When an entrepreneur decides to start a business, different options are available to them to finance and execute his project. These are goodwill and key money. Often, these two notions are confused. Discover their differences in this article.
A goodwill can be defined as a set of tangible and intangible elements allowing a company to carry out its activity. In other words, the sign, the clientele, the premises, as well as all the equipment necessary for the activity of a company constitute a business. The leasehold rights are also part of it. It should be noted that the price of the purchase of a business is quite high because, in addition to acquiring the right to lease and the premises, there is also the acquisition of the clientele. It should be noted that a business can only exist under two conditions: it must have a clientele, and it must constitute commercial activity. Generally, a business is sold when a company wishes to be sold. Moreover, a business can be partially sold, i.e., only a part of the elements that constitute a business is sold. The seller must be registered in the Register of Commerce and Companies or in the Trade Register.
The key money
When selling a business premise, the buyer is obliged to pay a sum of money, in the form of additional rent or compensation, to the owner of the premises in addition to the rent already negotiated in the lease contract. This is the key money. It is a sum that attests to the right of entry into the premises.
The key money is considered to be a rent supplement when its amount is accounted for in expenses. It is a sum that allows foreseeing the possible risks that the rental value of the area does not increase more rapidly than the rent. It is tax-deductible.
The key money is considered as an indemnity when it is a counterpart to the commercial advantages provided by the former owner or when it is a depreciation of the premises. It is an intangible asset that cannot be amortized or deducted for tax purposes. Very rarely, key money can be considered in a mixed way, whether it is in both cases at the same time. The lessor can only demand the key money if the premises were unoccupied until then.
For the business
The transfer of a business involves tax obligations for both the transferor and the transferee.
- For the transferor: he will have to tax the pre-tax profits to income tax or corporate tax, depending on the company, within 45 days. He must pay the VAT following the transfer of his business within 30 to 60 days. In addition, the transferor must pay the territorial economic contribution if the transfer took place during an accounting period.
- For the transferee: he must pay registration fees to the tax department within one month of the transfer. He must also make a VAT declaration and payment to the tax authorities within 15 days. And he must pay the taxes not paid by the transferor.
For the key money
If it is an indemnity, the key money is not taxable to the lessor. And for the tenant, it is not deductible.
However, if the key money represents a rent supplement, it is declared as property income for the lessor. It is, therefore, subject to VAT. But there is a possibility to spread it over a period of 4 years. The key money is deductible from the result on the basis of a percentage fixed on the duration for the tenant
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