Transferring assets from a sole-trader business to an s.r.o.

When we start a business and are not sure whether it will work out, we usually choose the simpler form of doing business, i.e. a trade licence (živnosť). But what should we do if things are going well, we have a high turnover and we do not want to pay high social and health insurance contributions? To save money, we decide to switch to a limited liability company (s.r.o.). But what should we do with the goods and assets we bought under the trade licence?

Here we bring you several ways of transferring assets from a sole-trader business to an s.r.o.

SALE CONTRACT – ISSUING AN INVOICE

The simplest way to transfer assets from a sole-trader business to a company is to sell them. A purchase contract or an invoice is drawn up between the s.r.o. and the sole trader, on the basis of which the assets are transferred to the company.

The price can be set in such a way that the will to conclude the purchase contract does not suggest an intention to circumvent other laws (the obligation to determine the price of the purchased item by an expert valuation, avoidance of income tax) and is not contrary to good morals. An expert valuation may therefore be needed to set the price.

As regards income tax, the tax residual value of the individual asset items is a tax-deductible expense, regardless of the amount of the sale price.

Exceptions include, for example, the sale of a motor vehicle, where the difference between the tax residual value of the motor vehicle and the sale price (if the price is lower than the tax residual value) is a non-deductible expense for the sole trader.

The simplicity of this method lies in concluding a purchase contract between the individual and the s.r.o. The price of the assets being purchased (sold) is a matter for agreement between the contracting parties. However, simple transfer pricing documentation needs to be prepared, which may be somewhat more costly.

NON-CASH CONTRIBUTION TO SHARE CAPITAL WHEN SETTING UP THE COMPANY

If the shareholder decides to transfer the assets from the sole-trader business to the s.r.o. right at the start, they can use these assets to form the company’s share capital.

A limited liability company is required to have share capital of at least €5,000. Share capital can be made up of cash or non-cash contributions. The value of non-cash contributions must be determined by an expert valuation, and the fee for such an expert valuation may depend on both the assets and the location. The non-cash contribution must be paid up before the amount of the share capital is entered in the Commercial Register (ORSR).

So the value of the assets must be determined by an expert valuation, and the non-cash contribution must be paid up before the amount of the share capital is entered in the Commercial Register.

In this way, all the assets previously used in the sole-trader business can be used to form the share capital, and no additional steps are needed to transfer the assets. The disadvantage, however, is the need for expert valuations and possibly also advisory services, which represent further expenses for the company.

Under the Income Tax Act, a non-cash contribution can be valued at fair values or at real prices. As regards value added tax, the contributor (as a non-entrepreneur) cannot act as a taxable person, and making a non-cash contribution to a limited liability company is not subject to value added tax.

INCREASING THE SHARE CAPITAL WITH ASSETS AS A NON-CASH CONTRIBUTION

Another option is to contribute the assets from the former sole-trader business to the s.r.o. to increase its share capital only after the s.r.o. has been established. If the shareholder decides to contribute the assets left over after the trade licence has ended, they can do so by increasing the company’s share capital.

Decisions on increasing the share capital of a limited liability company and on the non-cash contribution fall within the powers of the general meeting. If the sole shareholder is an individual, they exercise the powers of the general meeting on their own.

In this case too, the value of the non-cash contribution must be determined by an expert valuation. The provisions on paying up contributions when the company is established apply to the other steps.

Transferring assets to the s.r.o. this way involves additional financial expenses compared with forming the share capital with a non-cash contribution from the outset. You need to allow for the fees for official certification of the signatures on the minutes of the general meeting and the fee paid to the registry court for entering the changes in the Commercial Register.

So although increasing the share capital with a non-cash contribution is possible, it is financially disadvantageous for the company. It duplicates the administration of the previous case, and additional fees are required as well. With regard to both income tax and VAT, the procedure is the same as when forming the share capital with a non-cash contribution. However, increasing the share capital with a further contribution from the shareholder is not considered economically efficient (although it is possible), as it requires the same administration all over again as a contribution to the share capital when setting up a limited liability company.

A GIFT FROM THE SHAREHOLDER AS A NON-CASH CONTRIBUTION TO A LIMITED LIABILITY COMPANY

A gift is also a simple way to transfer assets from a sole trader to an s.r.o. A non-cash contribution that the shareholder (or the general meeting) does not decide to use to increase the share capital is regarded as a gift. Gifts received are not entered in the Commercial Register. The assets are donated to the company on the basis of a deed of gift.

A deed of gift is drawn up, on the basis of which the assets are transferred from the sole trader to the company without the sole trader receiving the corresponding consideration in return.

Such a non-cash contribution for the purposes of a gift does not need to be valued by an expert, because the subject of the gift is provided free of charge. The general meeting may reserve the right to decide on gifts in the memorandum of association.
For income tax purposes, the value of the donated assets is not regarded as a tax-deductible expense.

CONCLUSION

As regards VAT, a gift of assets is regarded as a supply of goods, i.e. a taxable transaction. Consequently, a free-of-charge supply of goods on which the tax was deducted in full or at least in part gives rise to a tax liability for the VAT payer.

We think the simplest way to transfer assets is a purchase contract or an invoice issued by the sole trader to the s.r.o. In any case, however, we recommend that you consider your situation individually.