B Law & Tax
20 March 2024

FAMILY BUSINESS EXEMPTION

The requirements for a company to be considered as a “family business” and to be able to benefit from the exemption in Personal Income Tax, Inheritance and Gift Tax, as well as Wealth Tax, are the following:

  • That the entity is not considered as a patrimonial entity, understanding as such those whose main activity consists in the management of a movable or real estate patrimony. This criterion is of utmost importance, since the legislation contemplates various situations and scenarios, particularly in the area of companies engaged in the real estate business. Depending on the particular circumstances, it will be determined whether the partnership is classified as a patrimonial entity, which could exclude it from the tax benefits granted by 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% jointly with his spouse, ascendants, descendants or collaterals of second degree.
  • That at least one of the members of the aforementioned family group, in the event that the shares are distributed among the members of the group, performs management functions in the company and obtains the majority of its income from work and economic activities through them.

In addition, in order to qualify for this exemption right, the company must allocate at least more than 50% of its assets and liabilities to an economic activity.

Fulfillment of these criteria will allow the shares or participations of the company to be exempt from Wealth Tax, Personal Income Tax and Inheritance and Gift Tax. In the case of an inheritance, the heirs will be able to benefit from a 95% reduction in the taxable base of the Inheritance Tax. 

However, in the case of donations of such shares or participations to future generations, there will be no tax repercussion on the donor’s Personal Income Tax, and the donees will enjoy a 95% reduction in the taxable base of the Donations Tax, provided that two additional requirements are met:

  • The donor must be at least 65 years of age, although this requirement will be considered to be met if, even if the donor is under 65 years of age, he/she is in a situation of total permanent disability, absolute disability or severe disability.
  • That the donor ceases to perform management functions in the company or family group, without this implying the need to transfer all of his or her holdings or shares in the company.
  • That the donor was entitled to apply the family business exemption in his or her Wealth Tax return.

In addition, both in cases of inheritance and donation, the heirs must keep what they have received for a minimum period of 10 years. However, in some Autonomous Communities, this period is 5 years in the case of inheritance. During this period, the requirements of the regime must continue to be complied with. Decisions cannot be oriented to substantially diminish the value of what was inherited or donated.

In order not to lose the exemption in the case of donations, the acquirers must maintain the shares of the family group in their estate for a period of between 5 and 10 years, depending on the Autonomous Community.

B Law & Tax International Tax & Legal Advisors.

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