22% or 50.6%?
A key question for sellers is whether profits from the sale are taxed as capital gains or business income. There are significant differences in tax rates depending on the classification. Capital gains are taxed at a rate of 22%, while business income is subject to progressive taxation and social security contributions at a marginal tax rate of 50.6% (2024). The seller should therefore make a specific assessment of whether the profit from a planned sale of a plot of land is considered business income or capital gains.
There are two main issues that must be considered in this context:
The first issue is whether the seller conducts business within the meaning of the Tax Act in the field of land development. If the plots of land are goods in such business, business taxation arises. As a starting point, the sale of undeveloped land will not be considered a business, but this may be different if the seller is responsible for developing the land, with roads, water, sewage, etc.
If the landowner is not considered to be engaged in land development, it must be determined whether the land council constitutes an operating asset in a business, for example an operating asset in agricultural activities (land and forestry). If the land is an operating asset in such a business, the gain will be taxed as business income, even if the seller’s activity in land development alone does not meet the conditions for business within the meaning of the Tax Act. The Tax Administration has stated that land that is not in use/lies fallow, but which is realized from the agricultural property, is considered to be a realization of operating assets. According to the Tax Administration, business taxation for such unproductive land is avoided if the area is used for other purposes outside of agricultural activities.
If commercial activities are conducted, the seller may be able to defer taxation by recording the gain in a gain and loss account. Depending on the circumstances, it may also be possible to reorganize the business by converting it into a real estate company free of tax and establishing a holding structure. One of the advantages of a holding structure is that the holding company is exempt from capital gains tax on share income. Gains on the sale of shares in the real estate company can thus be reinvested tax-free by the holding company. Taxation only occurs when dividends are distributed to the personal shareholder in the holding company. Recording gains in a gain and loss account and reorganizing by establishing a holding structure is not possible if the gains are taxed as capital income.
Binding advance ruling
The tax treatment of the land sale is central to the profitability of the sale. It is therefore important that specific tax assessments are made in negotiations between the developer and the seller, and before an agreement is entered into. It is also possible to request a binding advance ruling from the tax authorities on the tax consequences before the transaction is completed.
