How a family business is taxed

Updated on 27 September 2026. The state rules (the Wealth Tax exemption and the 95% Inheritance and Gift Tax reduction) have not changed; the big news is Madrid's Law 3/2026, which since 1 July 2026 raises the reduction to 99% for inheritances and gifts and extends to gifts the 5-year holding period that Madrid already required for inheritances. We have also added recent Supreme Court case law and the effect of a gift on personal income tax.

Family businesses hold a prominent place in Spain's business landscape. When the time comes to pass one on to the next generation, one of the main concerns is making sure the tax bill does not put the continuity of the business at risk.

To ease that handover, the law provides specific tax reliefs for family businesses. They do not apply automatically: several requirements must be met at the same time and kept up for years, and you must be able to prove them if the tax authorities check.

Is a family business taxed differently day to day?

No. While it is trading, a family company pays Corporate Income Tax (Impuesto sobre Sociedades), VAT and withholdings like any other. For tax periods beginning in 2026, Corporate Income Tax is 25% as a general rule, 23% for small companies (empresas de reducida dimensión, turnover below €10 million) and 19% / 21% (first €50,000 of taxable base / remainder) if the previous year's turnover was below €1 million.

Two nuances matter a great deal to families: if one person, alone or with their spouse or other relatives up to the second degree, controls several companies, turnover is calculated by adding up all of them (art. 101.3 of Law 27/2014); and asset-holding companies (sociedades patrimoniales) cannot apply the reduced rates.

The 'family business' label makes the difference in how the shareholders are taxed: when their wealth is taxed and when the business passes to the next generation.

Which taxes are involved

The Wealth Tax exemption is the cornerstone: the state Inheritance and Gift Tax reduction and the Large Fortunes Tax exemption both depend on it.

Requirements for the Wealth Tax exemption

It is not enough for the company to belong to a family. For shareholdings, art. 4.Ocho.Dos of Law 19/1991 and Royal Decree 1704/1999 require all of the following to be met at the same time.

1. The company must carry on a genuine economic activity

The company cannot be mainly engaged in managing assets. The law considers that it is if, for more than 90 days of the financial year, more than half of its assets are securities or assets not used in an economic activity. In that case, the exemption is lost entirely.

Assets bought with undistributed profits from economic activities of the current year and the previous 10 years do not count as such, but it is worth keeping an eye on the cash and investments that build up.

2. You must hold a sufficient stake

You need at least 5% of the share capital on your own, or 20% together with your spouse, ascendants, descendants or second-degree collateral relatives (siblings and siblings-in-law), whether by blood, marriage or adoption.

The exemption applies to shares you hold directly (art. 4 of Royal Decree 1704/1999); if there is a family holding company, the analysis is carried out on that company. Capital increases or reorganisations can cause someone to fall below the threshold without realising it.

3. Someone in the family must genuinely manage the business and be paid for it

You or, if the holding is joint, at least one person in the family group must perform effective management functions and be paid for them more than 50% of their total income from employment and economic activities.

• Roles such as chair, managing director, general manager, director (administrador) or board member count, but only if they involve effective involvement in decision-making and are evidenced by a contract or appointment.
• If that person manages several family companies, the 50% is calculated separately for each one.
• Receiving only dividends is not enough: the law requires pay for the management role.
• Keep the evidence (appointments, contract, payslips, minutes). If the pay is for the director's office, the articles of association must state that the office is remunerated (art. 217 of the Spanish Companies Act, Ley de Sociedades de Capital).

4. The exemption does not always cover the full value

It only covers the part of the value that corresponds to the assets needed for the business (less the related debts) in proportion to the company's net assets: a property for the family's private use or investments unrelated to the business reduce the exempt part.

What if you run the business as a sole trader?

The business assets are exempt if you carry on the activity habitually, personally and directly and it is your main source of income: at least 50% of your personal income tax base must come from the net income from that activity (art. 3 of Royal Decree 1704/1999).

The regulation refers to net income, but the Supreme Court has laid down as doctrine that, to check whether the activity is the main source of income compared with your other income, gross income, not net income, is compared (STS 827/2026 of 1 July, appeal 2632/2024, ECLI:ES:TS:2026:3041). The case set income from an activity taxed under the flat-rate módulos system against a pension, that is, income calculated by different methods.

Property-letting companies: the employee requirement

For letting property to count as an economic activity, art. 27.2 of the Personal Income Tax Law requires at least one person employed under an employment contract and full time. Without one, the let properties are treated as not used in a business and the company may end up as an asset-holding company.

