Taxation of professional capital gains

Verified 01 January 2024 - Legal and Administrative Information Directorate (Prime Minister)

When a company disposes of a property, it generates a profit (or loss) of a taxable exceptional nature. The system of taxation of professional capital gains differs according to whether the company concerned is subject toincome tax (IR) or to thebusiness tax (IS).

IR COMPANY

The system of professional capital gains shall apply where immobilization is affected by an event that causes it to exit the company.

Most often, the realization of a surplus value results from voluntary assignment (sale, business).

Please note

Exceptionally, the added value may result from a involuntary assignment. For example, in the event of expropriation or a disaster (e.g. fire), compensation to compensate for the transfer of ownership or loss of a fixed asset is treated as a transfer price and is likely to generate a professional gain.

Thus, the professional capital gains regime applies to companies engaged in an activity commercial, industrial, craft, liberal or agricultural.

This scheme does not concern individuals which are taxed following specific schemes :

Example :

The landlord of non-professional furniture (LMNP) who realizes a capital gain from the transfer of immovable property is subject to the real estate gains of individuals. Conversely, the renter of professional furniture who realizes a capital gain on a building comes under the professional capital gains if the immovable is recorded as an asset of its operation.

Please note

The completion date is the date of the transfer of ownership. If the sale is accompanied by suspensive condition (e.g. obtaining financing), the capital gain is taxable only at the moment of fulfillment of the suspensive condition.

The gain or loss, assessed item by item, shall be equal to the difference between the sale price and net book value of each item ceded.

Where the transfer price is lower than the net book value, a loss of value. On the contrary, where the transfer price is higher than the net book value, a added value.

In case ofcontribution, the transfer price of the items contributed in business shall be equal to the real value of the shares awarded as remuneration for the contribution.

When the assignment is made free of charge (donation, sharing) is the market value of the property at the date of the transfer that should be used to calculate the capital gain.

Please note

The transfer price recorded may be questioned by the tax authorities if it appears to result from abnormal management act.

The net book value of the disposed item is cost price, i.e. the purchase price (or original value). For depreciable items, this cost price is reduced by the depreciation allowed as a deduction for the tax base.

The applicable tax regime distinguishes between short-term capital gains and long-term capital gains.

Presentation of short and long-term capital gains

Capital gains are referred to as " short-term where they arise from the transfer:

  • elements of any kind acquired or created by the company since under 2 years.
  • or ofdepreciable items detained since at least 2 years, for the part corresponding to depreciation deducted for the tax base.

Please note

The 2-year period is calculated day by day, since the date of entry into the asset company.

On the contrary, capital gains are referred to as “ long-term” where they arise from the transfer:

  • non-depreciable items held since at least 2 years
  • or ofdepreciable items detained since at least 2 years to the extent that the capital gains exceed the overall amount of depreciation deducted for the tax base.
Tableau - Distinction between short-term and long-term capital gains

Duration of ownership of the property

Non-depreciable items

Depreciable Items

Less than 2 years

Short-term gain

Short-term gain

2 years or more

Long-term gain

Short-term gain within the limit of the depreciation deducted (then long-term beyond)

Example :

A depreciable item has been purchased €1,000 and has resulted in depreciation of an amount of €300.

Its book value is therefore 1 000 - 300 = €700.

If this item is sold €1,200 :

  • Less than 2 years after its entry into the asset, the resulting capital gain (i.e. 1 200 - 700 = €500) is a capital gain short-term.
  • At least 2 years after its entry into the assets, the capital gain of €500 shall be considered as:
    • short-term up to €300 (amount of depreciation previously deducted from taxable profits)
    • and long-term for the remainder, i.e. 500 - 300 = €200.

However, if the same item was sold €900, the gain from disposal (900 - 700) would be €200 and therefore less than the amount of depreciation (€300) previously deducted from profits. In that case, that added value would, in its entirety, have the character of an added value short-term.

Taxation of short-term capital gains

The sum of the short-term gains and losses realized during the financial year shall constitute the short-term net gain.

