In Spain, the family business continues to be one of the key pillars of the economy. Not only does it generate employment and wealth, but also, provided it is structured as such, it acts as an efficient instrument for investment and preservation of family wealth. However, its use as an investment vehicle entails significant legal and tax challenges. Recent regulatory developments and the tightening of controls on corporate structures make a critical review of the traditional family business model essential.
One of the main tax incentives for family businesses is found in the Wealth Tax (IP) and the Inheritance and Gift Tax (ISD). In this scenario, it must be taken into account that the exemption is conditioned to the company having a real economic activity, that the participation in the share capital is at least 5% or 20% jointly at family level, or failing that, that the acquisition value is higher than 20M€, or that the taxpayer performs management functions and receives a remuneration higher than 50% of the total income. In the latter case, when the family holds at least a 20% shareholding, the management functions and the derived remuneration may be carried out by a family member without prejudice to the fact that all the members are entitled to the exemption.
The problem arises when the family business is structured through a holding company, i.e., an entity that concentrates the ownership of other companies or real estate. In the case of these structures, special care must be taken since the Tax Authorities have been considering that the tax benefits are not applicable because they consider that there is no real economic activity. Judgments such as that of the SC of May 24, 2021 highlight the need to have sufficient material and human resources in the entity, interpreting that the mere holding of shares without active management is not enough.
This is in addition to the scrutiny of non-monetary contributions to holding companies, especially when they are made just before a transfer of assets. The Tax Agency may consider that the transaction has been instrumented, precisely, to achieve the tax exemption and does not pursue a real economic purpose, denying the tax deferral regime provided for in the Corporate Income Tax Law.
Another point of conflict is the management of the cash accumulated by the family holding company. The trend has been indicating that a company that has significant amounts of cash that have not been reinvested without economic justification may not be considered an entity with economic activity. Sometimes it is even concluded that the mere expectation of reinvestment is not enough to maintain the tax exemption, so it is necessary to be able to justify that the treasury responds to a functional need of the activity or to specific investment decisions.
Finally, it is worth remembering the tax reform that, in 2021, introduced the famous anti-holding rule in the corporate income tax by limiting the 95% exemption on dividends and capital gains. With this, the exemption can only be applied if the intermediate entity has a real economic activity and the corporate structure responds to valid reasons. This “trick” is also intended to avoid merely instrumental structures and to require a clear justification of the reason for each company in the group.
In short, although the family business is not in question as a concept, the excesses or deviations in its use as an investment vehicle are. With increasing fiscal pressure, family businesses that diversify their assets must justify each step with economic and fiscal logic. It is therefore necessary to review corporate structures, properly document business decisions and give real content to the family holding structure, otherwise families may be deprived of benefits that are essential for their intergenerational sustainability.
