Due to its relevance, we want to announce the recent Resolution of the Central Economic-Administrative Tribunal (TEAC) that analyzes the application of article 33.3 c) of the Personal Income Tax Law (LIRPF) regarding the exemption of the donation of shares in a family-owned company (article 20.6 of the Inheritance and Gift Tax Law – LISD).

The exemption for the donation of shares in a family-owned company and its impact on the Personal Income Tax (IRPF)

Article 33.3 c) establishes the non-taxation of the capital gain generated in the lucrative transfer of shares when the exemption provided for in the aforementioned article 20.6 of the LISD is applied.

For those who are not familiar with this exemption for the donation of shares in a family-owned company, it allows for a 95% reduction in the value of the donated shares to the spouse, descendants, or adopted children.

This reduction is applied in the Inheritance and Gift Tax and has certain conditions:

  • The donor must be 65 years old or older or be in a situation of permanent disability.
  • If the donor holds management positions in the company, they must cease to do so and stop receiving remuneration for those positions.
  • The recipient must hold the shares and be entitled to the exemption in the Wealth Tax for the ten years following the donation unless they die within that period.
  • The recipient cannot take actions that significantly decrease the value of the donated shares.

If these requirements are not met, the part of the tax that was not paid due to the reduction must be paid, along with late payment interest.

This exemption aims to facilitate the intergenerational transfer of family businesses, promoting the continuity of economic activities.

Furthermore, the aforementioned article 33.3 c) of the LIRPF declares that the capital gain realized by the donor upon making the donation, which would otherwise be subject to tax and not exempt, is not subject to tax. Instead, it must be taxed as a capital gain in the Personal Income Tax of the donor of the shares.

Although the literal wording of this article 33.3 c) is clear, there has always been doubt as to whether this non-taxation is 100% or, on the contrary, proportional to the percentage of affected/non-affected assets of the donated shares. Until now, the General Directorate of Taxes (DGT) had expressed its opinion on several occasions, but not in a clear manner.

The Resolution of the TEAC dated 29/05/2023

In this Resolution, the TEAC considers that, in the donation of shares in a family-owned company, within the scope of article 20.6 of the LISD, the non-taxation of the capital gain in the Personal Income Tax for the donor is not 100%, but rather in the percentage corresponding to the ratio of affected/non-affected assets of the donated shares.

It is evident that this interpretation, which resolves in favor of proportionality, thereby making the donation much more burdensome for the donor of the shares, will make donations of this type much less attractive.

It is important to note that this is a Resolution of the TEAC and, therefore, it is a relevant criterion. However, since it is not yet a repeated criterion, it does not constitute consolidated doctrine under article 239 of the General Tax Law (LGT). It remains to be seen how it evolves from a jurisprudential point of view.

Arguments contained in the Resolution of the TEAC

In its Resolution, the TEAC considers that the deferral of the capital gain does not apply to the entire gain, but only to the part corresponding to the value of the shares taking into account their affected status. From a purposive interpretation of the tax incentive, which seeks to facilitate the transfer of family businesses without tax obstacles, it is concluded that the deferral should only apply to the affected elements. The TEAC understands that the reasoning given by the Supreme Court for the application of proportionality in the Inheritance and Gift Tax is perfectly applicable to the case of the Personal Income Tax, since in all three taxes (Personal Income Tax, Inheritance and Gift Tax, and Wealth Tax), although they are different figures, the purpose pursued is the same: facilitating the transfer of the business.

Furthermore, the TEAC disagrees that the fact that the benefits provided for in the Inheritance and Gift Tax and the Wealth Tax differ from those of the Personal Income Tax (permanent exemption versus temporary exemption) affects the decision to apply or not the rule of proportionality of affected assets. The purpose is identical in all taxes: facilitating the transfer of the business. It is important to note that throughout the text, reference is made to the term “business,” a concept that is difficult to separate or exist outside the scope of an affected status. In other words, the pursued business continuity only makes sense within the scope of affected assets and not non-affected assets.

On the other hand, the TEAC also rejects the argument of double taxation in case the deferral is not applied in its entirety. Article 36 of the LIRPF provides for the donor’s subrogation in the lucrative acquisitions referred to in article 33.3 c) of said law, so that subrogation will only occur with respect to the value of the shares corresponding to the affected status. Therefore, since there is no subrogation regarding the portion of the shares that are not affected (a new price and acquisition date are established), there will be no double taxation when these shares are subsequently transferred.

Conclusion

In summary, the TEAC considers that the application of the proportionality rule of affected assets underlies the second paragraph of article 33.3 c) of the LIRPF, and that this rule would be meaningless if the deferral were applied to the entire gain, regardless of its affected status.

As mentioned, although this resolution may have a very significant negative impact on the donation of shares in a family-owned company, it is important to note that it is not yet consolidated doctrine, and its jurisprudential evolution will need to be followed.

We are at your disposal for any additional consultation or specific advice related to this TEAC Resolution or any other legal or tax matters concerning family businesses. You can leave your inquiry by clicking here.