Short-term net gain is added to taxable profit under the conditions and in the income tax rate (progressive scale of 0% to 45%).

Companies covered by the IR may spread taxation over three years in equal parts (over the year of implementation and the following 2 years).

Taxation of long-term capital gains

The long-term net capital gain is subject to the flat-rate levy (PFU) at the overall rate of 30%, which is broken down as follows:

  • 12.8% in respect of income tax (IR)
  • 17.2% social security contributions on income from assets.

Please note

The company may charge for any long-term losses that have been incurred in the previous 10 financial years on the long-term net gain realized in respect of a financial year.

In case of death of the farmer, established capital gains shall be subject to the long-term capital gains tax system. A general netting shall be made between the gains and losses recorded, without regard to the length of detention elements fixed assets correspondents. Thus, where compensation reveals a long-term net gain, it is taxed at the overall rate of 30%.

Taxation of long-term capital gains

In addition, in the case of long-term capital gain, the company benefits from abatement depending on the length of time the building is held. The allowance applies to capital gains realized on a building (built or unbuilt) allocated to the holding and entered in the balance sheet or in the fixed assets register.

The allowance shall also apply to capital gains realized on shares of businesses with a preponderance of immovable property and rights in a contract of property leasing. On the other hand, buildings to be demolished and land to be built are excluded of the abatement.

The abatement is 10% per year of detention beyond 5e (i.e. from 6e year). Years of detention are assessed in 12-month periods. Thus, the property must be recorded in the balance sheet for a period ofat least 60 months (5 × 12) to qualify for a rebate.

In practice, the capital gain realized on a property held for more than 15 years is therefore totally exempt.

Example :

The capital gain realized on a property held since 8 years shall be exempt up to 30%.

There are several tax exemption schemes professional capital gains.

Exemption on the basis of the amount of revenue

Exemption according to amount of annual revenue applies to net gains from the disposal of items of thefixed assets carried out by individual companies or businesses of persons (CNS, SCS, civil businesses) subject to income tax (IR).

The amount of annual revenue shall be the average of the duty-free revenue for the financial years ended (reduced to 12 months where appropriate) during the preceding 2 calendar years the closing date of the year in which the capital gains are realized.

Please note

If the operator or business was several activities, revenue generated in all activities shall be taken into account.

In order to benefit from the exemption, the operator or business must carry on an activity commercial, industrial, craft, liberal or agriculturalon a professional basis, since at least 5 years.

The capital gain shall be exempted in one of the following ways:

  • Exemption from totality the capital gain, where the annual revenue is less than or equal to €250,000 (activity of buying and reselling or supplying housing) or €90,000 (provision of services or non-commercial benefits)
  • Exemption partial of the capital gain, depending on the revenue and the activity company:
    • Activity of purchase-resale or supply of housing. When revenues are greater than €250,000 and less than €350,000, the exemption rate is calculated as follows: (350 000 - Revenue) / 100 000.
    • Provision of services or non-commercial profits (NBC). When revenues are greater than €90,000 and less than €126,000, the exemption rate is calculated as follows: (126 000 - Revenue) / 36 000.

Beyond these thresholds, the added value is not exempt country.

Example :

An operator engaged in an activity ofpurchase-resale has realized, in year N, a capital gain from the sale of €70,000. Its accounting year shall coincide with the calendar year and its revenue shall be:

  • Revenue N-2: €320,000
  • Revenue N-1: €240,000

The average revenue for 2020 and 2021 is: (320 000 + 240 000) / 2 = €280,000.

The exempt amount of the capital gain shall be: 70 000 × (350 000 - 280 000 / 100 000) = €49,000.

The capital gain will therefore be taxed to the tune of 70 000 - 49 000 = €21,000.

FYI  

Exemption is not cumulative pitch with the sale price exemption scheme (detailed below). However, it can be cumulative with the exemption of capital gains realized on retirement.

Disposal price exemption

Exemption according to transfer price individual business applies to capital gains realized in the case of transfer for consideration or free of charge of a given or a whole industry.

