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Tax Relief in Spanish Wealth Tax and Inheritance and Gift Tax for Non-Residents in Family Businesses

Spain
18 Nov 2011

Spanish wealth tax, which was reintroduced in September for the fiscal years 2011 and 2012, establishes that Individuals not resident in Spain are subject to the referred tax in respect of all assets owned by them that are situated in Spain, as well as rights that may be exercised or fulfilled in Spain.

Also, individuals not resident in Spain are subject to the Spanish inheritance and gift tax as regards to: i) all assets, of whatever nature, acquired by them free of charge, which are situated in Spain; ii) rights that may be exercised or fulfilled in Spain; iii) any amounts collected from life insurance policies purchased from Spanish insurance companies, or concluded in Spain with foreign insurance companies operating in Spain.

Taxand Spain analyses the tax benefits over ownership and free transfer of family businesses that apply to individuals not resident in Spain.

According to the wealth tax legislation, absolute ownership, naked ownership and life interest in holdings in entities, whether or not listed on regulated markets, will be exempt if the following conditions are met:

  • The entity's main activity is not simply the management of movable capital or real estate assets, as defined in the law
  • The taxpayer's holding in the entity amounts to at least 5%calculated individually, or to 20% calculated jointly with the interest held by his/her spouse, ascendants, descendants or collateral relatives up to the second degree, whether through blood, marriage or adoption
  • The taxpayer performs management functions at the entity, for which he/she receives compensation representing more than 50% of all his/her business, professional or personal income from other sources. Nevertheless, where the interest in the entity is held jointly with any of the persons indicated in the preceding paragraph, at least one of these persons must meet the conditions relating to performance of management functions and the corresponding compensation, although they will all be entitled to the tax exemption.

In turn, the inheritance and gift tax regulations establish a 95% reduction in the taxable income relating to the value of the holdings in entities, on the condition that:

In the case of acquisitions mortis causa:

  • The abovementioned wealth tax exemption applies to them
  • The acquirer retains the interests for at least ten years following the death of the decedent or the date of the public deed recording the gift
  • The acquirer makes no disposal of any kind or corporate transaction giving rise, directly or indirectly, to a significant reduction in the value of the acquisition during this ten-year period

In the case of acquisitions inter vivos, the following conditions must also be met:

  • The donor must be 65 or older, or have permanent (absolute or comprehensive) disability
  • If the donor performs management functions, he/she must cease to do so and to receive compensation for those functions from the date of the transfer
  • The right to the wealth tax exemption for the holdings acquired must be maintained for ten years following the date of the public deed recording the gift

The main doubt surrounding the application of this tax relief to nonresident individuals relates to the requirement regarding the performance of management functions and the compensation percentage. Although the Spanish tax authorities have not issued a specific ruling in this respect, it may be understood that the shareholder / family member who performs management functions and receives the relevant compensation must be a Spanish resident taxpayer, irrespective of whether or not the other shareholders are residents. This means that this shareholder will be subject to Spanish personal income tax.


Taxand's Take


To enjoy the tax relief indicated, each specific case requires in-depth analysis and implementation of the appropriate measures. This analysis is particularly attractive to non residents who own and lease real estate assets located in Spain because they can benefit from the family business tax relief, if they have an establishment, at least one employee, and fulfill the above mentioned prerequisites.

Your Taxand contact for further queries is:
Irma M? Fern?ndez Meana
T. +34 985 20 86 00
E. irma.fernandez.meana@garrigues.com

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Taxand's Take Author