Succession planning

What is a generational change?

Succession planning is an extensive process with several considerations to keep in mind. When you as a business owner are faced with handing over your business, it's crucial to start planning well in advance.

At the same time, having the right advisor by your side can give you an overview and peace of mind throughout the process.

A well thought-out and properly executed succession reduces the risk of unforeseen challenges and provides the best conditions for a smooth transition of ownership.

Whether the business is being handed over to a family member, an employee or a new external owner, thorough preparation is essential for a successful succession.

Thinking about transferring to an external buyer? Read here about business succession.

Hvem kan overtage virksomheden?
Det kan være børn, ægtefælle, medarbejder eller en ekstern køber.

Hvornår er det rigtige tidspunkt at starte planlægningen?
I god tid – gerne 3–5 år før selve overdragelsen.

Hvad med skat og gaveafgift?
Der kan være mulighed for skattemæssig succession og nedsat gaveafgift.

The following is an overview of some of the most important aspects of a succession, including who can take over, when it is appropriate to complete the transfer and what tax considerations may be relevant.

In this article you can read about:

§ What is a succession of a business?
§ Who can take over the business - and how does it work?

• Transfer to spouse
• Transfer to children, grandchildren or close relatives
• Handover to employee
• Transfer to external buyer

§ When is the right time for a succession?
§ Choosing an ownership structure for succession
§ Transfer for consideration, as a gift or against a promissory note

• Transfer for consideration, as a gift or against a promissory note
• Transfer for consideration
• Transfer as a gift
• Transfer against promissory note

What is a business succession?

The term generational succession is typically used to describe the situation where ownership of a business or company is transferred to the next generation.

For example, it can be from parents to one or more children, but it can also be to a trusted employee or to a new external owner. The transfer can include both ownership and management, or be limited to ownership or management only.

A generational change of business can take place both while the older generation is alive, but generational change can also take place after the death of the previous owner.

If a generational change is to take place after the death of the previous owner, it can be regulated in a will, for example. It is also possible to include terms to this effect in a future power of attorney.

Regardless of how a succession is structured, succession is a process that often extends over a long period of time and where it is necessary to take into account the tax consequences as well as the commercial and, not least, emotional aspects.

In practice, succession is not just about law and tax, but also about relationships, emotions and values. Many business owners find that the most important question is: Who can - and should - carry on the legacy?

An upcoming generational change typically raises these questions:

• Who should take over?
• When is the right time?
• What are the tax and legal implications to consider?

Succession ved generationsskifte

There are several ways to transfer a business, and the right solution depends on both the circumstances of the business and the wishes of the owner. The option of tax succession often plays a key role in planning, as it can allow the business to be transferred without major tax burdens.

Learn more about tax succession in our article: Tax succession and business transfer

However, there may also be other factors that play a role in the choice of transfer method. For example, there may be a desire for the generational change to be carried out at a certain pace, including successive transfers, escalation of influence, etc. If the transfer takes place partially or over a shorter or longer number of years, we always recommend that an ownership agreement is entered into between the people in the ownership group.

We explain more about the benefits of owner agreements in our article: Owner agreements in owner-managed businesses.

The most commonly used handover options are:

1. Transfer to spouse
2. Transfer to spouse, children, grandchildren or other close relatives
3. Handover to employee
4. Transfer to external buyer

1: Transfer to spouse

A business can be transferred to a spouse both during life and upon death. In both cases, the transfer can be made with tax succession, which means that no tax is triggered on the selling spouse's profit from the assets being transferred.

If the transfer is made as a living gift, there is no gift tax - regardless of the value of the business. In this situation, there is no tax burden associated with a transfer between spouses.

Transfer between spouses can be particularly beneficial in cases where there is a significant age difference between the spouses, as it allows the younger spouse to continue the business in the longer term.

This option can be a practical solution if a tax-free and simple transfer of ownership is desired.

2: Transfer to spouse, children, grandchildren or other close relatives

The business can also be transferred to other close family members, such as cohabiting partners, children or grandchildren. If a significant profit is realized from the transfer, it is relevant to consider whether the financial gain should be taxed.