In February 2026, the Supreme Court set out its position on letting companies that are part of a group (among others, STS 167/2026 of 17 February, appeal 1196/2024, ECLI:ES:TS:2026:637, and STS 186/2026 of 19 February, appeal 1326/2024):

• If the letting company belongs to a group (art. 42 of the Commercial Code) and the letting is managed with the group's staff and material resources, even if these sit in another company, the requirement may be treated as met.
• There must be a genuine pooling of resources and activity, and the letting company must be functionally integrated into the group's activity.
• Merely belonging to the group on paper is not enough: in that case the company itself needs its own employee.

If the employee is genuine and works full time, the requirement is met. In an inheritance tax case, the Supreme Court held that meeting art. 27.2 of the Personal Income Tax Law is enough, without having to justify the hiring in economic terms (STS 956/2025 of 14 July, appeal 2197/2023, ECLI:ES:TS:2025:3472). The tax authorities cannot reject it by arguing that there is too little work for the post: if they consider the contract fictitious, they must expressly declare it a sham (simulación) and explain where the sham lies.

Even so, hiring someone is not enough on its own if the company builds up cash, investments or other non-business assets exceeding half of its assets for more than 90 days.

Inheritance or gift: the Inheritance and Gift Tax reduction

The state rule: 95% and 10 years

This is the rule that applies when the competent region has not regulated its own reduction or improved the state one.

• Inheritances (art. 20.2.c of Law 29/1987): a 95% reduction for the spouse, descendants or adopted children (if there are no descendants, also ascendants and collateral relatives up to the third degree). The heir must keep what was inherited for 10 years, unless they die sooner.
• Gifts (art. 20.6): a 95% reduction for the spouse, descendants or adopted children, with requirements for both parties:
  • The donor must be 65 or over (or have permanent incapacity at the level of total disablement for all work, incapacidad permanente absoluta, or severe disablement requiring the assistance of another person, gran invalidez) and stop managing the business and being paid for it from the date of the gift. The donor may stay on the board: mere board membership does not count as management.
  • The recipient must keep the gifted shares and the right to the Wealth Tax exemption for 10 years, without transactions that substantially reduce their value.
• For gifts, the Supreme Court has clarified that management pay is measured from 1 January to the date of the gift, not over the full year (judgments of 31 October 2024, appeal 2262/2023; 13 November 2024, appeal 2305/2023; and 9 December 2024, appeals 2233/2023 and 2347/2023).

Madrid: the 99% reduction from 1 July 2026

Madrid already had its own reduction for inheritances: 95% with a holding period of only 5 years (former art. 21.Uno.3 of its consolidated text on devolved taxes). Gifts, on the other hand, followed the state rule in art. 20.6, with 10 years. Law 3/2026 of 30 June on Support for Family Businesses (Ley de Apoyo a la Empresa Familiar) moves the reduction to the new art. 22 of the consolidated text and improves it for inheritances and gifts where the tax falls due on or after 1 July 2026:

• 99% reduction (previously 95%) on inheritances and gifts of sole-trader businesses, professional practices or shareholdings.
• More beneficiaries: groups I, II and III (descendants, spouse, ascendants, siblings, nephews and nieces, uncles and aunts and certain in-laws) and fourth-degree collateral relatives (cousins). Also other group IV acquirers (more distant relatives or non-relatives) with an employment or services contract in force in the business, at least 10 years' service and management functions on the date of death or gift, performed without interruption for the 4 years immediately before it.
• Wider family group for the 20% test, extended to fourth-degree collateral relatives. The 5% individual threshold stays.
• More flexible management test: the 50% can be met between 1 January and the date of death or gift or in the previous calendar year, and can be met by any person in the family group, whether or not they hold shares.
• Gifts with no age requirement and no obligation for the donor to step down from management.
• 5-year holding period for inheritances and now also for gifts (instead of the state's 10 years), keeping the economic activity and without transactions that substantially reduce the value.
• It also covers cash and investments bought with profits from economic activities of the current year and the previous 10.
• It is incompatible with the state reduction and must be chosen within the self-assessment deadline. If you later breach the holding period, you must report it and pay the tax saved plus late-payment interest within 30 working days.

If you inherited before 1 July 2026 and Madrid's rules applied, the previous Madrid rule still governs: 95% and a 5-year holding period, not the state's 10 years.

Madrid's tax credits on the tax due (bonificaciones, art. 25 of the consolidated text) are then applied: 99% for groups I and II and 50% for group III (for gifts, subject to formal requirements such as a public deed). As children and spouses already have that 99% credit, the new reduction matters most for siblings, nephews and nieces and cousins, and for anyone who would not meet the state requirements.