In order to benefit from the exemption, the activity transmitted must be of commercial, industrial, craft, liberal or agricultural and exercised for at least 5 years.

The capital gain shall be exempted in one of the following ways:

  • Exemption from totality the capital gain, where the value of the items transmitted (excluding immovable property) is less than €500,000.
  • Exemption partial the capital gain, where the value of the items transmitted (excluding immovable property) is between €500,000 and €1 000 000. The exemption rate is calculated as follows: (1 000 000 - Value of items transmitted) / 500 000.

Example :

Individual business A is sold for a price of €1 300 000. Among the items submitted is a building whose sale price is €620,000. Deducting this amount, the envisaged transfer is therefore equal to €680,000.

The capital gain realized on the sale is €110,000.

The exempt amount of the capital gain is: 110 000 x (1 000 000 - 680 000) / 500 000 = €70,400.

The capital gain will therefore be taxed at 110 000 - 70 400 = €39,600.

Exemption in case of retirement

Exemption in the case of retirement individual business concerns the capital gain realized on the sale of either an investment or all of the securities held by a partner carrying on business in a business subject to income tax (IR).

Individual business Disposal of a

Exemption applies if all following conditions have been completed:

  • The professional activity has been carried out for at least 5 years. The activity may be of a commercial, industrial, craft, liberal or agricultural nature.
  • The company ceded is a SMB.
  • The transferor shall cease all functions in the transferred company, that is to say, all managerial and salaried activities within the company.
  • The transferor shall assert his pension rights either within two years of the transfer or within two years prior to the transfer.
Transfer of the securities of a business to IR

Exemption applies if all following conditions have been completed:

  • The professional activity has been carried out for at least 5 years. The activity may be of a commercial, industrial, craft, liberal or agricultural nature.
  • The business from which the securities are transferred is a SMB subject to income tax (IR).
  • The sale shall be in respect of all the securities held by the member.
  • The transferor shall cease all functions in the business from which the securities are transferred, that is to say, all managerial and salaried activities.
  • The transferor shall assert his pension rights either within two years of the transfer or within two years prior to the transfer.
  • The transferor shall not hold, directly or indirectly, more than 50% voting rights or rights in the corporate profits of the receiving company (the acquirer). This condition shall be assessed at the time of the transfer but also within 3 years of the transfer.
  • The business from which the securities are transferred shall not be held, on a continuous basis during the year of the transfer, at 25% or more by a company or by several companies not covered by SMB.

Please note

Capital gains on immovable property are excluded exemption.

Company to IS

The system of professional capital gains shall apply where immobilization is affected by an event that causes it to exit the company.

The realization of a capital gain is most often the result of a voluntary assignment (sale, business).

Please note

Exceptionally, the added value may result from a involuntary assignment. For example, in the event of expropriation or a disaster (e.g. fire), compensation to compensate for the transfer of ownership or loss of a fixed asset is treated as a transfer price and is likely to generate a professional gain.

Thus, the professional capital gains regime applies to companies engaged in an activity commercial, industrial, craft, liberal or agricultural.

The system of professional capital gains concerns businesses subject to SI, but most of the transfers of assets (excluding portfolio securities) by these businesses are taxable at the ordinary rate of 25% (15% for SMB).

On the other hand, the system of professional capital gains does not concern individuals which are taxed in accordance with specific schemes :

Example :

The landlord of non-professional furniture (LMNP) who realizes a capital gain from the transfer of immovable property is subject to the real estate gains of individuals. Conversely, the renter of professional furniture who realizes a capital gain on a building comes under the professional capital gains if the immovable is recorded as an asset of its operation.

Please note

The completion date is the date of the transfer of ownership. If the sale is accompanied by suspensive condition (e.g. obtaining financing), the capital gain is taxable only at the moment of fulfillment of the suspensive condition.

The gain or loss, assessed item by item, shall be equal to the difference between the sale price and net book value of each item ceded.

Where the transfer price is lower than the net book value, a loss of value. On the contrary, where the transfer price is higher than the net book value, a added value.

