your business and draw up a balance sheet, the following assets could emerge:
- real estate (own home or business premises)
You can use these assets to fill the gap between your income from pensions and annuities and your expenses. The return from these assets varies and depends on the type of investments you made.
When creating a new financial plan, do not hesitate to ask others for advice* (in Dutch). You can create a complete financial plan when working with an advisor. The goal is to plan your finances in such a way that you can live the life you want. Use your reserves as best you can, maximise returns, and hedge risks as much as possible.