The special tax regime for family businesses is a set of tax benefits designed to promote generational continuity and ensure tax neutrality when transferring ownership. It includes, among others, exemption from Wealth Tax and a reduction in Inheritance and Gift Tax.
Specifically, Article 4.8 of Law 19/1991 on Wealth Tax exempts shares from wealth tax provided the company carries out a genuine economic activity and allocates the majority of its assets to that activity. For its part, Articles 20.2.c) and 20.6 of Law 29/1987 of December 18, on Inheritance and Gift Tax, provide for a 95% reduction of the taxable base.
To qualify for this special tax regime, several requirements must be met, including that the company carries out a genuine economic activity (mere ownership of movable or immovable assets is insufficient), that at least 50% of its assets are dedicated to the business, and that the family member holds a minimum shareholding in the company (at least 5% individually or at least 20% jointly with family members). Furthermore, one of the family members must hold an effective management position and receive remuneration exceeding 50% of their income from employment and economic activities to demonstrate a genuine connection to the company. Finally, the acquirer must hold the shares for at least ten years. Continuous compliance with these requirements is essential to qualify for the exemption from Wealth Tax and the reduction in Inheritance and Gift Tax.
The draft bill presented by the Community of Madrid regarding the Family Business Law introduces several modifications to Inheritance and Gift Tax at the regional level. The main change is the increase in the applicable reduction to the taxable base, which would rise from 95% to 99% in cases of acquisition, whether by inheritance or donation, of sole proprietorships, professional practices, or shares in entities. This reduction would be conditional upon the beneficiary maintaining the acquired assets in their estate for a minimum period of five years.
It is also important to highlight the principle of proportionality of the acquired wealth, which limits the application of tax benefits to the assets strictly necessary for the business activity. In practice, this means that, in the case of transfers of shares in a family business, the State Administration excludes from the benefit (exemption from Inheritance and Gift Tax) assets considered non-business assets, "too much wealth," or speculative. Classic examples of such assets are the partners' homes or private vehicles, financial investments, and the company's cash balances. Under current state regulations, such non-business assets would fall outside the scope of the tax benefit, with the reduction applying only to the value of the share corresponding to the assets necessary for the business activity.
The reform proposed by the Community of Madrid allows for the application of the 99% tax credit on the taxable base corresponding to non-business assets in the company, provided that their acquisition cost does not exceed the amount of profits from the economic activities obtained by the entity in the last ten fiscal years. With the regional reform, assets such as cash, listed shares, or government debt are considered business assets as long as their acquisition cost is covered by the profits obtained in the last ten years.
In short, the regional reform strengthens tax neutrality in the transfer of family businesses, making the treatment of accumulated liquidity more flexible and objectifying the business asset criterion through the undistributed profits rule. However, these improvements are limited exclusively to Inheritance and Gift Tax. They do not apply to Personal Income Tax (IRPF) in the case of gifts, nor to Wealth Tax, where the Community of Madrid must respect, at a minimum, the criteria established in state regulations and in the Wealth Tax.