Resources from the transfer of capital do not qualify for exemption from Wealth Tax

The application of the exemption for assets used for economic activity in Wealth Tax and the Temporary Solidarity Tax on Large Fortunes (ITSGF) is a frequent point of debate for individuals carrying out economic activities. Recently, the Dirección General de Tributos (DGT) has delimited the scope of this exemption regarding certain financial resources.

What the DGT has ruled

The query concerned whether liquid balances and financial resources used for the acquisition of advertising spaces and the operational development of an activity could be considered assets used for the activity. The DGT has ruled that those financial resources representing the transfer of capital to third parties do not qualify as assets used for economic activity, in accordance with the Personal Income Tax Law (LIRPF).

Consequently, these amounts cannot benefit from the exemption in Wealth Tax or the ITSGF. However, regarding liquid balances held in bank accounts, the administration points out that their status as assets used for the activity depends on their actual necessity for the exercise of the activity. To determine this, the proportionality of the average balance must be assessed against the working capital needs of the economic activity itself.

What this means for you

If you are an individual carrying out an economic activity and intend to apply the exemption for assets used for the activity to reduce your taxable base in Wealth Tax or the ITSGF, you must keep two key distinctions in mind:

• Transfer of capital: If the money comes from the transfer of capital to third parties, you will not be able to apply the exemption, as these are not considered assets used for the activity.
• Bank account balances: Only those balances that are strictly necessary for the operations of your activity may be considered assets used for the activity.

What you should do

It is necessary to analyze the nature of each financial resource intended to be included in the exemption. In the case of bank balances, the administration will require a clear proportionality between the average available balance and the treasury and working capital needs of the activity. It is recommended to assess each situation individually to ensure that the designation of the assets as used for the activity complies with current regulations.