How is your capital gain taxed?

Depending on how we have obtained that capital gain, or what plans we have to reinvest, we will have to pay tax in one way or another.

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1.- Capital gains and losses in the new tax framework: separation of partners.

A recent ruling by the Central Economic Administrative Court has called into question the consideration that, for personal income tax purposes, was given to the income received by a partner after the acquisition of all his shares by the company itself.

A) Established model

One of the ways in which a company can reduce its capital by amortization is by acquiring the shares or holdings of a partner.

Traditionally, case law understood that the income derived from such an operation would be considered as a return on movable capital. This would include the income obtained from the participations in the entity’s own funds (article 25.1, Law 35/2006). For example, from obtaining dividends and other benefits derived from the condition of partner, to those resulting from amortization and transfer of financial assets.

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Tax Simulations

The Tax simulation responds to the concealment of a real legal business with the aim of reducing the tax burden. It is necessary for the Tax Administration to test the simulation.

B) New scenario

Well, the aforementioned Central Court decision signals what appears to be a change of direction and a transition to a new model.

This body understands that, with the sale of all his shares to the company, the shareholder is effectively separated from the company. For this reason, Article 37.1, paragraph e) of Law 35/2006, relating to the alteration of the taxpayer’s assets by separation from the company, should be applied. In such cases, the difference between the market value of the goods received and the acquisition value of the corresponding capital holding is considered as a capital gain or loss.

2.- Deduction for investments in new or recently created companies.

Taxpayers may deduct twenty (20) percent of the amount paid in said period if they subscribe shares or participations in recently created or new companies. In addition to the capital, business or professional knowledge suitable for the development of the entity’s activity may also be invested.

A.- What are the requirements to classify a company as new or recently created?

The shares or holdings in the entity must be acquired by the taxpayer either when the company is set up or when a capital increase is made in the three years after its setup and must remain in its assets for a period of more than three years and less than twelve years.

The entity must be in the form of a public limited company, a private limited company, public limited workforce owned company or a private limited labor company and not be listed on any organized market. This requirement must be met during all years of holding the share or participation.

Likewise, it must carry out economic activity that has the personal and material means to carry it out. In particular, it may not have as activity the management of movable or immovable property in any of the entity’s tax periods ended prior to the transfer of the holding.

And finally, the amount of the entity’s own funds may not exceed 400,000 euros at the beginning of the tax period in which the taxpayer acquires the shares or holdings.

When the entity is part of a group of companies, the amount of the own funds will refer to all the entities belonging to that group.

B.- What conditions must be given in order to make deductions?

1. The investment had to be made after September 29^th 2013, when Law 14/2013 came into force.
2. The maximum deduction base will be 50,000 euros per year and will be formed by acquisition value of the shares or holdings subscribed.
3. The direct or indirect holding of the taxpayer, together with that held in the same entity by his spouse or any person related to the taxpayer by blood or marriage up to and including the second degree, may not be, on any day of the calendar years in which the holding is held, of the entity or of its voting rights.
4. That they are not shares or holdings in an entity through which the same activity is carried out as was previously carried out through other ownership.

On the other hand, the amount reinvested which has given rise to the exemption for reinvestment in new or recently created entities, or the amounts which would have served as the basis for applying a regional deduction for the same investment, will not form part of this deduction.

3.- Exemption for reinvestment in new or recently created entities.

The entities that are entitled to this exemption must have the same considerations as those described in the previous point, provided that the shares and holdings to be reinvested have been subscribed as from September 29^th 2013.

When the amount reinvested is less than the total received in the transfer, only the proportional part of the capital gain obtained corresponding to the amount reinvested will be excluded from taxation.

As stated in article 38.2 LIRPF:

“a) When the taxpayer has acquired homogeneous securities in the year before or after the transfer of the shares or holdings. In this case, the exemption will not apply to the securities that remain in the taxpayer’s assets as a result of such acquisition.

b) When the shares or holdings are transferred to the taxpayer’s spouse, to any person related to the taxpayer by blood or marriage up to and including the second degree, or to an entity in respect of which any of the circumstances set forth in Article 42 of the Commercial Code apply with the taxpayer or any of the above-mentioned persons, regardless of its residence and the obligation to prepare consolidated financial statements, other than the entity whose holdings are transferred.”

4.- Reduction of capital gains produced in transfers acquired before December 31^st  1994.

Transfers for consideration are those legal acts or transaction that require a consideration in exchange for a good or right between the parties, which may be monetary or patrimonial (e.g. purchase of a property).

The amount of gains corresponding to transfers of assets acquired prior to December 31^st 1994 will be determined in accordance with the following rules:

First rule

The number of years between the date of acquisition of the item and December 31^st 1996, rounded up, shall be calculated.

Percentages for each year of stay exceeding two years:

• 11%: real estate.
• 25%: shares admitted to trading, except for share representing the capital stock of Real Estate and movable property investment companies.
• 28%: for the remaining capital gains.

Second Rule.

The transfer value shall be calculated for all the assets to which this provision would have applied, transferred from 1 January 2015 until the date of transfer of the asset.

Third rule

1. c) When the sum of the transfer value of the asset and the amount referred to in the previous point is less than 400,000 euros, the part of the asset gain generated before January 20^th 2006 will be reduced by the amount resulting from applying the percentages for each year of stay (the gain generated after this date will not be reduced).

When the sum of the transfer value of the assets is greater than 400,000 euros, but the result of the provisions of point b) above is less than 400,000 euros, the reduction will be made to the part of the capital gain generated before January 20^th 2006 that is proportional.

In view of the complexity that this assumption may acquire, the following example is given:

A taxpayer owns a house acquired on August 1^st 1992 for a price of 180,000 euros, with expenses incurred in the acquisition of 18,000 euros. He decides to sell the property on December 15^th 2013 for a price of 900,000 euros (IIVTNU: 25,000 euros).

Number of days until January 19^th 2006: 4,920 days.

Total number of days in the taxpayer’s assets: 7,807 days.

What is the amount of profit to be included in the tax base?

The part of the profit that has been generated from August 1^st 1992 (date of acquisition) until January 19^th 2006 will be reduced according to the period of time the house has been in the taxpayer’s assets until December 31^st 1994 (1996 minus the last 2 years):

Transfer value (900,000 – 25,000) = 875,000.00 euros

Discounted acquisition value (198,000 x 1.3167) = 260,706.60

Profit (875,000 – 260,706.60) = 614,293.40 euros.

Profit generated up to January 19^th (614,293.40 x 4,920/7,807) = 387,130.

Permanence of the element until December 31^st 1994 (rounded up): 3 years.

Reduction factor (11.11% x 3) = 33.33%.

Reduction (33.33% x 387.130) = 129,030.43

Reduced profit (614,293.40 – 129,030.439) = 485,262.97

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