In case ofcontribution, the transfer price of the items contributed in business shall be equal to the real value of the shares awarded as remuneration for the contribution.

When the assignment is made free of charge (donation, sharing) is the market value of the property at the date of the transfer that should be used to calculate the capital gain.

Please note

The transfer price recorded may be questioned by the tax authorities if it appears to result from abnormal management act.

The net book value of the disposed item is cost price, i.e. the purchase price (or original value). For depreciable items, this cost price is reduced by the depreciation allowed as a deduction for the tax base.

Most capital gains realized by companies subject to tax are treated for tax purposes as ordinary profit or loss (ordinary law). On the other hand, certain capital gains are the subject of special tax arrangements.

Ordinary law system

Where the ordinary rules apply, the capital gains realized shall be included in the ordinary profit or loss of the current financial year. They are therefore taxed at the normal rate of 25% (or at the reduced rate of 15% for SMB: titleContent).

In the event of capital losses, these shall be set off against operating profit or contribute to the formation of a reportable deficit.

The ordinary rules apply to subsequent capital gains :

  • Transfer of fixed assets tangible and intangible (e.g. goodwill, land, buildings or patents)
  • Transfer of securities of business with a predominance of immovable property (SPI) unquoted
  • Transfer of equity securities detained since under 2 years or investment securities
  • Disposal of securities of businesses established in a Non-cooperative state or territory.

Special schemes

Other capital gains are taxed reduced rate :

  • Transfer of equity securities detained since at least 2 years. The rate shall be set at 0%, and the company shall bear tax on a share of costs and charges assessed on a flat-rate basis at 12% the gross amount of the capital gains from disposal.
  • Transfer of securities of business with a predominance of immovable property (SPI) quoted. The rate shall be set at 19%.
  • Disposals of securities venture capital mutual fund, of professional private equity fund or venture capital business detained since at least 5 years. The rate shall be set at 15%.

In addition, a temporary arrangement allows taxation at the reduced rate of 19% capital gains resulting from transfer of immovable property. The benefit of this scheme is subject to compliance with the following conditions :

  • The transferred building corresponds to office or commercial premises, industrial premises or building land.
  • The transferred premises or land must be located in one of the geographical areas characterized by a particularly large imbalance between housing supply and demand.
  • The purchaser of the immovable is a legal person (e.g. a business) that does not deal at arm's length with the company that receives the arrangement. In other words, one of the two companies must not directly or through intermediaries hold the majority of the share capital of the other or exercise decision-making power there. Neither should the companies be placed under the control of the same third company.
  • The sale must be completed by December 31, 2026. However, if a promise to sell was made before December 31, 2026, the sale can be completed within 2 years from the date of the promise.
  • The purchaser undertakes to convert the acquired premises (or to build on the land) into residential premises within 4 years from the closing date of the financial year in which the acquisition took place. He may request an additional period of 1 year renewable from the administration.

Please note

The purchaser who fails to comply with his commitment to conversion or construction shall incur a fine equal to the amount of the tax saving recorded by the ceding company.

An exemption applies to capital gains realized in the event of transfer by way of expensive or as such free individual business of a specific or a complete industry.

In order to benefit from the exemption, the activity transmitted must be of commercial, industrial, craft, liberal or agricultural and exercised for at least 5 years.

The capital gain shall be exempt, according to the sale price, as follows:

  • Exemption from totality the capital gain, where the value of the items transmitted (excluding immovable property) is less than €500,000.
  • Exemption partial the capital gain, where the value of the items transmitted (excluding immovable property) is between €500,000 and €1 000 000. The exemption rate is calculated as follows: (1 000 000 - Value of items transmitted) / 500 000.

Example :

A complete industry is sold for a price of €1 300 000. Among the items submitted is a building whose sale price is €620,000. Deducting this amount, the envisaged transfer is therefore equal to €680,000.

The capital gain realized on the sale is €110,000.

The exempt amount of the capital gain is: 110 000 x (1 000 000 - 680 000) / 500 000 = €70,400.

The capital gain will therefore be taxed at 110 000 - 70 400 = €39,600.

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