Limitation of the 95% reduction in ISD to company transfers, which have a turnover of less than 10 million euros.

One of the measures published in the preliminary draft of the Law to Accompany the Budgets of the Valencian Community which will enter into force in 2017, is the limitation of the 95% reduction in the Tax on Inheritance and Donations (hereinafter, ISD) for the transmission of family businesses or businesses, only to those with a turnover of less than 10 millions of euros.

The Autonomous Government has defended this proposal as an improvement for SMEs, since the Valencian business fabric is mostly made up of them. However, companies that have a figure greater than 10 million euros, may apply the 95% reduction for the transmission of family businesses or businesses that are in state regulations. But, if they choose to apply state regulations, the other tax benefits regulated in the regional regulations cannot be applied.

We must remember that the Tax on Inheritance and Donations, being a tax assigned to the Autonomous Communities, these can regulate reductions, deductions and bonuses in addition to the rates and coefficients of pre-existing equity.

Therefore, the autonomies always they can improve the tax benefits already established in state regulations or they can also create their own tax benefits, as is the aforementioned 95% reduction in business transfers. Being a reduction of the Autonomous Community, it is incompatible with others regulated by state regulations.

In this sense, we mention the binding consultation of the General Directorate of Taxes V3054-16, published on July 1, 2016, where it tells us that in the case of choosing to apply the regulations of the Autonomous Community, all the regulations approved by this community in this regard, and the most favorable precepts cannot be applied exclusively and the unfavorable ones cannot be applied.

That is, families that receive companies where their turnover is over 10 million euros, if they want to apply the state reduction of 95%, the other tax benefits of the regional regulations may not apply, such as the reduction by kinship of the tax base of 100.000 euros, or the bonus in 50% quota planned for the year 2017 (in the case of donations, it will only be applied if the donor has a pre-existing estate of less than 600.000 euros) .

If we reflect on this tax measure undertaken by the Consell based on the report made by the Committee of Experts, on the one hand we clarify as a direct effect, economic damage and discrimination against large companies when transmitting their business to their families, and on the other hand as an indirect effect, the disincentivation to the growth of companies, with the consequent productive stagnation.

Also distinguish that this is only a preliminary draft, so that new changes may arise. However, the trend set by the Committee is increase taxation for large companies, and raise the tax rates for higher incomes.

Until the Law of Accompaniment of the Budgets of the Valencian Community enters into force, foreseeably in January 2017, such reforms will not be undertaken.

Now, in the case of family business transmission, we will have to make calculations, since in some cases it will be more convenient to apply the state regulations, of which we can apply the 95% reduction to the net value of the company that is transmitted provided that said amount is maintained for a period of 10 years , or apply the regulations of the Valencian community, where we can apply the reduction of 100.000 euros if our degree of kinship is included in group II (descendants and adopted twenty-one or more years, spouse, ascendants and adopters) and the bonus in 50% fee.

Also note that the requirements to apply the reduction are much more restrictive in the state regulations that in the autonomous one. One of the differences is in the difference of the years required that the heir / donor must keep the company active, the Valencian regulations establish 5 years, while the regional regulations establish twice.

As an example we show the comparative in the transmission of a company applying state regulations and regional regulations, differentiating two scenarios, depending on fulfilling the requirement of a small company, or not.

Not being ERD:

Table1Being ERD:


How to Live Aligned with conclusion of all measures undertaken by the Consell, we highlight the reduction of the bonus from 75% to 50% in inheritance, the elimination of said bonus in donations, and the 95% reduction limitation for the transmission of family businesses only to companies that have a turnover of less than 10 million euros. Consequently it leads to a progressive recovery of ISD, that in the near future it will be fully recovered, as the state government is coming, by introducing a minimum for all taxpayers, regardless of the territory where they reside, given the wide tax divergences that exist between the Autonomous Communities.

Teresa Giron Saiz

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