We are going to see the tax regime of the family business and when a company is considered as such. We already pointed out in the introduction to this series of articles, the more and more probable modifications in the regulations. So much of the Wealth Tax as of the Inheritance and Gift Tax. And how they seriously threaten the viability of family businesses in Spain and their maintenance within the control of the family through the generations.
The tax regime of the family business II
In order to avoid the fiscal impact of these taxes for the members of the entrepreneurial family, it is of special importance that the companies can be qualified for tax purposes as “family business”. This gives them access to the beneficial tax regime applicable to them, which can be summarized as follows:
- Exemption in the Wealth Tax. Avoiding having to pay tax on the ownership of shares or participations in the family company.
- Allowance of 95% of the base for the heir or donee in the Inheritance and Gift Tax. Allowing the succession between generations in the family business without a high tax cost for the new generation.
- Exemption in IRPF of the capital gain for the donor. In case of donation of shares or participations to the next generation of the family.
However, not every company that at a popular level can be qualified as a family business is really a “family business” in the tax sense of the term. In order to be one, it is necessary to comply with demanding requirements foreseen in the legislation. Being necessary a suitable planning that allows to arrange the situation adequately to avoid unexpected tax bills.
Requirements to be a family business
The requirements to be fulfilled for a company to be qualified as a “family business”. And therefore, its shares or participations are exempt in the Wealth Tax of the partner are the following ones:
- That it is not a patrimonial entity. That they are those whose main purpose is the management of movable or real estate assets. This requirement is especially relevant, since the regulations foresee different cases and scenarios. Especially in the case of companies engaged in the real estate business. Depending on the circumstances of the case, the company may or may not qualify as a real estate company. It may be excluded from the tax advantages of the family business regime.
- That the participation of the partner who intends to access this tax benefit in the capital of the entity is at least 5% individually. Or 20% with his spouse, ascendants, descendants or collaterals of second degree.
- Any of the members of the aforementioned family group must exercise management functions in the company. And obtains for them the majority of its income from work and economic activities. Again, this is a very controversial requirement at times. Due to the ambiguity of the term “management functions” and the interpretations that the doctrine and jurisprudence have given in this respect.
Other consequences of being a family business
The fulfillment of these requirements will allow to consider exempt the shares or participations of the company in the Wealth Tax. But it also lays the foundations for a future succession in the family business with a minimum or non-existent fiscal impact. Thus, in case of inheritance, the heirs will enjoy a 95% reduction in the taxable base of the Inheritance Tax. While in case of donation of the shares or participations to future generations, the same would not generate any tax impact on the IRPF of the donor and would benefit in the Donation Tax of the reduction of 95% of the base for the donees. Provided that two additional requirements are met:
- That the donor is 65 years of age or older. Or that he/she is younger but is in a situation of permanent disability, in degree of absolute or great disability.
- That if the donor had been performing management functions, he/she ceases to do so.
In addition, both in case of inheritance and donation, the heirs must keep what they have received for a period of 10 years. Although currently in Madrid the term is 5 years in case of inheritance. They must continue to comply with the requirements of the regime during that time. And without their decisions being oriented to substantially reduce the value of what was acquired in inheritance or donation.
Arrabe Integra
Tax Consulting
