The main reason why partnerships are formed is in search of tax savings. Within these fiscal effects, the patrimonial society can offer certain advantages to its partners:
- In the first place, they allow the patrimonial assets to be taxed by means of the Corporate Tax. This implies that the administrator can be taxed at the general rate of 25%, instead of the IRPF which can reach 45%. In addition, in the case of a company, it will not be subject to corporate income tax for unproductive real estate, while an individual would have to apply the personal income tax for second homes.
- In certain cases it would even be possible to declare the VAT on the purchase of a property, something that a private individual obviously cannot do. Although for this it would be necessary to allocate it to the "productive" part of the asset.
- The succession of patrimony is facilitated for the heirs.
- Therefore, the asset-holding companies are the classic way of tax savings for large estates.
With regard to more modest estates, the truth is that they may not represent a saving:
- Firstly, because they will apply lower personal income tax brackets. Therefore, they will not benefit from replacing this tax with the corporate tax.
- And secondly, because the incorporation of the company (and its management) has a series of costs.
1.- The concept of patrimonial entity:
A patrimonial entity will be understood as one in which more than half of its assets are constituted by securities or are not assigned to an economic activity, according to the average of the quarterly balance sheets of the fiscal year of the entity.
The concept of asset-holding entity is defined, for corporate income tax purposes, in Article 5.2 of the LIS, in the following terms:
"2. For the purposes of the provisions of this Law, a patrimonial entity and one which, therefore, does not carry out an economic activity, shall be understood to be that in which more than half of its assets are made up of securities or are not assigned, in the terms of the preceding paragraph, to an economic activity."
The value of the assets, of the securities and of the assets and liabilities not assigned to an economic activity will be that which is deducted from the average of the quarterly balance sheets for the year of the entity or, if it is the parent of a group according to the criteria established in Article 42 of the Commercial Code, regardless of the residence and of the obligation to prepare consolidated annual accounts, from the consolidated balance sheets. For these purposes, the money or credit rights coming from the transfer of assets assigned to economic activities or securities referred to in the following paragraph, which have been carried out in the tax period or in the two previous tax periods, will not be computed, if applicable.
For these purposes, the following shall not be computed as securities:
(a) Those held to comply with legal and regulatory obligations.
b) Those that incorporate credit rights arising from contractual relations established as a consequence of the development of economic activities.
c) Those held by securities companies as a consequence of the exercise of the activity that constitutes their object.
d) Those that grant at least 5 percent of the capital of an entity and are held for a minimum period of one year, for the purpose of directing and managing the participation, provided that the corresponding organization of material and personal means is available, and the investee is not included in this section. This condition will be determined taking into account all the companies that form part of a group of companies according to the criteria established in Article 42 of the Code of Commerce, regardless of residence and the obligation to prepare consolidated annual accounts."
A patrimonial entity shall be understood to be one in which more than half of its assets are made up of securities or are not assigned to an economic activity, based on the average of the quarterly balance sheets of the entity for the fiscal year.
To the extent that it can be deduced from the average of the quarterly balance sheets during the tax periods in which the holding is held that more than half of the assets are made up of securities or are not assigned to an economic activity, entity Y will be considered an asset-holding entity in that year and the rule established in Article 21.5.a) of the LIS will apply.
Notwithstanding the foregoing, the sole additional provision of Royal Decree 634/2015, of July 10, approving the Corporate Income Tax Regulations provides, regarding the concept of asset-holding entity in tax periods commenced prior to January 1, 2015, that:
"For the purposes of the provisions of paragraph 2 of Article 5, in order to determine whether or not an entity has the status of equity in tax periods commenced prior to January 1, 2015, the aggregate sum of the annual balance sheets of the tax periods corresponding to the time of holding the interest will be taken into account, with the limit of those commenced after January 1, 2009, unless there is evidence to the contrary."
In this regard, the concept of economic activity is contained in Article 5.1 of the LIS:
"1. Economic activity shall be understood to be the arrangement on one's own account of the means of production and human resources or one of both for the purpose of intervening in the production or distribution of goods or services.
In the case of the leasing of real estate, it shall be understood that there is an economic activity only when at least one person employed under a full-time employment contract is used for its management.
In the case of entities that form part of the same group of companies according to the criteria established in Article 42 of the Commercial Code, regardless of residence and the obligation to prepare consolidated annual accounts, the concept of economic activity will be determined taking into account all those that form part of the same."
