Allocation of financial assets in companies for the purposes of the family business reduction in gift tax

Last January, the Contentious-Administrative Chamber of the Supreme Court ruled on a cassation appeal regarding the scope of the 95% reduction in the ISD taxable base for the transfer for profit of a family business that was the owner of financial assets

The Supreme Court, in its ruling of 10 January 2022, analysed the factual situation of a donation of shares in a family business made by a mother to her son, who had benefited from the 95% reduction provided for in article 20.6 of Law 29/1987, of 18 December, on Inheritance and Gift Tax. Specifically, the financial assets of the donated company included shares in investment funds.

According to the Tax Administration’s inspection body, this type of assets cannot benefit from the 95% reduction, as they are financial assets unrelated to the economic activity of the company and, therefore, cannot be classified as assets assigned to such activity. However, the Supreme Court ruling is very relevant, as it establishes doctrine in relation to the allocation of these financial assets to the economic activity of family businesses, stating that “In particular, the needs of capitalisation, solvency, liquidity or access to credit, among others, do not in themselves oppose this idea of allocation“, admitting that these needs can justify the allocation of certain financial assets to the business activity.

Consequently, the taxpayer must be able to justify that the financial assets are necessary for the company’s activity, but, where appropriate, the burden of proof to the contrary must be on the tax inspectorate to prove otherwise.

Finally, it should be noted that in the coming months we will have to keep a close eye on the evolution of this issue and its application by the administration, as well as to see whether the criterion established will also be extended to Wealth Tax.