Transfer s.p. to family member | Transfer of an enterprise or part of an enterprise to a transferee

 

Introduction

In 2022, 109,552 sole proprietors are already active in Slovenia (hereinafter referred to as s.p.), which means that one in 20 Slovenians already has an open-to-work entrepreneurship. Why this is the case is difficult to answer, but certainly when the volume of revenues and consequent profits are reduced, it makes more sense to set up an s.p., where there are no costs of establishment, than a limited liability company (hereinafter referred to as the text d.o.o.), where a share capital of EUR 7,500.00 is required and the founding documents are accepted.

Through years of business and potential growth, especially for entrepreneurs approaching retirement, the question arises as to what to do with s.p.’s on the termination of business.

Some entrepreneurs choose s.p. close (when s.p. has few assets and liabilities and it is a service activity, it is sometimes appropriate), some choose to make a status transformation from s.p. v d.o.o. (especially those who would like to retain the status of owner/holder of the business shareholding, but would withdraw from the ordinary operating business), and some choose to transfer s.p. to a family member or, more legally, correctly – transfer of the company or part of the company to the acquirer entrepreneur) .

Transfer s.p. to a family member or, more correctly, the transfer of an undertaking or part of an enterprise to the acquirer entrepreneur is governed by the Companies Act (‘ZGD-1’) in Paragraph 72.a and 72.b.

In this paper, we will briefly present the process of transferring the s.p.a. to a family member or transferring the company under Article 72 of the Companies Act, the possible tax consequences of such a transfer and the costs incurred.

Legal basis

As already mentioned, the business or part of the company is governed by the Companies Act. The law distinguishes between two different transfers:

1. transfer of the whole enterprise to the acquirer entrepreneur (Article 72a ZGD-1);
2. transfer of part of the company to the acquirer entrepreneur (Art. 72.b. ZGD-1).

Article 72a of the ZGD-1 provides:

“An entrepreneur may transfer the company to another natural person for the time of his life (hereinafter referred to as the acquirer entrepreneur). By transferring to the acquirer, the acquirer entrepreneur’s business and the trader’s rights and obligations in relation to the enterprise are 300 000 000. The acquirer entrepreneur enters as a universalsuccessor in title into all legal relationships relating to the transferred entrepreneur’s business.”

As can be seen from the legal provision cited, it is possible to transfer s.p.’s to any natural person, not just a family member (in formal terms). However, in practice, transfers of S.P.’ to other natural persons other than family members are rare because they are less tax-friendly.

Article 72(b) also allows the transfer of part of an undertaking, namely:

‘The provisions of Article 72(a) of this Law shall apply mutatis mutandis to the transfer of an activity of an entrepreneur, with the exception of the provision of the second indent of the third paragraph, the provisions of paragraph 5 concerning the express consent of the entrepreneur, the use of the trader’s name and surname and the sixth paragraph concerning the erasure of the entrepreneur of his own motion and the cessation of the activity.’

Such a transfer is also rare in practice, as it is more difficult to achieve fiscal neutrality.

In the following contribution we will focus on the typical transfer of s.p. to a family member.

Tax rules allow the transfer of an S.P.to a family member in a fiscally neutral manner (without paying taxes at the time of the transaction), while taking care to ensure that the procedure is carried out in accordance with the law.

 

Universal legal succession

As is apparent from Article 72a, the transfer of an undertaking to the acquirer entrepreneur has the effect of a universal legal succession, which means that the acquirer, as a universal successor in title, enters all legal relationships connected with the transferred sole proprietor’s business. In practice, this means that there is no need to modify business cooperation contracts with business partners, employment contracts and other business events, as the acquirer entrepreneur assumes all business relationships previously entered into by the acquirer. While there are some exceptions, it is necessary to arrange for a copy of ownership in the case of means of transport and immovable property.

Universal legal succession also results in the acquisition of all assets and liabilities of the transferor entrepreneur from the cut-off date. However, the law provides for a safeguard for all creditors, which stipules that if the acquirer fails to fulfil the obligations arising from the transferor entrepreneur in respect of the company prior to the registration of the transfer of the company to the Business Register of Slovenia, the trader is liable for them with a laptop (still) with all his assets.