Article 5 defines economic activity as the management on one's own account of the means of production and human resources for the purpose of intervening in the production or distribution of goods or services, it being understood that in the case of the leasing of real estate there will be economic activity when at least one person employed under a full-time employment contract is used for the management thereof.
In the area of corporate income tax, the autonomy of the concept of economic activity as opposed to the same concept regulated for other taxes must be taken into account. In this sense, the preamble of the LIS justifies the new inclusion of a definition of economic activity, until then referred to Personal Income Tax, in view of the need for Corporate Income Tax, which is levied on income from economic activities par excellence, to contain a definition adapted to the very nature of legal entities.
Therefore, the interpretation of the concept of economic activity in the scope of Corporate Income Tax must be made in the light of the corporate business operation, and may differ from the interpretation made of the same in Personal Income Tax, since the same concept may have different and specific purposes in each tax figure. In this sense, precisely, Article 3 of the Civil Code, applicable to the interpretation of tax rules, states that "the rules shall be interpreted according to the proper meaning of their words, in relation to the context, the historical and legislative background, and the social reality of the time in which they are to be applied, paying attention fundamentally to the spirit and purpose of the same".
In the specific case of the leasing of real estate, the LIS establishes that such activity has the status of economic activity when at least one person employed under a full-time employment contract is used for its management.
However, the economic reality reveals business situations in which an entity has a relevant real estate asset, the management of which would require at least one contracted person, the entity therefore carrying out an economic activity in the terms established in article 5 of the LIS and, nevertheless, this requirement is supplied by the subcontracting of this management to other specialized companies.
2.- Concept of Assigned Assets:
Assets that are necessary for the development of an activity or economic exploitation and that, therefore, participate in the obtaining of the yield generated in that activity are called "assigned assets".
By way of summary, we could understand that:
(i) the money that proceeds from transfers of assets subject to tax,
(ii) that which comes from the ordinary activity of rendering goods and services,
(iii) the cash corresponding to dividends on qualifying holdings, and
(iv) customer receivables; could be considered as assigned assets in general terms.
- CASH - AFFECTIVE ASSET
- BANKS. (DOES NOT DERIVE FROM THE TRANSFER OF ANY ELEMENT) - UNAFFECTED ASSET
- CREDIT RIGHT. IF I MAKE A LOAN TO A THIRD PARTY TO THE ENGINEERING COMPANY THAT MAKES ME THE PROJECTS. - AFFECTED ASSET
- RELATED-PARTY TRANSACTIONS. LOAN TO A PARTNER - UNAFFECTED ASSET
- COLLECTION RIGHTS AGAINST THE TAX AUTHORITIES - AFFECTIVE ASSET.
Since the corporate income tax regulations do not expressly regulate such concept, in order to know what is considered to be an asset assigned to an economic activity, it is necessary to turn to the personal income tax regulations which comes to list them as:
- The real estate in which the activity of the taxpayer is developed.
- For it, it will be necessary to analyze the activity developed by the company to know if it is understood to be affected, with the special complexity that the particular cases of the activity of buying and selling of real estate or of real estate promotion that usually require an individualized analysis of each case.
- The goods destined to the economic and sociocultural services of the personnel at the service of the activity.
- And, on the contrary, the goods of leisure and recreation or of particular use of the holder of the economic activity (example of the private house of the partner, boats, villas, chalets) are NOT considered affected.
- Any other assets that are necessary to obtain the respective income.
This reduced numbering raises the question of what happens with the money, cash and various credit rights that the company may have in its assets.
What happens to a company's cash and credit rights?
In this regard, the corporate income tax regulations allow the consideration of cash and receivables deriving from the transfer of assets assigned to the economic activity for 3 years, i.e., the year in which they are transferred and the following two tax periods.
However, it is evident the complexity that arises for the taxpayer at the time of being able to distinguish which part of the money that he has in cash derives from an "affected" transfer and which part does not.
And what happens with the participations in other companies and loans granted?
In the case of participations, shares and capital transfers to third parties (deposits, loans, etc.), the regulations expressly state that they will not be considered as assigned assets.
However, the corporate income tax regulations expressly state that they are not considered as NON-affected securities:
- Those held to comply with legal and regulatory obligations.
- The rights of credits with origin in commercial relations proper of the economic activity of the company.
- Those held by the company as a consequence of its own corporate purpose (stocks).
- And those representing a shareholding of at least 5% in the subsidiary and held for a minimum period of 1 year, for the purpose of directing and managing such shareholding in an entity which, in turn, is not considered to be an asset.
