Spanish Supreme Court allows financial assets to be counted as held for purposes of family business activity

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On January 10, 2022, the Spanish Supreme Court issued a judgment regarding the application of inheritance and gift tax benefits provided for family businesses in cases where financial investments are part of the assets held by the company. The discussion focused on whether financial assets could be considered as assets related to the economic activity of the family business.

Tax benefits for family businesses

Spanish inheritance and gift tax provides for a reduction in the tax base covering 95%7 of the value of the family business if certain conditions are met. Among these requirements, the company must have been exempt for Spanish wealth tax purposes. Therefore, the tax advantage for inheritance and gift tax purposes requires prior exemption under the provisions of the wealth tax, which is established by reference to the Spanish personal income tax. physical. Spanish personal income tax law specifically refers to assets held in the course of a commercial activity in order to be considered exempt from wealth tax. Therefore, in order to apply the wealth tax exemption and the inheritance and gift tax reduction, taxpayers must prove that they need cash or financial assets for the purposes of the tax. commercial activity and, in this regard, they must prove whether these assets were held for the purposes of the activity carried out.

The precedents of the case

In this case, the tax audit found that the 95% reduction provided for by the law on inheritance and gift tax was not applicable to the value of the family business referred to in the financial investments because, of the n the opinion of the tax auditor, the financial assets cannot be considered as held for the purposes of the activity of the family business. The Economic and Administrative Court and the High Court of Aragon (the family business was located in the Autonomous Region of Aragon) ruled in favor of the taxpayer on the grounds that the conclusion of the tax authorities regarding the lack of involvement in the economic activity of the financial assets had not been sufficiently verified by the tax auditor, and of the fact that, in this case, there were indications that the financial investments met the needs arising from the activity of the company.

Supreme Court Judgment

The main conclusions of the Supreme Court can be summarized as follows:

• The fact that part of the value of the family business is made up of cash or financial assets should not be an obstacle, in itselffor the application of the reduction of inheritance and gift taxes, provided that the requirement of the involvement of these assets in the economic activity of the company is accredited.

• The following indicators could contribute to demonstrating that assets have been held for the purposes of business activity, and therefore these indicators could be considered relevant: the economic context and the sector in which the entity operates; average payment terms for both customers and suppliers; working capital ratios, business investment plans and any other circumstances, in each particular case, that could affect the business’s need to hold cash or cash equivalents.

The Supreme Court clarified that it is entirely reasonable that the cash generated by the activity of the company can be invested in financial assets within the framework of reasonable financial management. In this respect, the burden of proof of the involvement of these assets in the economic activity of the family business cannot be placed on the taxpayer, since it is the tax authorities which have required proof that he there is no such implication and that it is not total in the event that the cash equivalents or financial assets are greater than the working capital requirements or useless for the development of the activity.

In conclusion, the Supreme Court recalls the necessary definitive interpretation of the tax advantages of the family business intended precisely for its protection and its durability, and admits the effectiveness and the implication of the financial assets in the activity of the company. In particular, the Supreme Court affirms that “the need for capitalization, solvency, liquidity or access to credit, among others, do not in themselves preclude this idea of ​​involvement” of this type of assets. to the economic activity of the family business.

This judgment will contribute to the defense of the interests of taxpayers affected by the numerous adjustments made by the Spanish tax authorities which restrict the scope of the tax advantages granted to the family business.

The content is provided for educational and informational purposes only and is not intended and should not be construed as legal advice. This may qualify as “lawyer advertising” requiring notice in some jurisdictions. Prior results do not guarantee similar results. For more information, please visit: www.bakermckenzie.com/en/disclaimers.

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