Donations of family business shares cannot apply the 95% reduction

The application of tax reductions in the transfer of shares in family businesses requires strict compliance with requirements that link different taxes. A recent resolution from the Dirección General de Tributos (DGT) has clarified the necessary connection between Inheritance and Gift Tax (ISD) and Wealth Tax (IP).

What the DGT has ruled

The inquiry analyzes whether the transfer of shares can benefit from the 95% state reduction provided for in Article 20.6 of the Inheritance and Gift Tax Law (LISD). The body has ruled that, to access this benefit, the donor must be entitled to the exemption in Wealth Tax (IP) in accordance with Article 4.Eight.Two of the Wealth Tax Law (LIP).

This exemption in IP requires that the management functions of the company be exercised by a member of the donor's kinship group, limited to:

• Spouse.
• Ascendants.
• Descendants.
• Second-degree collaterals.

In the case analyzed, the manager was a third-degree collateral, which prevents meeting the family management requirement and, consequently, nullifies the possibility of applying the 95% reduction in the donation.

What this means for you

If you are an individual intending to receive donations of shares in family businesses, the company's command structure is a determining factor for your tax burden. It is not enough for the company to be family-owned in terms of ownership; it is imperative that operational management falls to direct relatives or second-degree collaterals.

If the company's management is exercised by more distant relatives, such as parents' siblings (uncles/aunts) or nephews/nieces (third-degree collaterals), the 95% reduction on the tax base will not be applicable, significantly increasing the tax cost of the operation.

What should be done

Before formalizing any transfer of shares or holdings under this regime, it is necessary to verify the composition of the management body and their degree of kinship with the donor. The company's governance structure must align with the requirements of the LIP to ensure the effectiveness of the reduction in the ISD. It is recommended to assess the company's management situation against the kinship limits established in the current regulations.