We are going to deal with the tax regime of the family business and its importance before the tax reforms that are announced. The family business is one of the main pillars of the Spanish economy, representing a large majority of its business fabric. According to data from the Family Business Institute, it is estimated that there are 1.1 million family businesses in Spain. They represent 89 % of the companies in Spain and 67 % of the existing private employment.
In the past we have repeatedly deal with aspects that we consider key for the family business and its survival. From aspects as important as shareholder value, to conflict resolution within the family business.
On this occasion, the experts of our Tax Consulting department, will analyze the tax regime in a series of three articles.
The tax regime of the family business in Spain
The great relevance of the family business makes it necessary to protect its continuity at all levels. For which it is essential to lighten or eliminate as much as possible the tax burden of the entrepreneurial families. With the will to allow the growth of these companies and their maintenance in the family environment through the generations. For this reason, the Spanish legislation has been providing for years an important set of tax incentives which, as a whole, we call “family business tax regime”. And whose relevance is gaining more and more importance in a scenario of changing tax rules.
In this sense, in recent times there have been recurring calls for the so-called “tax harmonization” between Autonomous Communities. What in practice means, a limitation of the possibility of the Autonomous Communities to establish rebates on taxes ceded by the State. In practice, these rebates eliminate or reduce these taxes to the minimum expression. Among which the Wealth Tax or the Inheritance and Gift Tax stand out.
Because of their economic importance and because they are the main objective of these “harmonization” proposals, it is worth mentioning the example of the Community of Madrid. It establishes important bonuses in these taxes. In such a way that the Wealth Tax is 100% subsidized, therefore, eliminated in practice. And the Inheritance and Gift Tax is 99% between spouses, and between parents and children or grandchildren. These powerful tax incentives are especially relevant for entrepreneurial families. They find in this tax ecosystem a propitious field for the growth of their companies and the maintenance of the same within the family group.
What is the tax regime for the family business?
However, the ever-closer threat of the elimination by the State of the possibility of applying these incentives. As well as the fact that they do not cover the totality of the fiscal costs that the business succession within the family may have. This makes it increasingly relevant to meet the conditions to be able to apply the beneficial but little known “family business tax regime”.
This family business regime does not consist of tax benefits for the activity of the company itself. But it is materialized in tax benefits for the self-employed who carry out the same. Or for the partners of the entities in case the activity is carried out through companies. These tax benefits are summarized as follows:
- Exemption in the Wealth Tax. Avoiding having to pay tax on the ownership of the activity or of the 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 Personal Income Tax. Of the capital gain for the donor in case of donation of the activity or of the shares or participations to the next generation of the family.
What would happen if this tax regime for the family business did not exist?
Thus, if this family business regime were not applicable, the typical taxation would be as follows:
- During the years in which he/she is the owner of the activity or of the shares or participations of the company. The businessman would be taxed for them in his Wealth Tax, according to the value of the company.
- In case of donating the activity or company to the next generation or generations. The donor will have a capital gain to be taxed in his Personal Income Tax for the increase of value that the company has had since he has been the owner. And in addition the donees would be taxed in the Tax on Donations.
- In case of death of the owner. The heirs would pay Inheritance Tax.
Avoiding this costly tax impact on the ownership of the activity, which would jeopardize its continuity in the family, requires careful planning to comply with the requirements of the family business regime.
All this will be analyzed in this series of articles, which you can also read by clicking here.
- Tax regime of the family business. Requirements of the companies.
- Tax regime of the family business. When it is a Self-employed and not a company.
Arrabe Integra
Tax Consulting
