B Law & Tax
15 March 2024

FAMILY BUSINESS EXEMPTION: CONTROVERSIAL ISSUESREGARDING ACCESS REQUIREMENTS IN LIGHT OF THE LATEST DGT PRONOUNCEMENTS

Recently, the DGT, in its binding rulings V2752-23 and V2390-23, has
clarified its criteria regarding the fulfillment of certain requirements for accessing the family business exemption.

The family business exemption is, to date, one of the main tax benefits for family businesses and, in many cases, has become indispensable for the survival and development of such companies in Spain. It is regulated in Article 4 of Law 19/1991, of June 6, on Wealth Tax (“WT“), which sets out the requirements for the application of this incentive.

In particular, according to the aforementioned article, the requirements to be met are as follows: (i) that the entity’s main activity is not the management of movable or immovable assets; (ii) that the taxpayer’s participation in the capital of the entity is at least 5% computed individually, or 20% jointly with their spouse, ascendants, descendants, or second-degree collateral relatives, whether the relationship originates from consanguinity, affinity, or adoption; and (iii) that the taxpayer effectively performs management functions in the entity, receiving a remuneration representing more than 50% of its total business, professional, and personal labor income.

Recently, the Directorate General of Taxes (“DGT”) has responded to two inquiries regarding requirements (ii) and (iii), in which the DGT clarifies how these requirements should be interpreted.

In the first binding ruling V2752-23, dated October 10th, the DGT analyzes a case of family asset restructuring. As a result of the planned restructuring operations, the direct shareholdings in the company would be contributed to a holding company and would become indirect.

According to the DGT, having an indirect participation in the family business, per se, does not constitute a breach of the requirements for applying the family business exemption. In the case under analysis, as a consequence of the restructuring, the family member who ended up having an indirect participation in the family business also held remunerated management positions within the entity. After the restructuring, he began carrying out remunerated management tasks in its own holding company, through which he participated in the family business.

The DGT concludes in this ruling that “Regarding the computation of income upon ceasing to hold a direct stake in entity A, in accordance with article 5.2 of the RIP, the income received from this entity must be taken into account as part of the total income from work and economic activities to determine whether the income received by the new holding company represents more than 50 percent of the total income from work and economic activities.

In the second binding ruling V2390-23, dated September 5th, the DGT analyzes the requirement (ii) mentioned earlier. In this case, a married couple holds a combined stake of 15% in the family business. One spouse has a direct stake of 11.5% and the other 3.5%. The latter spouse is the one performing management functions in exchange for remuneration. Following the provisions of the applicable regulations regarding requirement (ii), considered individually, one of the spouses would meet it by having a stake exceeding 5%.

Indeed, in this instance, the DGT clarifies that in situations where the combined ownership falls below the stipulated minimum of 20%, and the individual who fulfills requirement (iii) related  to managerial duties holds an individual ownership below 5%, the exemption would not be applicable to other family members.

Conclusion:

The criteria established by the DGT in these two recent rulings are relevant and should be considered when verifying compliance with the requirements for the application of said tax incentive, especially when establishing a family business or planning restructuring operations related to it.

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**The following publication contains general information on tax matters and does not constitute tax advice. This information is provided for informational purposes only and should not be interpreted as specific tax advice for your particular situation. B Law & Tax is not liable for any loss or damage arising from reliance on the information contained in this publication.

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