The so-called Family Business sector currently represents 89% of the Spanish business map, creating 67% of private employment and contributing 57.1% of the private sector’s GDP.
The relevance of this sector, for the national and international economy, led the Spanish legislator to introduce measures to diminish the tax burden associated with the creation, maintenance and transfer of these companies in the Wealth Tax and Inheritance and Gift Tax We are talking about the well-known Family Business Specific Tax Regime.
The Family Business Specific Tax Regime is made of a set of incentives aim at eliminating the tax burdens associated with the maintenance and growth of family businesses’ as well as facilitating its succession and survival over generations.
This set of measures is mainly composed by:
- An exemption in the Wealth Tax of the value of the family business.
- A relief applicable on Inheritance and Gift Tax, which can reach up to 99% in some regions, of the value of the family business and,
- A deferral in Personal Income Tax of the capital gain triggered for the donor as a result of donations of shares or interests in family businesses.
One may think that this tax regime is now empty of material content in the regions where the Inheritance and Gift Tax is relief at 99% or where a 100% relief is applied to the Wealth Tax payable.
However, the application of this regime can be crucial if the Parliament carries out substantial modifications with respect to the Inheritance or Wealth Tax law, whose regulations are currently assigned to the regions. In addition, this regime provides optimum alternatives for family reorganizations, since it facilitates the succession of the business in a planned and orderly manner. And it is, beyond any doubt, of at most importance in those regions where Wealth Tax and the Inheritance and Gift Tax are still in force.
Requirements to benefit from the family business tax regime
The requirements to be met are simple. However, the practical application requires tax advisory, technical assistance from experts and annual monitoring in order to verify the compliance with all the requisites for the application. We are talking about three conditions:
- That the family business is an operating company with economic activity in the terms defined in the Personal Income Tax Law and in which at least 50% of its assets are allocated to the development of its activity.
- That the family, considered as spouse, ascendants, descendants and collaterals up to the 2nd degree has at least 20% of participation in the business (or 5% individually).
- That a member of the family carries out management functions in the business and receives remuneration that represents more than 50% of their income from salary and economic activities.
Compliance with these requirements allows all the family members who participate in the family business to apply the exemption in the Wealth Tax, although it is true that the exemption can be partially applied in the event that part of the assets are not linked to a business activity.
This regime can be applied both, to companies located in Spain and abroad, so it is an interesting regime for foreigners or foreign entrepreneurs with businesses outside Spain.
Once the business is exempted in the Wealth Tax (even partially), a relief of 99% (or 95% depending on the regions) will be applicable to the transfer of the business on the Inheritance and Gift Tax payable, making the tax burden triggered practically irrelevant.
Succession in the family business
And, finally, if the aforementioned requirements are met, it is possible to anticipate the succession of the company inter-vivos via donation, without producing a tax impact on the donor’s personal income tax. For this to happen, in addition to the aforementioned conditions, the following must also happen:
- The donor is over 65 years old and,
- If he is carrying out management functions, and receiving remuneration for it, he would cease to do so due to the transfer. Although he will be allowed to continue advising the company as a member of the board.
- That the donors who receive the donation from the family business continue with the business for the following 10 years. This requirement is perhaps one of the most important since it requires annual verification for the company to benefit from the family business tax regime.
The advantages of this regime are many and very relevant, leading to significant savings in the personal tax burden of members of the family business. The practical application of this regime has given rise to many doctrine and jurisprudence over the last few years because almost 90% of donations and inheritances are reviewed by the Tax Authorities, being this particular regime one of the main issues in these tax inspections.