Although we are currently immersed in the income tax campaign, we cannot forget about wealth tax
(despite the 100% rebate offered in the Autonomous Community of Andalusia) and, linked to this, the tax
on large fortunes.
In this blog, we will focus on wealth tax.
Wealth tax (IP) is levied on the net worth of individuals and is a tax transferred to the Autonomous
Communities. Within the set of assets and rights subject to the tax, there are certain exemptions,
including those relating to shareholdings in entities. The purpose of this exemption is to encourage
business activity and prevent the tax from penalising productive investment.
Legal basis:
The legal basis for this exemption is found in Article 4. Eight. Two of Law 19/1991, of 6 June, on Wealth
Tax. This provision establishes the conditions that must be met for holdings in certain entities to be
exempt from taxation.
Scope of application:
The exemption may apply to:
Direct or indirect holdings in companies. However, in both types of holdings, the minimum
percentage requirement for participation in the company must be met.
Both commercial and professional companies, provided they meet the requirements.
Requirements for exemption
In order to benefit from this exemption, three main sets of requirements must be met simultaneously:
1. Economic activity requirements
The investee must effectively carry out an economic activity. Such activity shall not be deemed to exist
where the main asset consists of securities or real estate not used for business purposes.
Automatic exclusion: So-called ‘asset-holding companies’ —those whose main activity is the holding of
assets— are excluded from the scope of this exemption.
2. Participation and control requirements
The taxpayer must hold at least 5% of the capital individually or 20% jointly with their spouse,
ascendants, descendants or collateral relatives up to the second degree.
In addition, they must exercise effective management functions in the company and receive
remuneration for this representing more than 50% of their total business, professional and employment
income.
3. Valuation Requirements
The exemption applies to the value of the shares proportional to the assets used for economic activity,
i.e. not all of the shareholding is exempt if part of the company’s assets are not linked to the business
activity.
Frequent Cases of Application
-Family businesses: The exemption allows shareholdings in family businesses to be tax-free,
encouraging business continuity between generations.
-Active directors or partners: Those partners who actually participate in the management of the
company, and not as mere passive investors, are the main beneficiaries of this tax advantage.
Incompatibilities and Exclusions
-If the entity is purely patrimonial, the exemption does not apply.
-It also does not apply to holdings in entities which, although formally commercial, do not carry out
a real or relevant economic activity.
-The exemption does not apply automatically: it must be justified each year in the tax return,
proving compliance with the requirements.
Review by the authorities
The Directorate-General for Taxation (DGT) and the courts have issued numerous binding rulings and
judgments interpreting the scope of the requirements. In particular, the management function and the
proportionality of remuneration are examined in detail to prevent abuse or simulation.
In conclusion, the exemption of shares in companies from wealth tax is a key tax tool for promoting
investment in family businesses and protecting the productive fabric. However, its application requires
strict compliance with legal requirements and proper documentation and justification.
In an environment of increasing tax control, it is advisable to carry out adequate wealth planning and,
where appropriate, seek specialised advice to ensure the legitimate application of this exemption.
At MDG Advisors, we remain at your disposal if you are particularly interested in applying the Wealth Tax
exemption discussed in this blog.
Leticia Cayuela Mayor.