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Writer: Ranno Tingas, partner, Ernst & Young Baltic AS (EY)
This is a question that all investors ask themselves sooner or later. Ideally, it should already be decided when making an investment, but often, there is still time and a reason to think about it at a later stage. Fortunately, you can transfer your investment to a company later, but it needs to be done correctly.
The advantage of investing as a private person is its simplicity and the minimal bureaucracy involved. Therefore, new types of investment and investing platforms are at first often tried out as a private person. However, if volumes and revenues start growing, the question unfortunately arises eventually about whether investing as a private person is still sensible. This is because any interest income of a private person is immediately subject to taxation and, unfortunately, it is not possible to offset the gains and losses incurred by a crowdfunding platform. In addition, the deductibility of expenses is very limited for private persons and the risks are borne entirely by their assets. An important advantage that companies have is that income tax is paid only when distributing the profit and not when earning it. Thus, companies have obvious tax advantages, but also higher administration costs (time and money). With regard to the income tax rate, there is no difference in the taxation of interest income – the same tax rate applies to companies and private persons. In both cases, the income tax rate is 20%, but for private persons, it is calculated on the basis of gross income and for businesses, from net income (hence, the tax rate here is 20/80).
Investments can be transferred to your company as a sales transaction or non-monetary contribution.
Generally, the sales transaction option is more reasonable, as it enables to receive tax-free money from the company in the extent of the selling price of the investment. The transfer of an investment to your company through a non-monetary contribution is more bureaucratic, but in this case, no money is being moved. A free transfer or donation of investments to your company is not reasonable for a number of reasons. As an investment made through crowdfunding is essentially a loan, then we are talking about transferring a debt claim from a private person to their company. The transfer of an investment must be properly documented for the accounting of the company and for taxation purposes so that it would later be clear what was going on and what transaction it was.
If the decision on the form of the transfer of investment is made, then the issue of the price arises next. The general tax principle is that transactions between the involved parties must take place in market prices. Therefore, it is necessary to figure out the market price of your investment. However, it can be difficult to determine this and an assessment will not be worthwhile in the case of smaller amounts. Therefore, taking a risk and using the offer price, nominal value, and residual value of the investment at the secondary market can be a useful benchmark. It must be considered that a profitable sale of investment to a company makes the private person liable for income tax. Caution should be taken with investments whose actual market value is lower than the nominal value because selling them to a company for a higher price than the market value (albeit for nominal value, for example) creates a tax risk for the company.
Although transferring investments to your company is a permissible transaction, caution should be exercised when transferring investments to a company at a nominal price (shortly) before the end of the investment period. The tax officer may interpret it as tax evasion – being motivated by the desire to avoid interest profits as a private person and directing the profits to a company instead. In judicial practice, such income received by the company is taxed as the personal profits of a private person in the worst-case scenario.
In conclusion, there is no simple formula to tell whether it is better to invest as a private person or through a company. However, in crowdfunding, it is more economical to use a business when dealing with larger investments. It is the individual duty of every investor to define the ‘larger investment’ that would outweigh the extra bureaucracy and additional costs.
Check our FAQ ‘Investment account’ section, where you can find answers to the following:
- Moving investments from one investment account to another.
- How to transfer money from one investment account to another?
- Multiple investment accounts: private and business account.
In case you don’t have an account with Crowdestate yet, you can create it here.
Time to invest! 🙂