The moment of generational handover is one of the most critical for family businesses. To make it a little easier, tax benefits have historically been introduced when a parent donates his or her shares to his or her descendants. In Spain there are two regimes for this: the donation of shares and the succession pact. Let’s look at them in detail and review the new developments that have taken place in this area in recent times.
Donation of shares in the family business
Throughout Spain, the donation of shares between different generations of a family business has in theory tax advantages for both the donor and the donee.
- Reduction in inheritance and gift tax for the donee (usually the child of the company founder). The requirement is that he/she keeps the company in his/her possession for at least ten years. In this case it is the autonomous communities who regulate this benefit.
- Non-subjection of the capital gain to personal income tax of the donor, which is deferred. The conditions are that he/she is 65 or over or disabled and that he/she retires. In this case, only the State Law is competent to regulate the matter.
The risk of tax incentives for gifts of shares in family-owned companies
If the donee complies with the maintenance requirement and then sells his shares, at the time of the transaction he will have to pay the income tax that the donor did not pay at the time. If, on the other hand, the donee fails to comply with the maintenance requirement and, for example, sells the shares before ten years have elapsed, then it is the donor who has to pay the untaxed income tax. This can be a tricky situation, as the donor will then be a retired person who may not be at his best financially.
To this potential risk must be added the recent Resolution of the Central Economic-Administrative Tribunal of 29 May 2023 (RG 1501/2020), which has ruled that if the company that is donated is the owner of assets that are not used for an economic activity, the deferral in the donor’s personal income tax is only partial.
In other words, the donor will generate a taxable capital gain, in an amount proportional to the weight that these assets have in the company’s net worth. The remainder is deferred and subject to compliance with the maintenance requirement of the donee.
As a consequence of all these difficulties, many family businesses choose to plan the transfer on the death of the share owner.
The advantages of the succession pact
Certain autonomous communities with their own civil law have an alternative regime to donation: the inheritance pact.
With the succession agreement, the owner agrees, during his lifetime, to transfer certain assets to his heirs. The key difference compared to a gift is that inheritance agreements are taxed as an inheritance and, therefore, the transferor does not pay income tax. It is not necessary for the parent to be of a certain age or to retire. He can even continue to manage the company. It is also irrelevant if the company has assets that are not used for its activity.
This is not a tax deferral, but a definitive benefit. However, there is one condition: the heir must not transfer the assets before the expiry of five years or before the death of the previous owner. Otherwise, he is subrogated to their acquisition value and the inheritance agreement results in a mere tax deferral. It is the child, and not the parent, who is liable to pay the personal income tax.
The major limitation of the succession pact is that it can only be made in Aragon, Catalonia, Navarre, the Basque Country, Galicia and the Balearic Islands. For residents of other territories, two years of residence in one of these communities and a declaration of will are required for this civil law to apply to them.
At Confianz we can advise you on how to organise the generational handover of your family business in the most advantageous way. Get in touch with us.