Donors of family businesses must pay income tax (IRPF) on a capital gain on an amount proportional to the weight that the assets not assigned to the business activity have in the company’s assets. This is established in the ruling of 29 May 2023 of the Central Economic Administrative Court (TEAC).
In this way, the TEAC changes its criterion to agree with the Tax Agency. This is still a relevant criterion that has not yet been reiterated and does not constitute consolidated doctrine, because this issue has not yet been brought before the Supreme Court and therefore there is no established case law. However, at Confianz we believe that this could undoubtedly be a new opportunity for the transfer of family businesses during their lifetime.
Parents who donate the family business with assets that are not used for business purposes must pay personal income tax on capital gains
According to the recent TEAC ruling, in the case of donations from family businesses that include assets that are not used in the activity, the donor must pay personal income tax on a capital gain on an amount proportional to the weight that these assets have in the company’s assets.
This criterion is based on the application of Article 33.3 c) of the Personal Income Tax Law, which requires, in its reference to Article 20.6 of the ISD Law, and this, in turn, to Article 4 Ocho of the IP Law, that the assets of the entity whose shares are donated must all be used for economic activity.
Thus, the taxation of the related assets continues to be deferred. The donor will not have to pay tax on them if he has held them uninterruptedly for at least five years prior to the date of transfer. The member of the business family who receives the donation will be the one liable to tax if the sale takes place.
Tax hit on family business donations
In fact, the TEAC is now actually unifying the rules due to a loophole in the Personal Income Tax law by applying a rule – that of Wealth Tax (IP) – which is the one that configures the requirements of the family business, although it is not the one that gives rise to the exemption, which is referred to the Inheritance and Gift Tax (ISD).
According to the Central Economic Administrative Court, the same proportions of Inheritance and Gift Tax (ISD) should be applied to Personal Income Tax (IRPF), according to the tax regulations. The TEAC justifies this decision by referring to various articles of the IRPF and ISD laws, which indicate that the assets must be linked to an economic activity.
The difficulty of valuing non-business assets
With this new approach of the TEAC, there have also been almost simultaneous testimonies from affected taxpayers arguing that in their case the method of valuation of non-business assets for personal income tax does not reflect reality. For its part, the TEAC has defended the use of statistics from the Commercial Register and the consideration of essential factors such as the size and activity of the company.
An added difficulty for succession in family businesses
At Confianz we know that the moment of succession is one of the most critical for family businesses. While we are waiting to see if the Supreme Court will rule on this issue, there is no doubt that this TEAC ruling introduces a new tax difficulty and complicates the transfer of family businesses to descendants during their lifetime, in this case through donation.