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In the previous article we analyze the concept of asset entity for the purposes of Corporate Tax and the Tax consequences that arise from being considered as such.
However, as we have already indicated, the assessment of whether an entity is a Patrimonial Entity or not is carried out according to different criteria depending on the tax we are referring to, and, therefore, the consequences are also different.
In this article we discuss what is considered a Patrimonial Entity in the Wealth Tax and, therefore, in the Inheritance and Gift Tax which makes a reference to said rule.
Asset Entity for the Purposes of Wealth Tax and Inheritance and Gift Tax
Article 4.Eight.Two of the Wealth Tax Law defines as a Patrimonial Entity that Entity, whether or not a Company, whose main activity is “the management of movable or immovable property”.
And, for the purposes of this Tax, the Company is considered to have as its activity the management of assets and, therefore, not to carry out an economic activity, when for more than 90 days of the financial year, any of the following conditions occur:
- That more than half of its assets consist of securities.
- Or, that more than half of its assets are not related to economic activities.
And what is meant by an asset used in an economic activity for the purposes of the Wealth Tax?
The Wealth Tax regulations do make an express reference to the Personal Income Tax regulations, which, as already analyzed in the previous post, consider the following to be assets related to an economic activity:
- The property where the taxpayer’s activity is carried out.
It is important to remember the special complexity posed by the particular cases of real estate buying and selling or real estate development.
- The goods intended for the economic and sociocultural services of the personnel serving the activity.
- Any other assets that are necessary to obtain the respective returns.
And, in case there was any doubt, the asset regulations add that items intended exclusively for the personal use of partners, administrators and other kinship groups will not be affected.
What Happens to Company Shares and the Establishment of Loans and Deposits?
In this case, and despite the fact that the Personal Income Tax Law expressly regulates that in no case will “the assets representing the participation in the own funds of an entity and the transfer of capital to third parties” be considered as assets, the Wealth Tax rule (article 6.3 of the regulation) does allow that this type of asset may be considered as assets, provided that the attachment can be proven.
Requirements of Affection and Necessity.
In this regard, the courts and administrative bodies have ruled on several occasions that they require (i) a real and effective impact on the activity and (ii) proof of the necessity of these elements in order to carry out the economic activity.
Specifically, the Directorate General of Taxes has determined in several consultations that “it is one thing for a certain asset to have been obtained in the exercise of an economic activity and another for it to be allocated to the same.”
Furthermore, he clarified that, although the wealth Tax allows shares, deposits or loans to be considered as assets, it will always require “the exclusive use of an asset in a specific economic activity,” that is, its effective allocation to the activity, in addition to the aforementioned requirement of necessity for obtaining the respective returns.
And, to assess this “necessity”, the verification and inspection bodies of the Tax Administration “may take into consideration, if they deem it appropriate, the proportionality, volume or permanence of the assets in question in relation to the total assets of the entity and the type of activity to which it is dedicated, among other economic or financial parameters of the entity that they consider appropriate for the formation of their opinion.”
How Do These Criteria Affect My Company’s Treasury and Accounts Receivable?
As can be seen, the definition of an affected asset leaves open the possibility that any element may be considered unnecessary to obtain returns.
This regulatory framework creates numerous practical problems with the balances of current accounts, cash accounts, and other financial investments.
Often, the Tax Authorities demand that the balances and movements of the accounts correspond to the vicissitudes of the company and ask to justify that they serve the purposes of the activity, even going so far as to consider, on occasion, that a high bank balance is not justified as necessary to carry out a certain economic activity.
In this regard, it is worth mentioning Resolution No. 1485/2016 of the Central Economic-Administrative Court of July 11, 2019, which concluded that “financial fixed assets, temporary financial investments and the treasury from the investments of the companies referred to in Background cannot be considered assets affected by the TRLIRPF, as expressly established in the TRLIRPF, unless express proof of the amount required for treasury or financing that is rationally necessary for the exercise of the economic activity.”
And, that same body, in its Resolution of March 12, 2015, came to validate the accounting/financial criterion that stipulated that, only to the extent that the average bank balance exceeds the working capital needs, it is possible to speak of the existence of idle or unnecessary treasury for said activity and, therefore, excluding it for the purposes of calculating the affected assets.
Supervening Patrimonial Company
It may happen that an entity that has been making profits and has not distributed dividends among its partners, if those profits have not been invested in the economic activity itself and have remained on the balance sheet as financial investments, banks or cash, these may be considered as assets not related to the economic activity and cause the “supervening” equity of the company.
To this end, the Wealth Tax Law establishes an “escape clause” which stipulates that the resulting balance of non-affected assets must be reduced:
- in the amount of profits obtained in the current year and in the previous 10 years, derived from carrying out economic activity.
- and in the case of dividends received from investee companies if at least 90% of the subsidiary’s income derives from economic activity. In that case, they will be considered as profits from economic activity for these purposes.
In this way, a company is prevented from being considered a holding company simply by maintaining in its assets the profits obtained in the last 10 years.
What Are the Consequences of my Company Being Considered a Patrimonial Entity?
The Wealth Tax regulations provide for an exemption of the value of shares in entities, provided that a series of conditions are met, including that the company in which the share is held is not considered a holding company as of December 31.
However, it is important to note that being entitled to apply the exemption in the Wealth Tax is one thing, and being entitled to 100% of the exemption is another.
This means that, once it can be concluded that an entity is not a holding company and, therefore, has the right to apply the aforementioned exemption, it will be necessary to determine what percentage of exemption it can apply.
In this regard, it would be necessary to assess which part of that asset is indeed related to the economic activity (and therefore has the right to the exemption), and which part is not and would be excluded from the exemption.
In other words, if my Company is ultimately considered a holding company because it meets these conditions, keep in mind that we might have to include it in the shareholder’s wealth Tax return, with the value obtained according to the Wealth Tax regulations, and if we exceed 700,000 euros in wealth we will have to pay Tax on it, therefore, special attention must be paid to all these requirements and calculations to avoid surprises with the Tax Office.
Remember that, as we said in the previous article, the Tax Agency can review and settle the last 4 years with the corresponding interest in the case of supplementary settlements and the possibility of even facing the opening of sanctioning proceedings.
And, with regard to Inheritance and Gift Tax, state regulations provide a 95% reduction in said Tax in those cases in which there is a gratuitous transfer (mortis causa or inter vivos) of shares in entities, provided that said shares were entitled to exemption from Wealth Tax.
Therefore, whether or not a particular company is considered an asset entity also affects the amount payable in the event of a donation or inheritance of its shares.
All of this highlights the crucial importance, when structuring a business group and for proper succession tax planning, of analyzing these aspects in advance and seeking proper advice.