The transfer of s.p. to a family member results in a universal legal consequence, which means that the acquirer enters all legal relationships (rights and obligations) in respect of the transferred entrepreneur’s business.

 

What’s the process?

For ease of understanding, the process can be divided into 3 phases and described below in a very simplistic way.

The first stage comprises the action taken before the transfer of the company itself. Initially, employees must be informed in writing of the transfer of the company in accordance with the Employment Relations Act. Then certain documents are required by the company’s accounting. In particular, it is the preparation of financial statements (statement of release, balance sheet, list of fixed assets) on the cut-off date (so-called “day D”).

Once the balances have been ready and approved we move on to the second phase of the transfer of the company, namely it is necessary to draw up a contract for the transfer of the company, which must be concluded in the notary record. The Companies Act specifies all the elements of such a contract. Once the contract is drawn up and signed and endorsed in a notaar record, a departure to the business register (AJPES) where the transaction is realised – the transferor entrepreneur is deleted from the register and the transferee entrepreneur is entered in the same register (where the acquirer may have a pre-existing s.p.).

When the business register enters the change of the holder of the company in the court register (presumably within one day), we move to the third stage , namely accounting and tax tasks must be carried out in order to make the transfer of the company to a family member fiscally neutral.

The process of transferring a company to a family member can be divided into 3 phases, and the duration of the whole procedure is between 14 days and 3 months.

Fiscal neutrality, (no) transfer payable

As we mentioned in the introduction itself, the transfer of an undertaking to a family member or other acquirer entrepreneur may be tax neutral (no tax is payable) under the following conditions:

1. in the case of a transfer of an undertaking (as a whole) to another natural person as a result of: a) death, b) permanent incapacity for work, c) retirement or d), it is a transfer of the undertaking to a spouse, child, adoptive child or stepdaughter;
2. the acquirer must continue to pursue the activity;
3. the acquirer must value the assets and liabilities assumed, depreciate the assets assumed and calculate the gains and losses in respect of the assets and liabilities received, taking into account the value at the date of cessation of the transferor’s business (cut-off day) of the transferor, according to which it would be assumed in the calculation of the taxable amount of the transferor who ceased to pursue his business or in such a way as if the cessation of the activity had not taken place.
4. the transferor entrepreneur must take over the provisions made by the transferor which are ate at the transferable undertaking and the conditions relating to those provisions, as would be the case for the transferor who ceased to be an activity, as if the cessation of the activity had not taken place.

An additional condition — which is tested after the transaction has taken place is that the transferee’s business must be carried on for a further five years , otherwise the tax advantage already obtained (fiscal neutrality) has been lost. It is possible, on the basis of the position of the Financial Administration of the Republic of Slovenia, that the transferee entrepreneur is statusly transformed into a limited liability company (before the expiry of the five-year period).

The transfer of an enterprise to the acquirer entrepreneur is also not subject to the Value Added Tax (VAT) Act because of Article 10 of the same Law. However, the condition is that the transferee must be entered in the register of taxable persons for value added tax.

Transfer s.p. to a family member or to any third party may be paid for or free of charge. In practice, transfers of the company are mostly free of charge, especially when s.p. is transferred to the next generation (parents – children) since in such a case the transaction is not taxed in the light of the Inheritance and Gift Tax Act. In other cases, the transaction may also be subject to other taxes.

Costs

It is more difficult to estimate by the number what is the total cost of transferring the business to a family member or other acquirer entrepreneur. The cost depends on the size of the undertaking and the complexity of the process (means of transport, employees, real estate, etc,..). In principle, however, the costs of running the whole procedure and preparing the necessary acts (contracts) and other advice on the transaction start at EUR 900.00 (excluding VAT) to facilitate transactions.

Finally,

As mentioned above, the transfer of s.p. to a family member or the transfer of a company to the acquirer entrepreneur is not so easy, and given the fact that the procedure is conducted only once, it is a good thing that you are led through the procedure by a professional who has already conducted similar procedures.

At the Law Firm Križanec andmamo in the field of business transfers and status transformations of independent children have a lot of experience, so we can assure our clients that we take the matter in accordance with the law and practice.

If you are interested in the process of transforming s.p. v d.o.o. we invite you to read the following publication: https://www.odvetnik-krizanec.si/preoblikovanje-s-p-v-d-o-o/.