Ownership and directorship in family businesses
In May and July of this year, the Spanish Supreme Court handed down two judgements in which the conclusion it reaches is that to benefit from the so-called “family business” regime, it is not necessary for the person forming part of the family group who performs actual directorship functions—receiving in respect of such functions the greater part of his/her earned income—also to have an ownership interest in the capital of the company. It is sufficient for such person simply to form part of the kinship group.
The so-called “family business” regime envisages entitlement to an exemption from Wealth Tax (IP) and a 95% allowance against inheritance and gift tax (ISD), for both inter vivos transfers (donations) and mortis causa transfers (inheritance) made to certain family members, and is applicable to shares (SA or SL) in companies, subject to compliance with certain tax requirements.
These include the requirement that the ownership interest held by the taxpayer, deceased or donor, in the capital of the entity should be at least 5% calculated at individual level or 20% calculated collectively along with that corresponding to his/her spouse, second-degree ascendants, descendants or collateral relatives (third degree for the purposes of inheritance and donations tax in Cataluña), irrespective of whether the kinship is based on consanguinity, affinity or adoption. Another requirement is that the taxpayer should perform directorship functions in the entity, receiving for such functions compensation which accounts for more than 50% of his/her total income from business activities and work performed personally.
The rule also stipulates that when the ownership interest held in the entity is joint, along with that of any of the persons forming part of the kinship group referred to in its provisions, the requirements with respect to directorship functions and related compensation must be met by at least one of the persons in the kinship group, even though they are all entitled to apply the regime. The Supreme Court’s judgement related to a case in which there was a transfer by inheritance of shares in a family business to two daughters and a usufruct in favor of the spouse, it being the two sisters (daughters of the deceased) who had assumed the directorship functions in the company for many years.
The deceased, along with her spouse, held a 100% stake in the company, with no ownership interest being held by the daughters by whom the directorship functions were performed.
The Court concluded that when considering whether the person assuming directorship functions is or is not required to have an ownership interest, the rule should be interpreted from a teleological perspective, in such a way that if the aim is to offer certain benefits to family companies to facilitate their transfer, insofar as is possible, thereby avoiding a situation in which they are forced to dissolve in order to pay the tax, the logical approach—in the Court’s view—is to interpret the rule in a manner favorable to the achievement of this aim.
According to the Court, since it is not expressly stated in the rule that the person performing directorship functions (in a kinship group) must be a shareholder, given the reality behind the case, the regime in question should be applicable, since this is precisely one of the situations, in the Court’s view, which this tax incentive was designed to cater for.
In short, the Supreme Court, seeing that the rule was insufficiently specific in its terms, based its conclusion on its spirit and purpose, which is to facilitate the transfer of family businesses.
Garrigues Family Business Department
This article was published on Diari de Tarragona
