What are the requirements for applying the 95% tax relief on Inheritance Tax for family businesses according to the Supreme Court?

The Supreme Court, in its ruling 1881/2020 of 18 June 2020, analyses the requirements for accessing the 95% tax relief on Inheritance Tax for family businesses. This benefit, provided for in Article 20.2.c) of Law 29/1987 and linked to Article 4.Eight.Two.c) of the Wealth Tax Law, requires that the taxpayer exercises effective management functions in the parent company and receives remuneration representing more than 50% of its total income, excluding income from indirect shareholdings in other exempt family entities.

The High Court establishes that the shareholdings to benefit from the exemption must be direct, excluding indirect shareholdings, with the aim of delimiting the concept of a family business as one in which the members of the family group have ownership or decision-making power.

Likewise, for the calculation of 50% of the administrator’s income, income from entities whose direct holdings are exempt from Wealth Tax are not included, as they meet the requirements of Article 4.Eight.Two. This is because indirect holdings through intermediary companies do not fit the purpose of Article 4.Eight.One of the Wealth Tax Law, which requires that the taxpayer habitually, personally and directly carries out the business or professional activity, this being his main source of income.

These rules ensure that the existence of multiple family businesses does not hinder the exemption in mortis causa or inter vivos transfers, limiting it to remuneration derived from direct shareholdings. Moreover, this interpretation is in line with the doctrine of the Directorate General of Taxes regarding the calculation of the administrator’s income in holding companies and investee companies.

Consequently, the case law reinforces the ‘family’ nature of the company as a key requirement for tax benefits, ensuring that the business activity is exercised directly, habitually and personally by members of the family group.

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