Inheritance and gift tax aspects of business succession

Case 1: Inheritance of a partnership enterprise

1. facts 1 (basic facts)

E. with hometown Beckenried/NW is resident in Zurich (variant: Stans/NW). E., a restaurateur by trade, has been extremely successful in setting up a nationwide trade in orange must from Nidwalden. The success of his individual enterprise is so great that he intends to expand internationally in the near future. Privately, E. prefers high-proof products. He has acquired a considerable wine collection, which he also sees as a private capital investment.

On July 12, 2023, E., who is in good health, dies unexpectedly of a stroke. His estate totals CHF 24 million. There are no debts. At the time of his death, the sole proprietorship has a book value of CHF 2 million and a market value of CHF 6 million.

E. has not made any succession arrangements. His heirs are his wife F., who also resides in Zurich (variant: Stans/NW). His two children A. and B. are already adults. Daughter A., who has just completed her studies as a food engineer at the ZHAW Winterthur, lives in Meggen/LU. Son B. works as a winegrower in Germany, where he also resides. E., his wife and children are all Swiss citizens.

Questions

1. Is income tax due when E. passes away?
2. Who are the heirs of E.? Is inheritance tax owed?
3. Let's assume that daughter A. takes over the company as part of the division of the estate. What are the tax consequences of this and what influence does this have on the division of the estate?

2. variant a) for facts 1

The basic facts are the same. However, the deceased entrepreneur E. has drawn up a will according to which his sole proprietorship is to go to his managing director G. (resident in Wollerau/SZ). G., who is also a restaurateur, has been managing the company for two years. G. and E. are not related.

It is assumed that the testamentary arrangement does not violate any rights to a compulsory portion.

Question

• Does the inheritance tax apply?

3. variant b) to facts 1

The basic facts are the same. However, the assets essentially consist only of the sole proprietorship. The allocation of the company to daughter A. is therefore not possible within the framework of the division of the estate for lack of sufficient assets.

Questions

1. Let's assume that daughter A. nevertheless wants to take over the company herself. What options are open and what tax consequences would be associated with this?
2. Let us assume that no solution can be found to transfer the business to the subsidiary. What are the tax consequences of liquidating the sole proprietorship?

4. variant c) on facts 1

The basic facts are the same. However, E. does not trade in orange must as a sole proprietor, but through an AG with its registered office in Lucerne (E. AG), in which he holds 100% of the shares.

Questions

1. Is income tax due when E. passes away?
2. Is inheritance tax due if wife and children inherit?
3. Let's assume that daughter A. takes over the shares in the company as part of the division of the estate. What are the tax consequences of this and what influence does this have on the division of the estate?

Case 2: Management buy-out at a corporation

1. facts 2

Founded 25 years ago, X. AG, based in the canton of ZH (variant: in the canton of NW), operates several art galleries in Switzerland and Belgium. Patron P. wants to slowly retire from the business due to age. He has no descendants. However, he would like to transfer the business to his long-time employees A., B. and C., who already hold the management of the business (management buy-out).

The company has a fair value of CHF 10 million in mid-2023, determined on the basis of KS SSK No. 28.

P. intends to transfer the shares in the company to A., B. and C. on preferential terms - at 20% of the fair market value, i.e. a total of CHF 2 million. In this way, he wants to make it easier for his employees to take over the company, especially as they do not have sufficient financial resources of their own.

A. takes over 60% of the shares, B.and C. each take over 20%.

Questions

1. Does the transfer of the shares on preferential terms trigger gift tax or income tax for A, B and C?
2. Assuming there is a gift, what is the taxation?
3. Assume there is a gift. What happens if the employees acquire the shareholdings via an acquisition holding company?
4. Assuming there is income, how is it taxed?

2. variant a) for facts 2

The basic situation is the same. Let us now assume that after five years there are differences of opinion about the management style. As a result, C. wants to leave the company and sell his shares.

A., B. and C. have concluded a shareholders' agreement under which a direct sale to a third party is excluded. A. and B. have a mutual right of first refusal at the net asset value or intrinsic value of the shares.

B. subsequently decides to acquire the 20% share package from C.. The net asset value is considerably below the market value.

Question

Are there any tax consequences when C. sells the shares to B.?

Case 3: Donation, succession arrangement or employee participation

1. facts3 (basic facts)

A. Schreinerei AG operates a sawmill and a workshop in the canton of Nidwalden. A. is the sole shareholder and member of the board of directors of the joinery. He lives with his family in the canton of Nidwalden. A. wants to retire early next year and dispose of his shares. From now on, he wants to devote himself only to his hobby, art. The carpenter's workshop was founded by his grandfather, taken over by his father and continued by A. until today.

A. is widowed and has a daughter B. and a son C. Daughter B. has been managing director for some years and is interested in taking over the carpenter's workshop. However, the company has not been very successful in recent years. Employee D. is a long-time schoolmate of A. and is also interested in taking over the joinery. He already contributed significantly to the success of the company under A.'s father. D. lives in the canton of Zurich. Son C. is an artist and not interested in the carpenter's workshop itself.

According to the most recent appraisal, the market value (capitalized earnings value) of the workshop is CHF 7.5 million and the market value (capitalized earnings value) of the sawmill is CHF 12.5 million. After successful decades, the workshop and sawmill are unfortunately oversized today. There are hardly any interested third parties. Moreover, the carpenter's workshop is located in the middle of a residential area. However, several real estate companies are interested in the land, on which they could build a housing estate. Hidden reserves exist only on the real estate.

After many years of success, sales and earnings have slumped in recent years. The average net profit is still TCHF 71.

Questions

1. How is the value of the company determined?
2. Sole shareholder A. wants his daughter B. and employee D. to each have a half share in the carpenter's workshop. However, son C. should also receive one third of the company's value. What are the options?

2. variant a) on facts 3: gift to children and employees

Father A. is primarily seeking a gift (or an advance inheritance) to his children B. and C. and to his long-time school colleague and employee D., who in the meantime has almost become part of the (company) family. For the carpenter's workshop, which is unfortunately oversized today after successful decades, he no longer sees a future (in the medium term). Only for the land there are still interested parties who would build a housing estate on it.

Question

• What are the tax consequences?

3. variant b) on issue 3: succession plan for the carpenter's workshop

Father A. is striving for a succession plan for the carpenter's workshop, as he still believes in its continued existence (in the medium term). The order books are well filled in this respect. Unfortunately, the carpenter's workshop has become oversized and is located in a residential area. He is also considering restructuring. There is a long-standing friendship between employee D. and sole shareholder A.. Employee D. and daughter B. are interested in taking over the company, but daughter B., as a family member, is to remain managing director, although she has not been very successful so far. Employee D. had already contributed significantly to the success of the company, not least under A.'s father.

Father A. transfers half of the shares to daughter B. and half to employee D., each for a purchase price of one third of the pro rata enterprise value (mixed gift), and assigns the purchase price claim to nan son C.

Question

• What are the tax consequences?

4. facts c) toSubject 3: Transfer of an employee shareholding

There are no friendly relations between employee D. and sole shareholder A., but employee D. is to become the new managing director and replace the less successful daughter B.. Employee D. had already contributed significantly to the success of the company, not least under A.'s father. A. hopes that this will revitalize the company. Daughter B. leaves the company. A. is also considering a prior restructuring.

Sole shareholder A. gives away/transfers one third each of his shares to daughter B., employee D. and son C.

Question

• What are the tax consequences?

Addendum: Overview cantons with privileged business succession

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