Shareholders must meet activity requirements for Wealth Tax exemption

The application of the exemption for Wealth Tax (IP) on shares in entities is not automatic and requires strict compliance with conditions regarding the nature of the company's activity and the role of the partners.

What the DGT has ruled

The Dirección General de Tributos (DGT) has specified that, to access the exemption provided for in Wealth Tax regulations, the entity in which one holds shares cannot have the management of movable or immovable property as its main activity. The corporate purpose and the actual activity of the company are decisive for this tax benefit.

Furthermore, three key requirements have been established for the application of this criterion:

• Amount of participation: The taxpayer must hold at least 5% of the shares individually, or 20% jointly with family members.
• Management functions: At least one member of the kinship group must exercise management functions in the entity.
• Manager's income: The member exercising management must receive, for said work, more than 50% of their business, professional, or personal labor income.

Finally, the exemption is not total on the value of the shares; it only covers the proportional part corresponding to the value of the assets directly used for the entity's economic activity.

What this means for you

If you hold shares in family businesses or investment companies, you must verify that the entity's activity is not limited to the mere management of real estate or movable income. If the company is considered a wealth management firm, it will lose the right to the exemption on those shares in its wealth tax return.

For taxpayers who manage their wealth through corporate structures, it is fundamental that the income structure of family members meets the 50% threshold derived from management activity; otherwise, the full value of the shares will be taxed.

What should be done

It is necessary to conduct an analysis of the entity's actual economic activity and its asset composition to determine what percentage of the share value is truly exempt. Likewise, it must be verified that the remuneration of the family members exercising management complies with the percentages required by regulations to avoid contingencies in the tax settlement.