Non-Compete Agreement Capital Gain

The tax obligation for the no-competition tax has been challenged in several acquisitions. Prior to 2003, the Income Tax Act (“Law”) did not provide for the imposition of competition bans and it was established by court that any compensation received under a negative or restrictive non-competition clause was a “wealth” and therefore tax-exempt.1 It is interesting to note that the law still does not define capital maintenance. However, in 2003, the clause (va) was added to section 28 of the Act. It provides that any amount, whether received under an agreement or received in cash or in the form of goods because it does not engage in any business or professional activity, is considered a profit or profit of companies or professions, making it taxable as a “business reception” at the applicable rates. In addition, S. 28 (va) does not apply to the receipt for the transfer of the right to produce, manufacture or process an item, nor to the right to carry out taxable transactions as a “capital gains” (a capital gain) under the law. As a result, the No Competition Commission was imposed either as a capital gain or in revenue after 2003. As described above, the dishes are divided and there is not a single formula that fits in all cases. The parties concerned must take into account a large number of considerations when completing the structure of the agreement. The nature of the transaction, the contractual intent of the parties, the impact on the source of income and the identity of the person engaged in the business are relevant in determining whether the non-competition fee, as a business income, should be imposed at a higher rate in accordance with Section 28, period. In addition, if the parties have expressly recognized that the takeover involves a non-compete fee or if there is a duty of self-competition with project proponents and directors, it is likely that the courts will order a separate imposition on the non-competition obligations covered in Section 28 (va). If the purchaser transfers only the right to operate and the beneficiary is not a bearer shareholder, it is likely that the tax will be levied as capital income under Section 45, but if the transfer is a restriction for the person who actually runs the business, the tax is perceived as business income.

As most savvy homeowners understand, there are three parties to each business sale: the buyer, the seller and the IRS.