Which region's rules apply and the deadlines

• Inheritances: the rules of the region where the deceased was resident (where they lived for most days in the previous 5 years).
• Gifts of shares or of a sole-trader business: the rules of the region where the recipient is resident (with the same 5-year rule).
• Gifted property: if you give a sole-trader business that includes real estate (for example, its premises), that property is governed by the rules of the region where it is located (art. 32.2.b of Law 22/2009).
• Deadlines: 6 months from the death (extendable by a further 6 if requested within the first 5 months) and 30 working days from the gift. In Madrid, forms 650 and 651 are used.

Other regions also have their own reductions or improve the state one (with different percentages, holding periods or requirements), apply their own tax credits on the tax due and set their own Wealth Tax allowance (arts. 47 and 48 of Law 22/2009). If Madrid's rules do not apply, check that region's rules before signing.

Personal income tax: the donor's capital gain

• Inheritance: any gain on the deceased's shares is not taxed in their personal income tax (art. 33.3.b of Law 35/2006).
• Gift: gifting shares usually gives rise to a capital gain for the donor, but art. 33.3.c excludes it if art. 20.6 of Law 29/1987 is met. In return, the recipient takes over the original acquisition value and date (art. 36), so the gain is deferred until a future sale.
• Watch out in Madrid: the income tax rule refers to the state requirements. If you make a gift with Madrid's reduction without meeting art. 20.6 (for example, because you are under 65 or keep managing the business), work out the income tax cost before signing.
• Pending: the Supreme Court has admitted an appeal (order of 11 March 2026, appeal 2557/2025) to decide what happens to that carry-over of values and to the limitation period when art. 20.6 is breached. At the date of this update we are not aware of a published judgment.

The Large Fortunes Tax is still in force

The Temporary Solidarity Tax on Large Fortunes (Impuesto Temporal de Solidaridad de las Grandes Fortunas) was created for 2022 and 2023, but Royal Decree-Law 8/2023 extended it until wealth taxation is reviewed as part of the reform of regional financing. It remains in force today:

• It taxes net wealth above €3,000,000 at 31 December, with a €700,000 tax-free allowance and rates from 1.7% to 3.5% (in practice, tax is only payable above roughly €3.7 million).
• The same assets as in Wealth Tax are exempt, including a family business that meets the requirements.
• Wealth Tax actually paid is deducted; in Madrid, where Wealth Tax has a 100% credit, this tax is paid in full, so the exemption carries a lot of weight.
• It is filed on form 718, from 1 to 31 July of the following year. The Constitutional Court upheld it in STC 149/2023 of 7 November.

Even if you pay no Wealth Tax in Madrid, you must file the return (form 714) if your assets and rights exceed €2,000,000 (art. 37 of Law 19/1991).

Common mistakes that cost you the relief

1. Assuming that a business owned by a family is a 'family business' for tax purposes.
2. Being paid only in dividends, or receiving management pay that is undocumented or below 50%.
3. Building up cash, investments or non-business property until they exceed half the assets for more than 90 days.
4. Letting property without a full-time employee, or relying on the group without genuine integration.
5. Selling, reducing capital or carrying out transactions that substantially reduce the value during the holding period.
6. In Madrid, not opting for the regional reduction in time, or not checking the donor's income tax position.
7. Not checking every year, before 31 December, that the requirements are still met (shareholding, management pay and the make-up of the assets).

In summary

Family business taxation offers very useful tools for the handover, but there is no automatic relief simply because a business belongs to a family: the shareholding, the management role, genuine activity, the balance sheet and the region decide the outcome.

If you are preparing a handover or want to check whether your company meets the requirements today, we can review it with you before you take any steps: you can book a tax consultation. If the business is coming to you through an inheritance, our guide to the first steps in an inheritance may help.

Important: the taxation of family businesses depends on the rules in force and on the specific circumstances of each company and family. This article is for information only and is not a substitute for personalised tax or legal advice.

Legislation and sources

• Law 19/1991 on Wealth Tax (arts. 4.Ocho and 37)
• Royal Decree 1704/1999, requirements for the family business Wealth Tax exemption
• Law 29/1987 on Inheritance and Gift Tax (art. 20)
• Law 3/2026 of 30 June on Support for Family Businesses (Madrid)
• Madrid Legislative Decree 1/2010, consolidated text (arts. 22 and 25)
• Law 35/2006 on Personal Income Tax (arts. 27, 33 and 36)
• Law 38/2022 (art. 3, Temporary Solidarity Tax on Large Fortunes)
• Royal Decree-Law 8/2023 (extension of the Large Fortunes Tax)
• Law 27/2014 on Corporate Income Tax (arts. 29 and 101 and transitional provision 44)
• Law 22/2009 on regional financing (arts. 28, 32, 47 and 48)
• STC 149/2023 of 7 November (Large Fortunes Tax)
• STS 167/2026 of 17 February (ROJ STS 637/2026, ECLI:ES:TS:2026:637), on CENDOJ