Business Transfer: Definition, Legal and Tax Implications

Do you want to buy or sell a business?

Buying or selling a business is a complex operation involving legal, tax, contractual, and labor law aspects. The sale of a business represents the transfer of an entire organized complex of assets used in the business activity and entails effects and responsibilities that should be thoroughly understood. This guide analyzes all the main aspects of a business sale, from contracts to debts, from tax implications to employee protection, to help you make informed decisions.

What is a Business Transfer?

A business transfer refers to the transfer, generally for consideration and definitively, of an entire business enterprise. It occurs when a set of assets organized functionally to carry out a business activity is transferred (Article 2555 of the Italian Civil Code). 

What is a Transfer of a Branch of Business?

A branch of business is an organized set of business assets, endowed with its own organizational and functional autonomy.  treated as a unitary complex of assets, even though it is part of a larger complex. We can imagine a company within another company. 

As an alternative to the sale of the entire company, it is possible to sell only a branch of the company , provided that it represents an organized and autonomous structure capable of carrying out an economic activity. 

Often, this option is more commonly used in practice because, unlike a total transfer, it allows you to identify exactly what you want to transfer and what you want to exclude.   

Difference between transfer of business and transfer of assets

The transfer of a business is distinguished from the mere transfer of assets by:

• Organization : the assets must be functionally linked for the exercise of a productive activity;
• Suitability for business activity : even potential suitability is sufficient; it is not necessary for the business to be operational at the time of transfer.

The sale price.

The determination of the consideration for the transfer is normally the result of a negotiation between the parties, based fundamentally on the prices applied to similar transfers in terms of type at that given time and in a specific area. However, negotiations often take place without rational economic justifications and, unfortunately, there are also value adjustments by the Revenue Agency even years later. 

Therefore, it is advisable to carry out an appraisal of the value of the company being transferred in order to base negotiations on rational reasons and protect oneself from future tax assessments. 

Form of the Assignment Agreement

Pursuant to Article 2556 of the Italian Civil Code:

• Written form is required for evidentiary purposes;
• If the company is subject to registration in the Business Register, the deed must be drawn up in public form or as a private deed authenticated by a notary and registered within 30 days.

The electronic form is also permitted, provided it complies with the rules on digital signatures and meets the requirements for registration in the Business Register.

Effects of the Assignment

1. Succession in Contracts (Article 2558 of the Italian Civil Code)

The transferee automatically succeeds to the company's non-personal and unexpired contracts, unless otherwise agreed between the parties. The third-party contractor may withdraw if there is just cause, within 3 months of notification of the transfer.

2. Transfer of Credits (Article 2559 of the Italian Civil Code)

The transferee automatically succeeds to the credits relating to the company. The effect is opposable to third parties upon registration in the Business Register, without the need for notification. However, a debtor who pays the transferor in good faith is released from liability.

3. Debts (art. 2560 cc)

The transferor is not released from debts incurred prior to the transfer unless there is consent from the creditors. The transferee is jointly and severally liable for debts shown in the mandatory accounting records.

Case law clarifies that, in internal relations, each party is liable for the debts of their own management unless otherwise agreed. These are the so-called "pure debts," such as:

• Extra-contractual debts;
• Debts from unilateral contracts;
• Debts from bilateral contracts where the performance has already been provided by the third party.

4. Prohibition of Competition (Article 2557 of the Italian Civil Code)

The seller may not, for a period of 5 years, commence an activity likely to divert the clientele of the transferred business. The prohibition may be limited or excluded, but not extended beyond 5 years.

5. Protection of Workers  (Article 2112 of the Italian Civil Code)

The transfer of ownership does not terminate employment contracts. Employees automatically transfer to the transferee with the same rights and contractual conditions. In particular:

• Employees retain their seniority;
• The transferee takes over the wage and contribution debts;
• The transfer does not, in itself, constitute grounds for dismissal.

However, in the event of significant organizational changes, trade union procedures may be initiated (Article 47, Law 428/1990).

Tax Aspects of Business Transfer

For the Assignor:

• The transfer generates a capital gain that is taxable as business income (Article 86 of the TUIR).
• VAT does not apply to the transfer of the business, as it is an operation outside the scope of VAT (Article 2, paragraph 3, letter b, Presidential Decree 633/72);
• It may be subject to registration, mortgage, and cadastral taxes depending on the composition of the business assets.

For the Assignee:

• The company assets received are recorded in the balance sheet at the purchase price;
• Depreciation is applied according to the new book values;
• Any goodwill recorded in the balance sheet can be amortized for tax purposes over 18 years (Article 103, paragraph 3, TUIR), regardless of the civil law amortization period.

Tax Clearance Certificate

Before transferring the business, it is advisable to request the certificate of release (art. 14 Legislative Decree 472/97) from the Revenue Agency. This document certifies the absence of tax debts on the company and limits the joint and several liability of the transferee for the tax arrears of the transferor.

The certificate must be issued within 30 days of the request and is valid for 3 months. If it is not issued within the stipulated time, the transferee is considered exempt from liability for any unknown tax debts.

Conclusion

The sale of a business is a complex and delicate operation. It is essential to rely on professionals experienced in commercial, labor, and tax law to ensure that all legal and operational aspects are correctly managed.

If you are thinking of buying or selling a business , knowing the rules is the first step to a safe and successful transaction.

For advice on the sale of a business or a branch of a business, contact the experts at Studio Genise.