How should a Company’s shares or interests be valued for Tax purposes?

The valuation of shares or participations company’s valuation is a requirement for tax purposes due to various circumstances that may arise in the lives of citizens and businesses. Correctly determining the value from a tax perspective depends on the circumstances that require the valuation, such as the sale of shares, a donation, an inheritance, a merger, a non-monetary contribution, or the dissolution of the company, among others. This means that there is no single valuation method, and it can be a complex process depending on the case in question.

Cases requiring the valuation of a company’s shares or stocks for tax purposes

The valuation of shares and interests is required for tax purposes, among others, in the following cases:

• Obligation to file the Wealth Tax Return(to be filed within the same period as the Personal Income Tax Return) and, where applicable, the obligation to file the Temporary Solidarity Tax Return on Large Fortunes (to be filed in July): the valuation method will depend on whether the shares or interests are in entities listed on organized markets, that is, whether they are listed on the stock exchange. The method is determined by the Wealth Tax Law.
• Transfer of shares or stock for consideration When a partner decides to sell their shares or stock in a company, their value must be calculated. This will determine the capital gain or loss to be declared for personal income tax (IRPF) or corporate income tax (CIT), depending on the individual or legal entity. The value will be determined by the Personal Income Tax (IRPF) or Corporate Income Tax (CIT) Law, as applicable, but minimum tax values are established for each case.
• Transfer of shares or stocks free of charge “inter vivos” or “mortis causa” to heirs: In family businesses the ppartners It’s crucial. The valuation of shares and interests is essential to determine their value for inheritance purposes and during the lifetime of the shareholders. Furthermore, it’s necessary to take into account the reductions and bonuses available in each autonomous community that can improve state tax benefits.
• Incorporation of new partners in capital increases with non-monetary contributions: It is necessary to determine the fair value of the shares or interests to be assigned for the purposes of the exchange.
• Mergers: It is necessary to know the value of the shares or stocks of both the acquiring and the absorbed company to calculate the correct exchange of securities.
• Issuance of new shares or participations: When a company issues new shares or participations, it is necessary to determine their issue value and the “ex-ante” and “ex-post” value of the shares or participations, that is, their value before and after the capital increase, which also determines the value of the subscription or assumption rights.
• Liquidation of the company When a company is liquidated, it is necessary to determine the value of the partners’ shares or interests in order to distribute the company’s net assets.

How are shares and interests valued under the Wealth Tax Law and the Personal Income Tax Law?

According to the Private Property Law, this will be carried out at the theoretical value resulting from the last approved balance sheet, provided that the balance sheet has been subjected to review and verification, whether mandatory or voluntary, and the audit report is favourable.

In the event that the balance sheet has not been audited or the audit report is not favourable, the valuation will be made based on the highest of the following three values:

• The nominal value of the shares or interests.
• The theoretical value resulting from the last approved balance sheet is the portion of net equity corresponding to each share or participation, taking into account certain corrections established in commercial legislation.
• The value resulting from capitalizing at a rate of 20% the average of the profits of the three fiscal years closed prior to the date of accrual of the Tax: The following formula may be used to calculate said capitalization:

According to the Personal Income Tax Law, unless there is proof that the amount actually paid corresponds to what independent parties would have agreed under normal market conditions, the transfer value may not be less than the higher of the following two:

• The net worth values corresponding to the transferred securities resulting from the balance sheet for the last fiscal year closed prior to the date the tax actual occurs.
• The result of capitalizing at a rate of 20 percent the average of the results of the three fiscal years closed prior to the date the tax accrues.

Let’s see an example in the event that a taxpayer of the Wealth Tax is required to declare his or her shares.

The company details are as follows:

• Share capital:60,000 €
• Total number of shares:30,000
• Theoretical value resulting from the last approved balance sheet (2022):€75,000
• Results of the last three exercises:
  • either  2022 Results:€12,500
  • either  2021 Results:11,000 €
  • either  2020 Results:7,500 €

Taking into account the above data, we can make the following assessments:

• Theoretical value:75,000 € / 30,000 = 2.50 € per share.
• Face value:60,000 € / 30,000 = 2 € per share.
• Value resulting from capitalizing the company’s average profits at a rate of 20%of the three fiscal years closed prior to the tax accrual date:
  • either  Sum of net profit for the last three financial years: €31,000.
  • either  To the previous resultWe apply the capitalization formula at 20%: (31,000/3) / 20% = €51,666.67, which divided by 30,000 shares = €1.72 per share.

As we can see, the highest value is the theoretical value (€2.50/share), so this would be the value to be considered for the purposes of this taxpayer’s Wealth Tax Declaration.

What other valuation methods exist?

In addition to the valuation methods established by the Assets Law and Personal Income Tax, there are other, more complex valuation methods that allow for a valuation more in line with the market value of the company’s shares or interests, which is enforceable between independent parties. These methods are based on an analysis of the following factors:

• Real net asset value: It is based on the valuation of the company’s assets and liabilities at their market value.
• Present discounted value of cash flows (also called “Free cash-flow”): It is based on the valuation of the company’s expected future cash flows.

In conclusion, the valuation of a company’s stocks and shares is essential in a multitude of scenarios. The application of the appropriate method to determine value will depend on the specific circumstances of each case. It is essential to understand the commercial, accounting, and tax regulations that govern these valuations in order to avoid problems with potential tax assessments from the Administration due to discrepancies with the value declared by the parties.