B Law & Tax
20 December 2023

Tax Advisor: Tax analysis of corporate restructuring: Implications on companies, assets, and Inheritance and Gift Tax (ISD)

In response V2752/2023 dated October 10, the General Directorate of Taxes (DGT) analyzes a restructuring operation of a family company (entity A) that owns 100% of entity B. Entity A is responsible for directing and managing the company’s participation in entity B. In 2019, the parents donated shares in entity A to their children, benefiting from a 95% reduction in Inheritance and Gift Tax (ISD). The restructuring planning involves two brothers, each holding 32% in entity A, contributing their shares to two new management companies. Each brother will have 100% ownership and will manage the company that oversees their participation in entity A with their own financial and material resources.

 

Fiscal Impact on Non-Monetary Contributions: Focus on Corporate Tax

If each brother contributes at least 5% of the capital of entity A (specifically 32%) to a new company in Spain, meeting the requirements of Article 87 of the Corporate Income Tax Law (Ley del Impuesto sobre Sociedades or LIS), the operation would be subject to the tax regime established in Chapter VII of Title VII of the LIS. However, regarding Wealth Tax and possibly the Tax on Large Fortunes and Inheritance and Gift Tax, the exemption would not apply. This is because the brother who will perform managerial functions in both the new holding entity and the participating entity (entity A), receiving remuneration from both, would not be considered as a holder of “a direct stake” in the company.

If each brother contributes a stake that reaches or exceeds 5% of the capital of entity A (specifically 32%) to a new company in Spain, and the requirements of Article 87 of the Corporate Income Tax Law (LIS) are met, the non-monetary contribution operation would be subject to the tax regime of Chapter VII of Title VII of the LIS. This tax treatment would apply under the conditions and requirements specified in that regulation. It is important to note that the shares in entity A, acquired by the new company as a result of the contribution, would retain the fiscal value and seniority they had in the hands of the individual who made the contribution.

 

Fiscal Challenges in the Transfer of Shares

However, concerning Wealth Tax (and, by extension, this could have implications for the Tax on Large Fortunes), the exemption will not be valid when family members who perform managerial functions cease to be direct owners of the family business by transferring the stake to the holding. Regarding the calculation of income upon ceasing to be holders of a direct stake in entity A, the income received from this entity must be considered as an integral part of the total income from work and economic activities. This is done to determine if the income earned by the new holding company represents more than 50 percent of its total income derived from work and economic activities.

 

Key Considerations for ISD Reduction

The DGT emphasizes that, to apply the reduction in Inheritance and Gift Tax (ISD), the value for which the reduction was made is crucial, not the nature of the asset. The non-monetary contribution of shares to a new holding entity does not violate the “maintain what was acquired” requirement. However, this requirement is not sufficient to ensure the reduction, as Article 20.6.c) of the ISD Law establishes two additional requirements: refraining from “acts that could substantially reduce the value of the acquisition” and being entitled to exemption from Wealth Tax for ten years after the donation. The loss of exemption in Wealth Tax also entails the loss of exemption in ISD.

 

In summary:

The DGT analyzes a restructuring operation of a family company (entity A) that owns 100% of entity B. In 2019, the parents donated shares in entity A to their children, benefiting from a 95% reduction in ISD. The restructuring involves two brothers, each with 32% in entity A, contributing their shares to new companies. If they meet the requirements of Article 87 of the Corporate Income Tax Law (LIS), they will be subject to the tax regime of Chapter VII of the LIS. However, regarding Wealth Tax, the exemption would not apply if the brothers cease to be direct owners by transferring the stake to the holding. The loss of exemption in Wealth Tax implies the loss of exemption in ISD. The DGT highlights the importance of the value in ISD reduction and mentions additional requirements, such as refraining from acts that substantially reduce the value of the acquisition and being entitled to exemption from Wealth Tax for ten years.

 

 

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