Transfer of a Business in Luxembourg

Overview of the Legal Framework Governing the Transfer of a Business

The transfer of a business involves the transfer of all the tangible and intangible assets comprising the business, including its trading name, equipment, installations, leasehold rights and customer base, the latter constituting the central element of the business.

A client base may also be transferred in connection with the practice of a liberal profession. However, given the personal nature of the relationship between professionals and their clients, such a transfer may not prejudice the clients’ freedom to decide whether to continue their relationship with the successor introduced by the transferor.

In Luxembourg, the transfer of a business is completed by the mere agreement of the parties on the subject matter and the price. This means that the transfer is generally carried out by means of a private sale agreement, since the mandatory involvement of a notary is not required.

The sale agreement is therefore drawn up in at least two originals. An additional copy of the agreement is sometimes prepared for delivery to the landlord, depending on the relevant provisions of the lease agreement.
In practice, there is no obligation to register the agreement with the registration authorities.

Effects of the Business Transfer Agreement

1. Employees

The transfer of the business entails the transfer to the new owner of all employment contracts in force on the date of the transfer.

This transfer takes place automatically by operation of law (Articles L.127-1 et seq. of the Labour Code) and is therefore binding on both the employees and the purchaser of the business, provided that the business being transferred constitutes an economic entity comprising the material and human resources required to operate autonomously and that the purchaser continues the same or similar activities as those carried out by the transferor.

In this respect, the transferor and the transferee must inform the employee representative bodies (staff delegation, etc.) of the transfer of the business. Where the workforce consists of fewer than 15 employees, this formality is, in principle, without effect, although it is customary to inform the employees concerned directly.

It should also be noted that every employee remains free not to continue their contractual relationship with the new owner of the business.

2. Lease

The transfer of the business generally entails the transfer to the new owner of the lease relating to the premises from which the business is operated. In this respect, however, reference should be made to the provisions of the lease agreement governing the assignment of the lease to third parties, as the lease may make such an assignment subject to the landlord's prior written consent.

3. Business Permit

The transfer of the business does not entail the transfer to the purchaser of the business permit. This permit is issued by reference to the person applying for it.

The purchaser must therefore obtain, prior to effectively taking over the business, a business permit (autorisation d’établissement) issued by the Directorate-General for SMEs and Entrepreneurship of the Ministry of the Economy.

Tax Treatment of the Transfer of a Business in Luxembourg

1. Taxation of the Transferor

The transfer of the business gives rise to immediate taxation (even where part of the purchase price is financed by the seller), at the ordinary tax rate, of the capital gains arising from the transfer of fixed assets (premises, customer base, equipment, tools, etc.), as well as any profits arising from the overall transfer of inventories and, where applicable, any profits generated by the operation of the business that have not yet been subject to taxation (provisions, etc.).

2. VAT

The transfer of a business would, in principle, give rise to VAT on the price of the goods held in stock. Transfers of equipment and goods normally constitute taxable transactions.

However, the transfer of a total or partial universality of assets to another taxable person is not regarded as a supply of goods (Article 9 of the Luxembourg VAT Law).

This exception allows the transfer to fall outside the scope of VAT, provided that the transferee is treated as continuing the person of the transferor and assumes the transferor's rights and obligations for VAT purposes, in particular with regard to any adjustment of deductions relating to capital goods.

The transferor, of course, remains liable for declaring and paying any taxes due in respect of taxable transactions carried out prior to the transfer.

In this respect, it is advisable to include a clause in the business transfer agreement stating that: “The transferee undertakes to subject any subsequent transfers of movable capital goods included in the sale to VAT and, where applicable, to make any adjustments that would have been required had the seller continued to use such goods.”