Your business acquisition exempt from taxes?

What is a participation?

A participation in the broad sense of the word means that a person has an interest in a company, in which it is driven by another. But this is the generic meaning. There are various specific nuances and details depending on the field. For example, in the business sense, we speak of a participation when a company owns shares in another company.

In the tax sense, and the most interesting concept from a tax point of view, a participation occurs when at least 5% of the nominal paid-up share capital is placed in the other company. An example to illustrate this:

• Company A issues shares nominally worth €1,000,000.
• Company B decides to buy €50,000 worth of shares. Using arithmetic, we then arrive at the conclusion that 5% of shares have been purchased. This is the condition to speak of a participation.

What is the participation exemption?

Now that we know what a participation is, we can discuss the participation exemption. What is prevented by the participation exemption is that previously taxed profits (from another company) are not taxed again. Article 13 Corporate Income Tax Act 1969 plays a central role in defining the participation exemption. Subsections 8 and 9 of this article then make exceptions here. For example, the participation exemption will not apply if there is a non-qualifying investment participation. Furthermore, the participation exemption will not apply to a taxpayer classified as an investment institution.

Participation exemption in a business acquisition

In the context of a business acquisition, an entrepreneur can benefit from participation exemption when his or her Holding Company sells an underlying operating company (one B.V. is not a B.V!) through a share transaction. The book profit made on this sale will then go to the Holding Company untaxed. If only assets are sold, the participation exemption will never apply and the profit made on the sale of the company will always have to be settled with the tax authorities. And that can be difficult. If you operate a sole proprietorship or partnership, you can only transfer your business through an asset transaction and therefore never benefit from the participation exemption. 

But beware: when claiming the participation exemption, the tax authorities do consider how long your holding company and operating company have existed. The requirement is a history of 3 years (there seems to be room here, but ask for a ruling beforehand). The reason is that the IRS does not want you to set up a new corporate structure just to avoid paying VPB on the profits of your company sale.

Finally, there are always exceptions to the rule, it is therefore important to keep an eye on Section 13 of the 1969 Corporate Income Tax Act. All in all, it can be concluded that the participation exemption prevents us from paying too much tax.