The inheritance of enterprise, known as succession, is a big challenge for many people. Especially when it comes to legal and tax complexities. Business owners need to keep in mind many issues involved in the transfer of their enterprise. In this article, we will provide general information on business succession and the tax aspects that need to be considered.
Table of Contents
- What is succession?
- Succession management – what is it?
- How to appoint a succession manager and who can become one?
- Rights and duties of a succession manager
- Inheritance of enterprise and taxes
What is succession?
Succession is the process of transferring ownership and control of a business from one person (or a group) to another. It can occur in various circumstances such as death of the owner, retirement, sale of a business, or incapacity to run it further.
Succession is a significant challenge for many enterprises. If it is not done properly, it can result in the loss of the business value or even its complete failure. Thus, entrepreneurs should consider succession and prepare it in advance.
The succession process involves many aspects that are worth consideration, such as:
- legal and tax issues,
- management of employees,
- ensuring business continuity, and
- protecting the value of the business.
Depending on the circumstances, the succession process can be either simple or complicated. In the latter case, it may require the assistance of external experts such as lawyers, tax advisors, and business consultants.
Succession management – what is it?
Succession management is a form of temporary management of a business. It allows for the maintenance of a company’s operational liquidity after the death of an entrepreneur. By appointing a succession manager during his lifetime and registering him in the Central Register and Information on Business (Polish CEIDG), the entrepreneur ensures that the manager can immediately take over the company’s operations. There is no need to fulfill any other formalities at a notary after the entrepreneur’s death. If succession management is appointed, agreements with employees and contractors remain valid. The continuity of executing contracts is preserved. Moreover, the succession manager can quickly obtain authorization to execute concessions or permits.
The objective of succession manager is to run the enterprise until the inheritance formalities are settled. The manager is particularly responsible for agreements with employees and contractors, tax matters, and social insurance. The management period is usually 2 years from the date of the entrepreneur’s death. However, if there are important reasons, the court may extend it for a period not longer than 5 years. Thanks to this solution, legal successors have time to decide whether they want to continue the business, sell the company or close it. At the same time, the company does not lose liquidity during this period.
How to appoint a succession manager and who can become one?
The succession manager may be a natural person who has full legal capacity.
However, a person against whom a legally valid judgment has been issued regarding:
- prohibition of conducting business activity,
- a penal or a protective measure in the form of ban on conducting business activity performed by an entrepreneur or business activity in the field of assets’ management
cannot become a succession manager.
Moreover, a legal person cannot be a succession manager. This means that an entity such as a limited liability company cannot hold this function.
The entrepreneur can choose the method of appointing a succession manager. It can be a person designated by the entrepreneur or a proxy who automatically becomes the succession manager after the entrepreneur’s death. Regardless of the method, the consent of the designated person is necessary. The choice of succession manager must be also registered in CEIDG. This can be done both during the appointment of the proxy and after granting him adequate rights. There are no special requirements for the proxy’s qualifications or powers. The only condition is having full legal capacity and no ban on conducting business.
If the entrepreneur did not appoint a succession manager before his death, the entrepreneur’s spouse, statutory heir, testamentary heir, or legacy beneficiary has the right to appoint one. It should be done within two months from the date of the entrepreneur’s death. The condition is that the spouse or successor must have the right to inherit the enterprise. As for the legacy beneficiary, he must have a share in the enterprise according to the testament.
Rights and duties of a succession manager
The succession manager has the right to use the data and name of the deceased entrepreneur’s company. Nonetheless, he needs to add the designation “in inheritance”. He is obliged to carry out the rights and duties resulting from the deceased entrepreneur’s business activity and to run the inherited enterprise. The manager cannot transfer his duties. But, he can appoint a proxy for specific actions. Moreover, a succession manager represents the inherited company in cases related to its operations. This concerns both administrative, tax, and court-administrative proceedings.
The succession manager acts on behalf of the owners of the company in inheritance. They are jointly liable for all obligations related to running the business. The owners also have the right to take part in the profits and losses resulting from the company’s activity. The manager pays them the profits in adequate proportions.
Simultaneously, succession manager is not personally liable for the company’s debts or obligations. This can be the case only in certain, exceptional cases specified in regulations. But, he is responsible for damages resulting from the improper performance of duties. What is more, he may be liable for tax and social insurance obligations. This can happen if enforcement from other sources is ineffective.
The succession manager may perform his duties for free, or for remuneration. The remuneration must result from an agreement with persons on whose behalf the succession manager acts. If he receives remuneration, the provisions of the Civil Code on commission apply. This means that the manager is subject to compulsory social security insurance (Polish ZUS).
One of the significant tasks of the succession manager is to prepare and submit an inventory of the company in inheritance to a notary. This inventory must include the components of the inherited company. There also should be information about their value. It should correspond to the state and prices at the time of the entrepreneur’s death. The inventory should also include inheritance debts related to the deceased entrepreneur’s company. It should additionally provide information about their amount at the time of his death. The succession manager must prepare the inventory immediately after taking over this function. The owners of the inherited enterprise have the right to demand from the manager a report on running the company after the succession management has expired.
Inheritance of enterprise and taxes
- Income tax
It should be noted that if an entrepreneur and their deceased spouse owned a business jointly, and the deceased did not engage in economic activity, the entrepreneur will be subject to tax on the entire income. Revenues from operation of the business will be taxed only by the living spouse. Moreover, shares acquired by the succesors will not be included in the distribution of profits. The living spouse is considered the owner of the entire business. This means that he becomes also the owner of the deceased spouse’s shares and other assets acquired during this period. Income tax will be calculated based on tax-deductible costs, non-tax-deductible expenses, tax exemptions and reliefs, as well as reduction of income, tax base, or tax.
If an enterprise has been transferred to the successors, they settle income tax on revenues obtained in the period from the date of the entrepreneur’s death to the end of the tax year. The inherited enterprise must submit the appropriate tax return form by the 30th of April of the following year. It is important to remember that it is not possible for an enterprise to file an inheritance tax return for the period from the beginning of the year to the day of the entrepreneur’s death. The tax liability of the deceased entrepreneur for this period is determined by the tax authority. The respective tax decision is then delivered to the successors.
An inherited enterprise must also calculate and pay income tax advances. This results from the continuation of the business activity of the deceased entrepreneur.
An entrepreneur who established succession management will not be automatically removed from the register as a VAT payer after his death. The head of the tax office will change the data only upon receiving notification about the change of succession manager. VAT applies to self-produced goods and goods that have not been previously supplied.
- Inheritance of enterprise and Gift Tax
If a natural person acquires an enterprise or its share by inheritance or specific bequest, he may be exempt from inheritance and gift tax. This is possible after meeting certain conditions. First of all, such an acquisition must be reported to the competent head of the tax office. One must do it within 6 months from the final court decision, registration of the certificate of succession or release of the European Certificate of Succession. The acquirer must complete the form SD-ZP or SD-Z2 if he is a member of the closest family.
The second condition is that the acquirer shall run that enterprise for a period of at least 2 years unless he’s a member of the closest family. If the business was acquired by more than one person or contributed to a company, it qualifies for tax exemption under certain conditions. Namely, the shares acquired in exchange may not be sold within 2 following years.
Debts and liabilities related to functioning of the enterprise, are not deducted from the value of the remaining items or property rights that are subject of the inheritance. The acquirers of the enterprise do not have to run it personally.