Impossibility of applying the 95% reduction in ISD if the donor is a legal entity

The Dirección General de Tributos (DGT) has issued a relevant ruling regarding the limits of reductions applicable to Inheritance and Gift Tax (ISD). The inquiry focuses on determining whether it is possible to apply the reduction provided for in Article 20.6 of the Inheritance and Gift Tax Law when the donation comes from a legal entity.

What the DGT has ruled

The body has ruled that it is not possible to apply the 95% reduction in this scenario. The criteria are based on several legal requirements that are not met when the donor is a company:

• Wealth Tax taxpayer: The regulations require that the donor be entitled to the exemption in Wealth Tax, a condition that legal entities cannot hold as they are not taxpayers of said tax.
• Family relationship: The reduction is conditional on the donor being a spouse, descendant, or adopted child, ties that do not exist between a donee and a legal entity.
• Personal conditions: The requirements regarding the age, disability of the donor, or the exercise of management functions required by the law for this benefit are not met.

What this means for you

This ruling has a direct impact on asset transfer planning. If an individual receives a donation from a company, they will not be able to benefit from the 95% reduction established in Law 29/1987. This implies that the tax burden will be higher than what might be expected if the nature of the entity were confused with that of a natural person.

What should be done

It is necessary to analyze the ownership structure and the nature of the donors in any asset transfer operation. Since the application of this benefit strictly depends on the personal and tax status of the donor, each operation must be analyzed individually to determine the real tax burden and avoid errors in the tax settlement.