Improvement agreements made during lifetime: impossibility of applying the family business reduction

The Directorate General of Taxes (DGT) has issued a relevant ruling regarding the taxation of company shares when they are transferred through improvement agreements with immediate delivery, a figure provided for in Galician civil law.

What the DGT has ruled

The query concerned the possibility of applying the 95 percent reduction in the valuation of social shares, in accordance with the state regulations of the Inheritance and Gift Tax (ISD). The DGT has concluded that this reduction is not applicable in this specific case.

The central argument lies in the nature of the acquisition. Although improvement agreements are considered succession titles, when the delivery of the asset is made in the present, the acquisition occurs while the deceased is still alive. State regulations, specifically Article 20.2.c) of the Law on Inheritance and Gift Tax (LISD), establish as an indispensable requirement that the person from whom the acquisition is made must be deceased for said reduction to apply.

What this means for you

This ruling has a direct impact on descendants who receive assets or shares through improvement agreements in Galicia. If the transfer of company ownership is formalized during the lifetime of the owner, the operation does not fall under the succession scenario required by law to access the 95% tax benefit.

Consequently, the valuation of these shares cannot benefit from the family business reduction, which increases the tax burden of the operation as the requirement of transmission due to death is not met.

What should be done

When planning the transfer of shares in family entities through civil figures such as improvement agreements, it is necessary to analyze the timing of the delivery of the assets. The distinction between delivery in the present and delivery after death determines access to significant tax benefits in the Inheritance and Gift Tax (ISD). It is recommended to assess each legal and tax situation individually to understand the implications of choosing a specific transfer model.