Exchange of shares

Exchange of shares enables creation of a functioning corporate structure

The entrepreneur may find himself in a situation where the company is making a substantial profit, but for some reason the entrepreneur gets only a relatively small portion of this success for his personal use. In many cases, the reason is not only the high level of taxation, but can be a result of an inappropriate corporate structure. At Fiscales, we want to ensure the continuity of our customers’ business. Thus, finding the best structure is of utmost importance and an exchange of shares can be an excellent tool to implement it.

Exchange of shares is a tax-neutral arrangement in which a group is formed

In exchange of shares, the entrepreneur assigns his shares in a company to a new company. In return, the entrepreneur receives new shares in that new company. Thus, after the exchange of shares, the entrepreneur owns his company indirectly, i.e. through a new company and a group structure has been established.

Exchange of shares is one of the tax-neutral arrangements in income taxation. Thus, no income taxes will be payable, even though the ownership of the shares changes. The new company will normally pay transfer tax on the value of the shares it acquires.

Exchange of shares can be a risk management tool and a first step for finance negotiations and engaging employees

In many cases, in addition to its core business assets, the company has other assets and functions as well. Through an exchange of shares or other M&A transaction, it’s possible to separate the company's assets and liabilities into different units, in which case, for example, the accumulated profits can be secured from operational business risks. This possibility to separate is an important risk management tool and its importance should be assessed, inter alia, in situations of expansion.

Through an exchange of shares a more efficient corporate structure can be achieved for the possible future finance negotiations and M&A transactions. With the exchange of shares, only assets that are essential for operations can be left in the company, which is clearer for investors and allows them to join with a smaller investment. The emerging group structure may also enable a tax-efficient way to dispose of the business company's shares in the event of a M&A transaction.

When considering the involvement of key personnel through shareholdings, it’s important to determine what activities and related assets are affected by the employee's contribution. This is important simply in ensuring that the employee has the financial means to acquire shares in the company when he doesn’t have to pay for the non-business assets of the company. Using a M&A transaction, such as exchange of shares, ensures that employee engagement can be made in the most appropriate way for both the entrepreneur and the employee.

Exchange of shares enables company's profitability to be utilized in dividend taxation

An entrepreneur can receive lighter taxed dividend (7.5%) up to EUR 150,000 a year. Although the amount of that lighter taxed dividend is determined on a company-by-company basis by the provisions of the law, it’s also possible for the entrepreneur to influence it. A well-designed corporate structure and the M&A transaction that leads to it, make it possible, for example, to take good results into account in the amount of lightly taxed dividend.

Properly executed exchange of shares is an important means of ensuring business continuity

We warmly recommend going through the operations of your company and the owners and calculating the effective tax rate of the received income, i.e. the amount of taxes paid by your company and you combined. Thinking about the bigger picture is also a very current topic, when the intention is to expand operations or engage employees.

Exchange of shares can make it possible to shape the corporate structure into a much more profitable form for the entrepreneur. However, the tax neutrality of an exchange of shares requires strict compliance with tax regulations and careful documentation. Thus, we always recommend applying for an advance ruling and making use of experienced professional assistance before entering into an arrangement. At Fiscales, we have in-depth and long-term knowledge of M&A transactions and exchange of shares. With our exceptionally strong expertise on tax and financial questions, we’ll be your strong partner in creating a viable corporate structure.