This regulation leads us to consider as unaffected assets all other shares/participations that the company may have (for example, in investment funds or stock exchange shares), as well as deposits and loans of any kind.
Both the value of assets and the value of assets not assigned to economic activities shall be that which is deduced from the accounts, provided that the latter faithfully reflect the true situation of the company's assets and liabilities.
For the purpose of determining the part of the assets that is constituted by securities or assets and liabilities not assigned to economic activities:
1st The following securities shall not be computed:
Those held to comply with legal and regulatory obligations.
Those that incorporate credit rights arising from contractual relations established as a consequence of the development of economic activities.
Those held by securities companies as a consequence of the exercise of the activity constituting their object.
Those that grant at least five percent of the voting rights and are held for the purpose of directing and managing the shareholding, provided that, for these purposes, the corresponding organization of material and personal resources is available, and the investee is not included in this letter.
2º Those whose acquisition price does not exceed the amount of the undistributed profits obtained by the entity will not be computed as securities or as items not assigned to economic activities, provided that such profits derive from the performance of economic activities, with the limit of the amount of the profits obtained both in the year itself and in the last 10 previous years. For these purposes, dividends deriving from the securities referred to in the last paragraph of the preceding paragraph are assimilated to profits from economic activities, when at least 90% of the income obtained by the investee entity derives from the performance of economic activities.
b) That the taxpayer's interest in the capital of the entity is at least 5% computed individually, or 20% jointly with his spouse, ascendants, descendants or collateral relatives to the second degree, whether the origin of the relationship is by blood, affinity or adoption.
c) That the taxpayer effectively performs management functions in the entity, receiving remuneration that represents more than 50% of the total business, professional and personal work income.
For the purposes of the above calculation, the income from the business activity referred to in number 1 of this section shall not be included among the business, professional and personal employment income.
When the participation in the entity is joint with one or more of the persons referred to in the preceding letter, the management functions and the remuneration derived therefrom must be carried out by at least one of the persons of the kinship group, without prejudice to the fact that all of them are entitled to the exemption.
The exemption will only apply to the value of the shares, determined in accordance with the rules established in Article 16.1 of this Law, in the part corresponding to the proportion existing between the assets necessary for the exercise of the business or professional activity, less the amount of the debts derived from the same, and the value of the net assets of the entity, applying these same rules in the valuation of the shares of investee entities to determine the value of those of the holding entity".
For its part, Royal Decree 1704/1999, of November 5, 1999, which determines the requirements and conditions of business and professional activities and of participations in entities for the application of the corresponding exemptions in Wealth Tax, establishes in Article 6, paragraph three, the following:
"Article 6. Valuation of the participations and determination of the amount of the exemption.
3. In order to determine whether or not a patrimonial element is affected to an economic activity, the provisions of Article 27 of Law 40/1998, of December 9, 1998, on Personal Income Tax and other tax regulations shall apply, except for the assets provided for in the final clause of paragraph c) of section 1 of said article, which, if applicable, may be affected to the economic activity. Items intended exclusively for the personal use of the taxpayer or of any of the members of the kinship group referred to in Article 5 of this Royal Decree or those that are assigned, for less than the market price, to related persons or entities in accordance with the provisions of Article 16 of the Corporate Income Tax Law, shall never be considered as assigned items.".
Currently, Law 35/2006, of November 28, 2006, on Personal Income Tax and partially amending the Corporate Income Tax, Non-Resident Income Tax and Wealth Tax Laws (BOE of November 29, 2006), hereinafter LIRPF, regulates in Article 29, paragraph one, the assets assigned to an economic activity, establishing that:
"Article 29. Affected assets and liabilities
1. The following shall be considered as assets and liabilities related to an economic activity:
a) The real estate in which the activity of the taxpayer is carried out.
b) The goods destined to the economic and sociocultural services of the personnel at the service of the activity. Assets for leisure and recreation or, in general, for the private use of the owner of the economic activity are not considered to be affected.
c) Any other assets that are necessary to obtain the respective income. In no case will assets representing the participation in the equity of an entity and the transfer of capital to third parties be considered as such".
From the first of the transcribed precepts there are two issues that must be differentiated: on the one hand, access to the exemption, which requires compliance with letters a), b) and c) the latter in its first three paragraphs and, on the other hand, the scope or objective scope of the exemption, an aspect referred to in the last paragraph of Article 4. Eight. Two of the LIP.