Do I have to declare my shares in a company for wealth tax purposes?

As is well known, the voluntary period for filing Personal Income Tax (hereinafter, “IRPF”) and Wealth Tax (hereinafter, “IP”) for the 2023 tax year opened on 3 April. This voluntary filing period will end on 1 July.

In this blog post, we are going to focus exclusively on the IP and, specifically, on the obligation to declare in said tax the value of the shares or stocks (hereinafter referred to in general as “shares”) held in a company.

Am I obliged to file Wealth Tax?

As is the case with personal income tax, not all individuals resident in Spain are required to file the IP.

Specifically, Article 37 of Law 19/1991 of 6 June 1991 (LIP) establishes the obligation to file when either of the following two circumstances are met:

• The amount of this tax, after applying any deductions or rebates that may apply, would be paid; or
• The value of their assets or rights according to the valuation rules of the LIP is higher than €2,000,000, although this limit varies in the communities with a foral regime.

In relation to the first of these limits, it should be borne in mind that, in order for the tax liabil-ity to be paid, it must be higher than the minimum exemption.

This exempt minimum, as a general rule, amounts to €700,000, as established in Article 28 of the LIP.

However, this minimum amount can be modified by the Autonomous Communities, as they have the power to do so. As an example of this issue, we should remember that the minimum exemption in the Valencian Community is only €500,000.

For this reason, the taxpayer’s regional tax residence will have to be taken into account in order to verify this, as it will depend on the Autonomous Community in which the taxpayer resides.

What is the value at which I must declare my shares for Wealth Tax purposes?

This question is settled in Articles 15 and 16 of the LIP, depending on whether shares in listed or unlisted companies are involved.

For listed companies, Article 15 indicates that they should be computed according to the average trading value of the last quarter of the year, which will be reported annually by the Ministry of Finance and Public Administration.

In the case of unlisted companies, article 16 of the LIP requires us to make a distinction according to whether they are audited or not.

• If the company is audited (even voluntarily), the valuation will be that resulting from its theoretical value based on its balance sheet at the end of the financial year. This value is obtained by dividing the net worth by the total number of shares.
• If the company is not audited, the valuation will be the higher of the following three options:
  • Its nominal value.
  • The theoretical value of its balance sheet at the end of the financial year.
  • The value of capitalising at 20% the average profits of the three financial years ended prior to the date on which the tax becomes chargeable.

Are there any exemptions for these actions in the PI regulation?

Yes, there is an exemption regulated in article 4. Eight. Two of the LIP which regulates the so-called “family business exemption“.  

Although there is no consensus on its definition, we can define a “family business” as one in which the ownership and/or management is in the hands of a family that has a vocation for continuity, as they want the business to continue in the future in the hands of their descendants (Barroso, et al., 2012).

However, the aforementioned provision establishes certain conditions that must be fulfilled in order for the exemption to apply:

The article itself also regulates a number of conditions for the value of the shares of the “family business” to be exempt, and these are as follows:

a. That the entity in which the shareholding is held does not have the status of an asset-holding company.

In other words, the activity carried out by the company must be different from the mere management of movable or immovable property.

For these purposes, movable or immovable property shall be deemed to be managed if any of the following conditions are met for more than 90 days during the financial year:

1. More than half of its assets consist of securities.
2. More than half of its assets are not assigned to business activities, as indicated in the IRPF regulations (very important in relation to property rental activity, as it is required to have an employee with a full-time employment contract).

That said, we must point out that there are a number of values that are not taken into account when analysing these circumstances, which are as follows:

• Those held in order to comply with legal regulations (a very important exception for Venture Capital Companies).
• Those that incorporate credit rights arising from the contractual relations of the economic activity carried out.
• Those held by securities firms for the purpose of carrying out their objects.
• Those that grant at least 5% of the voting rights and are held for the purpose of di-recting and managing the shareholding, provided that the company has the materi-al and personal means to do so (a very important exception in holding-type compa-ny schemes).

b. Questions relating to the percentage shareholding in the company.

The precept also establishes two well-differentiated limits on the percentage of participation:

• When held individually, at least 5% of the share capital is required.
• When jointly owned with family members (up to the second degree), this percentage of shareholding rises to a minimum of 20%.

c. Exercise of managerial functions and remuneration.

Finally, the article requires that the taxpayer must exercise management functions in the company and, in addition, receive remuneration representing more than 50% of his total net income from work, business and/or professional activities.

If all these requirements are met, would the exemption be 100%?

Unfortunately, no. When we meet the above-mentioned requirements, we only obtain the right of access to this exemption.

In addition, the legislator requires another condition for applying this exemption, which is that of its scope (also known as the “proportionality rule”).

Specifically, the aforementioned article 4. Eight. Two establishes that the exemption will only reach the value of the shareholdings in the part corresponding to the proportion existing be-tween the assets necessary for the exercise of their business or professional activity, less the amount of the debts deriving therefrom, and the value of their net assets.

Schematically, to obtain the percentage of the exempt value (“P”), the following formula has to be applied:

P = (Assets necessary for the activity – Debts of the activity) / Net Worth

To improve the understanding of this limit, it is best to look at it with a practical example. Let’s assume a family company in which Paco is a shareholder and holds 100%. The company’s balance sheet at the end of the year is made up of necessary and non-necessary assets as follows:

In the above case, assuming that the requirements for exemption are met, the exemption would be 70%, as it is the result of the following quotient:

P = ((8.000.000 – 1.000.000) / 10.000.000) x 100 = 70%

Accordingly, Paco will declare in his IP his shares in the family business as follows:

• Exempted: 70% of €9,000,000, i.e. €6,300,000
• Non-exempted: 30% of €9,000,000, i.e. €2,700,000

As we can see, when it comes to applying the exemption for the “family business” provided for in the IP, it is not possible to generalise, as there are many variables that taxpayers must take into account, analysed on a case-by-case basis.

Do you need advice? Access our area related to the declaration of company shares in the Wealth Tax:

Tax Advice | Devesa Lawyers