B Law & Tax
26 September 2023

Tax advisor: The Central Economic-Administrative Court (TEAC) establishes criteria affecting family business succession

Spanish Tax Authority,requires donors to apply capital gains tax in the IRPF on assets
transferred in the operation that are not related to business activity.

According to a resolution by The Central Economic Administrative Tribunal (TEAC)
has upheld an approach that discourages the transfer of family businesses during
the owner’s lifetime. According to a TEAC resolution, the deferral of taxation of
capital gains, as established in article 33.3 c) of the IRPF law, no longer applies to all
capital gains but only to those corresponding to the percentage of assets related to
the total assets of the entity whose shares are transferred.

This establishes the rule that within the scope of the IRPF, the same principle of
proportionality as in the Inheritance and Gift Tax (ISD), along with the regulations of
the Wealth Tax referred to by the law of that tax, is applied to avail of the benefits
related to family businesses.

TEAC supports this decision by arguing that “the IRPF Law requires, in the reference
it makes to article 20.6 of the Inheritance and Gift Tax Law, and the latter, in turn, to
article 4. Eight of the Wealth Tax Law, regulated by article 3 of RD 1704/1999, that the assets comprising the entity’s assets whose shares are donated are intended for an economic activity”.

The TEACs new approach has sparked additional controversy regarding how asset value is calculated for capital
gains tax purposes in the IRPF. In fact, the affected taxpayer filed a complaint
arguing that “the valuation method used to identify the affected elements does not
reflect reality, and there has been no proper justification for using this criterion. In
their complaint, they noted that “even among different companies whose shares are
part of the asset, different valuation methods have been employed without clear

The Inspection relied on data from the Mercantile Registry indicating the proportion
of short-term financial assets and liquidity in relation to the total for each type of
company, based on their registered activity in the CNAE. In general, the average of
these values was calculated. Then, this average or the highest percentage from the
last year was applied to the book value of the item in question to determine the
portion considered related to business activity and the portion that is not.

TEAC concludes that, despite the taxpayers objections, the criterion used is
reasonable due to the complexity of the valuation. It is based on a percentage
obtained from Mercantile Registry statistics covering a large number of companies
and considering various economic activities. In summary, the resolution highlights
the importance of considering both the size of the company, except in the case of
large companies, and its activity when determining the allocation of assets.


B Law & Tax International Tax & Legal Advisors.


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