If the company is owned directly without an intermediate holding company, there are basically two options:

• Capital gains tax, where you are taxed on the profit from the transfer
• Tax succession, where the new owner takes over the deferred tax liability, which means that the transfer does not trigger taxation of the profit.

Tax succession is often used in practice as it defers tax payments and eases the financial burden associated with generational change. However, a number of conditions must be met, including that the recipient meets the requirements to receive the business with tax succession.

When transferring the business to children or grandchildren, it's worth considering whether the younger generation should gradually join the ownership group over a number of years, and whether the transfer of decision-making power and influence can also take place over time.

If such a solution is desired, it is especially good to start planning early.

If you want to ensure that the business remains in the family - even if your children or grandchildren divorce - you can, for example, combine the transfer with a separation of property clause. This way you can ensure that the business does not have to be shared with your spouse in the event of separation or divorce and/or death.

Read more about family and inheritance law

3: Handover to employee

When transferring the business to an employee, financing often plays a key role. The employee rarely has the same financial options as an external buyer, and the transfer is typically less likely to be settled by seller financing than a generational change within the family.

If the transfer is made to a trusted employee who has been with the company for more than five years, it may - depending on the circumstances - be possible to complete the transfer with tax succession. This can help ease the financing burden.

Learn more about the possibilities of transferring to an employee.

4: Transfer to external buyer

If the right candidate to take over the business cannot be found within the family circle or among the company's employees, it is necessary to find an external buyer to take over the business. Such a transfer cannot be done with tax succession.

Depending on the ownership structure, the transfer may trigger taxation of the profit made at the time of transfer.

A handover to an external buyer differs significantly from a generational change within the family - both in terms of process, timeframe and preparation.

Whereas a family succession often takes place over a longer period of time with a more personal and value-based approach, an external sale typically requires a more commercial approach and a structured sales process with sales maturation, due diligence and negotiations with potential buyers.

When is the right time for a generational change?

A generational transfer can take place either during the owner's lifetime or as part of the estate administration after the owner's death.

However, a generational transfer doesn't have to wait until the owner's death or retirement age. Many choose to complete the transfer while they are still active in the business. This allows for a smooth transition and better planning - legally, tax-wise and organizationally.

Early planning also allows time to transfer responsibility and values - not just ownership. It creates security in the family and stability in the business. There are several models for how a succession can be organized while you are still active. The choice depends on the relationship with the future owner and the structure of the company, among other things.

Are you considering a generational change? Contact us here to get an overview of your options.

In practice, it will almost always be an advantage to start the process well in advance - preferably 3-5 years before the transfer must be completed.

Early intervention gives you the opportunity to:

• Transfer ownership and influence gradually
• Train and introduce the new owner
• Customize ownership structure and tax structure
• Ensure peace of mind for both family and business

A smooth transition can also benefit the company's customers and partners, who will have a more stable experience of the ownership change.

In addition, an unforeseen event affecting the business owner - such as illness, accident or death - can complicate the situation if the succession is not planned in advance.

In such situations, the existence of legal documents such as wills, powers of attorney, prenuptial agreements and ownership agreements that regulate ownership and decision-making power going forward can be crucial.

If you want a specific person to inherit the business, this should be clearly stated in a will.

Read our article about powers of attorney and wills

By choosing an advisor who can provide coherent advice on all legal aspects of the process, you get a holistic and tailored solution that takes into account family and inheritance law, corporate and tax law and business matters.

This ensures a safe and well-planned transition of ownership, where all essential aspects are considered from start to finish.

Choice of ownership structure for succession

When a business is to be transferred to the next generation, it is generally advantageous to run the business as a company - typically as a limited liability company (ApS or A/S).

This provides better opportunities to align ownership, leverage tax benefits and minimize risk.

If the business is run as a company - or if it is converted into a company prior to the generational change - there are different ways to structure the transfer.

Examples can be:

• Full or partial transfer of shares
• Sale to holding company
• Creation of A and B shares with differentiated rights, e.g. where A shares have increased voting rights or other special economic or management rights
• Tax-free share exchange to set up a holding company
• Demerger, where assets and activities are split into several companies
• Distribution of cash to own holding company before transfer

A commonly used model is for both the current owner and the future owner to establish holding companies.

