17.10.2017

Company in estate inventory

Determining the value of a company belonging to an estate of deceased in the estate inventory is a slightly challenging task for trustees because there are several ways in which valuation can be performed. The purpose of the valuation is to find out the current value of the company.

According to the Tax Administration instructions the value of the shares of unlisted limited liability company is determined primarily based on the price paid of the shares of the same company i.e. the purchase prices used in comparable transactions. The use of this valuation meth od requires inter alia that comparative trades have been made nearby the beginning of the tax liability and with a market-based basis. Based on my own experience options for using this valuation method for shares in unlisted limited liability companies are relatively rare.

If the fair value cannot be based on comparable transactions the fair value of a share and also fair value of the business of business person and self-employed person are determined on the basis of net asset value and the productive value in the inheritance and gift taxation. Regardless of the valuation method in taxation the company’s minimum value is considered to be the net asset value.

In principle the net asset value is calculated by deducting the liabilities of the company from the assets registered in balance sheet of the latest accounting period of the company.  Assets and liabilities are measured at fair value either on the basis of balance sheet value or other available information. If the accounting period is due to expire within two months of the origin of the tax liability (the date of death of the deceased) the balance sheet of accounting period ending in near future can be used as basis.

The productive value is calculated on the basis of the results shown on income statements of three latest accounting periods, excluding extraordinary items and financial statement transfers from the results. Also computational salary of the entrepreneur is excluded, if the entrepreneur has not taken any pay. Deferred income taxes can also be deducted from the results. From the adjusted result of these three financial years, there will be calculated an average, which is capitalized with interest rate of 15 %.

If the productive value is higher than the net asset value, the average of the net asset value and the productive value is considered fair value in taxation. When the net asset value is higher than the productive value, the net asset value is considered as fair value. In the case of a limited liability company, the fair value of one share is obtained by dividing the fair value of the company by the number of all shares.

The determination of the fair value of a limited partnership and general partnership is based on the rights the partner has on the company’s assets on the basis of the partnership agreement.

Above mentioned is a simplified version of the Tax Administrations directive ”Varojen arvostaminen perintö- ja lahjaverotuksessa” (Valuation of the assets in inheritance and gift taxation). In addition, in valuation of the company many kinds of different factors affecting the fair value must be taken into account. Personally, for the determination of company’s fair value, I use the systems of our office which are designed for this purpose and which significantly speed up the determination of fair values of companies.

If the intention is to realize the company and not only transfer the shares to the heirs in the distribution of an estate, the fair value of the company should also be determined, in addition to aforementioned taxable value. Various accounting methods are available for determining the fair value. Our office uses P-Analyzer software that calculates the company’s fair value through a variety of conventionally used calculation methods.

It is good to know the fair value in order to use fiscally rational and tax-efficient value in estate inventory proceedings.

We have modeled both the definition of the fair value as well as the calculating method according to tax instructions. Valuations are essential for further actions of estate inventory i.e. for potential division of the property of the spouses and distribution of an estate as well as potential trade and on the other hand also for tax planning. There will be a different amount of tax for the same event depending on whether the tax is formed on the basis of inheritance tax or if the tax is based on capital gains.

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