Family business and wealth tax: how to face the year end

Family businesses take advantage of certain tax breaks in regards to Wealth Tax (“WT”) and Inheritance and Donations Tax (“IDT”) in order to ease the transfer to future generations as well as its existence throughout time.

Such tax breaks in WT and IDT are subject to meeting certain requirements on the 31st December of each year which is when the WT is accrued.

It is important to verify each year that such requirements are being met in case any adjustment must be made. Not meeting with the requirements can affect the shareholders in their WT and IDT but also to any possible tax breaks they might have taken advantage of previously by receiving family business shares as a donation or inheritance since these must be owned for a minimum amount of years.

The analysis must include:
– Confirmation that the compensation received by the family member or members that hold directorship positions at the company amounts to over 50% of all his personal work-related income.

Each shareholder must check if the degree of kinship that he has with the person who holds the directorship position allows him to take advantage of the tax break on WT.

– Determining what percentage of assets of the company are really used by the company to perform its business.

• First it must be ensured that the company is not considered an asset-holding company.

A company is deemed to be an asset-holding company if during more than 90 days in a tax year more than half of its assets are not used by the company to perform its business. If such assets are shares in other companies which do not amount to more than 5% of their voting rights and are not owned with the purpose of managing such stake, the company would be considered to be an asset-holding company.

• Secondly, to determine more precisely the actual percentage of assets that are used to perform the business. Special attention must be taken with group loans, financial investments and cash in accounts.

Carrying out this study of the company and the family will result, in many occasions, in taking some kind of actions in regards to the company’s investment policy, group structure, dividend distribution, compensations, etc.