The transfer of shares or participations in a family business enjoys a very beneficial taxation in the Inheritance and Gift Tax (ISD), applying a reduction of 95% that operates throughout Spain as long as certain requirements set forth in the regulations are met. In order to clarify your doubts and take the necessary steps before carrying out this type of transfer, in this article we summarize the most important points in this regard.
If you have any doubt, consult our team of lawyers and economists in Comunidad Valenciana. We are specialists in family business taxation, as well as in donations and inheritance.
What is the 95% reduction in the ISD for family businesses?
The Inheritance and Gift Tax Law contains a 95% reduction in the taxable base in the event of transfer by succession or donation of shares in family businesses, a tool that aims to reduce the tax bill applicable to generational succession. However, certain requirements must be met, as we will see below.
Requirements for applying the 95% reduction for the transfer of the family business
In order for the 95% reduction to be applicable, it is necessary that we are dealing with the transfer of participations or shares in a family business. Therefore, the requirements inherent to this type of company must be met. They are as follows:
- It cannot be a patrimonial entity. These are mainly dedicated to the management of movable or real estate assets.
- The beneficiary must have at least a 5% share in the family business. It is necessary that the participation of the beneficiary of this reduction in the family business is at least 5%, or 20% together with his/her spouse, ascendants, descendants or collaterals up to the second degree.
- One of the family members must exercise management functions in the company. In addition, he must obtain the majority of his income from work and economic activities. Must be a family member in one of the categories described in the previous point.
- At least 50% of the company’s assets and liabilities must be subject to an economic activity.
All these points involve a wide range of casuistry that only a specialist in Tax Law knows first hand. To avoid mistakes, consult before taking any step.
Non-subjection of the capital gain in Personal Income Tax and Wealth in case of donation of a family company
In addition, as regards Personal Income Tax and Wealth Tax, there is the possibility that the capital gain or loss obtained by the donor is not subject to these taxes, also under certain requirements.
Requirements to apply the non-taxation of the profit associated with the family business in Personal Income Tax and Wealth Tax.
Fulfilling the above requirements is sufficient for the inheritance of shares or stocks in a family business to be a transaction not subject to Personal Income Tax and Wealth Tax, so that the heir will not be taxed on the corresponding capital gain, if any.
However, in the case of a donation, certain extra requirements must be met in order for the capital gain not to be taken into account for Personal Income Tax and Wealth Tax purposes. They are as follows:
- The donor must be 65 years of age or older. This requirement will also be met when, being under 65 years of age, the donor is in a situation of absolute permanent disability or severe disability.
- That the donor relinquishes management functions in the family business. It is not necessary, in order to comply with this requirement, for the donor to transfer all his or her participations or shares in the company.
- That the donor is entitled to apply the family business exemption in his Wealth Tax. 1,000,000 in the case of taxpayers with a mental disability, with a degree of disability equal to or greater than 33%, and for taxpayers with a physical or sensory disability with a degree of disability equal to or greater than 65%.
Finally, it is essential that, both in the case of inheritance and donation, the heir or donee maintains his or her participation in the family business for at least 10 years, although in some autonomous regions this period is reduced to 5 years, as is the case in the Valencian Community.
It is important to bear in mind that this income, although not subject to tax, must be declared for personal income tax purposes.
Taxation of the transfer of a family business in the Community of Valencia
In the case of the Community of Valencia, there are some specific reductions for the transfer of companies or shares in certain entities in Inheritance and Donations that improve or complete the national standard.
Successions:
- Reduction of 99% of the value of the individual agricultural enterprise in favor of the spouse, descendants, adopted, ascendants, adoptive parents and collateral relatives, up to the third degree. The reduction will be 90% if the deceased at the time of retirement was between 60 and 64 years of age.
- Reduction of 99% of the value of the individual company or professional business in favor of the spouse, descendants, adopted, ascendants, adoptive parents and collateral relatives, up to the third degree, provided that the requirements are met. Also in this case, the reduction will be 90% if the taxpayer, at the time of retirement, was between 60 and 64 years of age.
- Reduction of 99% of the value of shares in certain entities in favor of the spouse, descendants, adopted, ascendants, adoptive parents, or collateral relatives, up to the third degree, provided that the requirements are met.
In all these cases, the reduction will be 90% if the taxpayer, at the time of retirement, was between 60 and 64 years of age.
Donations:
- 99% of the value of an individual agricultural enterprise in favor of the children or adoptees or, when there are no children or adoptees, of the parents or adoptive parents of the donor. This same reduction will be applied to grandchildren, with the same requirements, provided that their parent (child of the donor) is deceased. The reduction will be 90% if the deceased at the time of retirement was between 60 and 64 years of age.
- 99% of the value of a sole proprietorship or professional business in favor of the spouse, descendants or adoptees, or, when there are no descendants or adoptees, in favor of the spouse, parents or adoptive parents. The reduction will be 90% if the deceased was between 60 and 64 years of age at the time of retirement.
- 99% of the value of the participations in entities in favor of the spouse, descendants or adoptees, or, when there are no descendants or adoptees, in favor of the spouse, parents or adoptive parents. Also in this case, the reduction will be 90% if the taxpayer at the time of retirement was between 60 and 64 years of age.
Again, there are specific requirements that are important to be aware of. For example, maintain the acquisition of equity for at least 5 years.
If you have any questions, contact our team We will guide you to find the most beneficial tax solution for your case.