Inter-Generational Transfers and Commercial Real Estate: What Will Happen to the Property Business?

Transferring the Business to the Next Generation

The property business may be operated as a sole proprietorship, a general partnership, or a limited liability company. If the business is not already owned by a limited liability company, it should be considered whether the business should be transferred to such a company before the inter-generational transfer takes place. This can normally be done without triggering taxation.

Before transferring the business, several critical issues should be considered, including:

• Whether one heir should own the entire business or whether it should be co-owned by several heirs.
• Whether the heirs have the necessary skills to operate the business, or whether it should be managed by external parties, especially considering future maintenance and investment needs in the property portfolio.
• Whether the business can be divided among different heirs.
• Whether heirs should have the right to demand to be bought out if the business is co-owned.

The transfer of family-owned limited liability companies can be carried out in various ways, such as:

• Shares in the family company are given as a gift or through a gift-sale. The deed of gift may include conditions such as:
  • The shares shall be the separate property of the children.
  • The shares and dividends shall be managed by a trustee until the children reach a specified age, or dividends may be placed in a blocked account.
  • Until a certain age, the child only receives funds to cover wealth tax and education, or other reasonable investments.
  • If shares are given to minors, a specific provision in the deed of gift can state that the ownership interests shall not be subject to the County Governor’s supervision under the Guardianship Act (formerly the Public Trustee).
• Before the transfer, A-shares with majority voting rights may be established in the family company so that the parent generation retains control.
• A family agreement is entered into to regulate the management of the family company.

Family Agreement

A family agreement regulates the relationship between the parent generation and the children as shareholders in the family company. The family agreement is therefore a form of shareholders’ agreement. However, there may be particular considerations, such as ensuring that the family company remains owned and controlled by the family, which may require special regulation. This must be balanced against the siblings’ opportunity to sell their shares in the family company in the future.

The family agreement may include clauses that address or combine these considerations in various ways.

Organizational provisions in a family agreement may include:

• The parent generation has veto rights or is granted majority voting rights (which may also result from the use of different share classes). This arrangement may be limited to a specific number of years, providing guidance on how long the senior generation will remain in control.
• Who has the right to appoint board members, including the chair of the board. Often, it is natural for the parent generation to hold the position of chair, while in other cases, an external chair may be more appropriate.

Financial provisions in a family agreement may include:

• The parties agree on the dividend policy for the family company.
• Terms for the transfer of shares and underlying property, including whether siblings have pre-emptive rights to the shares and how the price is to be determined (for example, estimated market value or a proportion thereof).
• Terms requiring the company to demerge parts of the business or specific assets.

Sale of the Property Business

If the parent generation decides not to transfer the business to the next generation and instead opts for a sale, the transaction structure must be considered. In many cases, it is necessary to “clean up” the target company so that it only owns the business to be sold. It may be advisable to demerge assets not used in the business before the sale.

If the parent generation wishes to sell but prefers to wait until after the inter-generational transfer, this can be regulated in various ways through provisions in the family agreement. These may include:

• A qualified majority may require the company to be sold, and the other shareholders then have a tag-along obligation.
• An heir may offer their shares to another shareholder at a specified price, and if the offer is not accepted, the other shareholder is obliged to sell their shares on the same terms.

Tax and Duty Considerations

Inheritance tax has been abolished, but an inter-generational transfer can still present tax challenges. Tax and duty rules change frequently, so a specific assessment is important. The main rules today are:

• If the parent generation (personally) sells shares in a Norwegian family company, the gain (beyond a shielding deduction) is taxable at 37.8%. If a holding company sells Norwegian shares, the gain is tax-free. Distribution of dividends (beyond a shielding deduction) from the holding company to individuals triggers dividend tax at 37.8%.
• Gift transfers of shares do not trigger taxation for the donor. The heirs assume the donor’s tax basis for the shares (continuity), meaning the heirs inherit “latent tax” and are taxed on both the increase in value during the donor’s ownership and their own period of ownership upon any subsequent sale.
• Gift-sales only trigger taxation for the donor if the sale price exceeds the tax basis of the shares.
• If the donor or recipient is tax resident in another country, it must be assessed whether inheritance tax, capital gains tax, or similar is triggered in that country. The same applies if foreign shares or other foreign assets are transferred.

Moving forward

At some point, the parent generation must consider what will happen to the family-owned business. This process requires careful planning, and the various alternatives must be evaluated. It is therefore important to start the process early so that the necessary preparations can be made, including assessing the right time to involve heirs or others.