The change of ownership then takes place through the transfer of the operating company's shares or shares between the holding companies.

Among other things, it allows you to:

• Tax-free profit on sale (for the holding company)
• Greater flexibility when distributing dividends and differentiated savings
• Better delineation of financial risk

Establishing a holding company structure requires careful planning, but creates a more robust and flexible foundation for effective succession.

Depending on the chosen model, it may be relevant to ask the Danish Tax Agency for a so-called binding answer in order to clarify the tax consequences of the generation shift in advance. In that case, the Tax Agency's processing time must be taken into account when planning.

When should you seek a binding answer from the Tax Agency?
When you are planning a tax-free share exchange, demerger or gift transfer with succession.

If the succession involves restructuring, there may also be special conditions that must be met for these transactions to be carried out without tax consequences, e.g. the shares may not be resold within a three-year period.

Due to the many legal and not least tax aspects, preparations should therefore begin well in advance.

Transfer for consideration, as a gift or against a promissory note

When considering transferring your business, there are several possible models - depending on your wishes, the value of the business and the financial situation of the recipient.

Basically, the transfer can be done as:

- A sale for cash consideration
- A gift transfer
- A transfer against the issuance of a promissory note
- A combination of the above

Whichever model you choose, you should consider whether the conditions for transferring the business with tax succession are met. With succession, the transferee takes over the transferor's tax position, which means that you as the transferor are not taxed on any profit from the transfer. Instead, taxation is deferred until the time when the transferee later disposes of the business.

If the transfer can take place with tax succession, it can have a significant impact on the financing needs in connection with the generation change and should therefore always be included early in the planning.

How do you choose the right transfer model?
It depends on family circumstances, the value of the business, and the recipient's finances, among other things.

Learn more about the conditions for tax succession in our article: Tax succession and business transfer.

Transfer for consideration

In an ordinary sale of the business for consideration - for example, to children, employees or an external buyer - you are generally taxed on your profit at the time of the transfer. However, under certain circumstances, the transfer can be completed tax-free if the business is run as a company and the sale is made through a holding company that owns the shares or shares in the sold company.

If the transfer is not to an external buyer, it is a condition that the purchase price corresponds to the company's market value. If the purchase price is set lower, there is a risk that the Tax Agency will consider the difference to be a gift.

Valuation of the company therefore also plays a major role in connection with a generational change.

Transfer as a gift

In the case of succession, all or part of the purchase price can be adjusted as a gift, which means that the recipient does not pay full consideration for the business. In such cases, a gift element arises, which can trigger either gift tax or income tax - depending on the relationship between giver and receiver.

The gift tax is generally 15% for gifts to children, grandchildren and others in the close family circle.

However, if certain conditions are met, a reduced gift tax of 10% can be applied when transferring a business within the immediate family.

Read more about the new rules for succession and reduced gift tax

In addition, gift tax-free gifts can be made annually within a fixed limit - in 2025 the limit is DKK 76,900 per child. This option can be advantageously utilized as part of the generational change to reduce the amount subject to gift tax.

It's crucial that the company's market value is determined correctly, as gift tax is calculated based on the difference between the market value and the purchase price used. An incorrect valuation can, for example, result in the subsequent collection of gift tax.

To safeguard against such unforeseen consequences, a tax reservation is often included in the legal contractual basis. This allows you to adjust the terms or cancel the transfer if the tax authorities override the valuation used.

Read more about the use of tax withholding in succession

Gifting can be an attractive solution - especially when the goal is to ensure continued family ownership of the business while easing the buyer's financing needs.

Transfer against the issuance of a promissory note

If the next generation is not able to pay the entire purchase price in cash, all or part of the amount can be settled by issuing a promissory note.
This model is often used for generational changes within the family, where the next generation does not have the means to finance the purchase in cash.

The debt instrument must generally be drawn up on market terms - including appropriate terms for repayment and interest.

However, in practice, the tax authorities have recognized that loans between close family members can be granted on more lenient terms, as interest and repayment exemptions can be agreed.

There will be no tax consequences as long as it is a demand loan, which means that the lender can terminate the loan in whole or in part at any time at short notice.

In addition, the lender has the option to forgive the outstanding debt at a later date - in full or in part.