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27.2.2023

Taxation of Stock Sale

Generally, an amount included in your income is taxable unless it is specifically exempted by law. Thus, any capital gains are usually taxed independent of how long the seller has owned the stock or how they had acquired it in the first place. Correspondingly, depreciation of the shares can be deduced in the tax return. Depreciation refers to deducting costs incurred from purchasing the asset.

Taxation of capital gains

The taxation of capital gains is firstly dependent on whether the seller of the shares is a natural or legal person. Capital gains by natural persons fall in either 30 or 34-percent tax brackets, depending on the amount taxable. However, capital gains totaling under €1,000.00 annually are exempted. Also, other transfers exempted by law aren’t counted toward that €1,000 threshold. When capitals gains or losses are calculated, a natural shareholder is allowed to deduct the total acquisition cost as well expenses arising from transfer of shares such as commission or delivery fees.

The taxpayer may also choose not to utilize actual acquisition costs if the so called deemed acquisition cost results in a larger deduction. With deemed acquisition cost the taxpayer may deduce 20% of the profit from the sale of the shares if they have held the shares for less than 10 years. If the shareholder has held the stock for longer than 10 years, they may deduce 40% of the profit. If deemed acquisition cost is used, no other expenses may be deduced from the profit and the capital gains are taxed under the Income Tax Act.

How stock sales are taxed

If a legal person i.e. a company is the seller of the stock, any capital gains are taxed as business income at 20-percent rate. An exemption to the general rule that all income is taxable, are shares that are part of a company’s capital assets; under certain requirements transfer of capital asset shares doesn’t contribute taxable income. Correspondingly, acquisition costs of capital asset shares cannot be deducted. The requirement for tax-free transfer is that the transferred stock belongs to the capital assets of the owner company, and in addition, the transfer of stock must fulfill the requirements set in the section 6´b of the Act on the Taxation of Business Income (these requirements include things like the requirement of the percentage of ownership and its duration).

To the buyer of the stock the acquisition cost won’t be deductible until the stock is transferred over again. Also, the acquisition cost can’t be considered depreciation in the accounts on the basis of the shares diminishing in value. However, financing costs are usually deductible since they’re paid annually. The payer is liable to pay 1.6% Asset Transfer Tax over the entire purchase price.

Any confirmed losses in the taxation of the target company will be lost if more than half of the stock of the company is directly or indirectly transferred. Under special circumstances the Tax Administration can grant a permit of exception to retain the losses.

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