We, and particularly the politicians, find it difficult to stop talking about our family businesses and we refer to them as the lifeblood of our economy, the thermometer of our growth, the driving force behind job creation, almost our national source of pride.
But, in reality, do they get so much attention and loving care? Are the protection and incentives that they get from the taxpaying point of view effective? I’m afraid that, although there are many specific regulations which in some way are aimed at the family business, their efficacy in terms of effective benefits is pretty much obstructed by the number of restrictions and limitations which have been introduced by either regulation or administrative doctrine. There are so many situations where we end up walking into insuperable obstacles that advancing in efficient planning on occasion requires a real balancing act, a gymkhana of drawbacks, provisos which can only be overcome with creativity and imagination.
In order to progress in correct planning, therefore, it usually takes advisors to the ultimate need to inform the businessman, the client, of their doubts and uncertainties, and the advisability of making binding tax consultations which make it possible to restructure while we are all getting better, so that we will not be exposed to the probable absence of understanding from the Tax Inspectors vis-à-vis the arguments in justification from the businessman, and not even this option is a panacea, when our General Tax Directorate has decided that it is not enough to make us wait six months for a reply, now it serves us up a desert crossing which may last more than a year with the result that the immediacy is diluted and the timeliness and advisability of the decisions to be taken lose all their value.
The reality, in any case, is that the family business has protective measures, especially as regards the exemption to Property Tax and the reduction in the tax base of Inheritance and Gift Tax. Concentrating on this specific question, each and every one of the heads of our family businesses notice at a moment in the lifetime of the companies, one of the fundamental debates, which is none other than that of deliberating on the inheritance. Who will inherit the business? Who will run the business when we who are now the managers are no longer around? Second generations overlapping the third…., the much-recommended solution of family protocol, and so on. Now, as if all this, on its own, were not sufficient reason for concern, as it involves beyond all doubt a factor in family stress and, on many occasions, a great deal more, to this is added, as an overwhelming extra factor the pressure of the tax payments that the inheritance finally agreed and provided for will mean for the family treasure chest, to the extent that on occasion it compromises the future viability of the business project or exercises a decisive influence on the will of the family to streamline the business with everything that that involves.
The current mechanisms which validate the neutral inheritance of the family business pivot around exemption from Property Tax, but the particular detail that the above-mentioned exemption may be total or only partial is fundamental when validating the existence of a proper and optimal situation in preparation for a possible inheritance. Let us analyse this aspect of our taxation and let us start, as we of course must, by considering the current allowance in the Canaries in Inheritance and Gift Tax as temporary – I would be pleased (and we will consider this in the future) if, once and for all, somebody dared to armour-plate allowances and/or exemptions both in Property Tax and in Inheritance Tax which were in perpetuity and became permanent over time.
Therefore, proper planning for the inheritance of the family business requires, in the first place, ensuring the maximum exemption in Property Tax. When analysing the regulation of this exemption, we come upon a goodly number of limitations which in the end reduce the determination of the coefficient which will finally tell us what percentage of the business is exempt and therefore protected for Inheritance Tax. It is sometimes discouraging to discover that maximising the exemption may be incompatible with growth in an orderly and structured manner, limiting liabilities and unnecessary exposures and diversifying the corporate assets and investments.
Thus, the undistributed profits which are not reinvested which exceed those accumulated over the last ten years are negative rather than positive. The same thing occurs with the real estate, which has been created through years of sacrifice which must be part of an independent business activity of leases in order for it to be positive rather than negative. What should we say about financial investments in capital markets or simple powerful liquidity positions, and holdings in other companies, which may also end up being negative? And of course, we should not even mention the strategy of planning for the growth of the company with a structure of holding companies which brings together the family stockholdings and which manages in an orderly manner the management and global holdings in different family business projects. In this latter case, the exemption must be won in this equity holding company and achieving it fully or almost fully may become an exercise of the greatest difficulty.
In short, excellence, having been able to grow by accepting risks, having wanted to diversify and generate a safety net, in the form of savings funds and provisions, which will ensure survival in the long term and the wellbeing of the members of the family who have contributed with the effort of several generations to getting to where they now are do not appear to be rewarded.
It is true that all these unnecessary stumbling-blocks and complications can and must be overcome although this may involve making a silk purse out of a sow’s ear and waiting for common sense to prevail and that the new doctrine of the General Directorate of Taxation and Jurisprudence, which we are anxiously awaiting, reverses a few recent interpretations, which have undermined the need to give a solid foundation to family SMEs. Today, structuring, diversifying and growing in an organised and secure manner is insufficiently rewarded but involves the generation of additional difficulties when planning. We need protection in tax planning which is more empathetic towards the bold efforts of so many families.
Would it not be a great deal simpler to validate a full exemption in Property and Inheritance Tax for all those business structures of a family origin, with the only requirement being that the family should continue to own and manage the business without growing and becoming richer, evolving towards the management of their own assets, often created on the basis of effort, creativity and healthy ambition, being a handicap, but, on the contrary, a public and institutional recognition of the priceless effort of so many businesspeople? My case rests.