Investments in venture capital companies and their impact on the family business regime

Venture capital companies (SCR) are closed-end collective investment entities that raise capital from a number of investors whose main purpose is to take temporary stakes in the capital of companies of a non-real estate or non-financial nature that, at the time of taking a stake, are not listed on the first stock exchange market or any other regulated market; all with the purpose of generating profits or returns for the investors.

In recent years, many family groups have invested or are considering investing in this type of entities, being the taxation associated to these investments an aspect to be considered at the moment of approaching the investment. In particular, the possibility of applying the benefits of the family business regime for the indirect holding of these investments is of special interest, an aspect on which we will focus in this article.

The family business regime allows the family company to be exempt from Wealth Tax (IP) and to reduce the taxable base for Inheritance and Gift Tax (ISD) by 95%. In order for individual partners to be able to apply these benefits of the family business regime, it is required, among other requirements, that the company in which they directly participate does not have as its main activity the management of movable or real estate assets, i.e., that the majority of its assets are not made up of securities or assets not used for economic activities.

In this respect, the rule (Article 4. 8 of the Wealth Tax Law 19/1991 -LIP-) excludes from the computation as securities, among others, (i) those held to comply with legal and regulatory obligations and (ii) the shares that grant at least 5% 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 does not, in turn, have as its principal activity the management of movable or real estate assets (the so-called “control portfolio”).

Therefore, in order to determine whether the investment by legal entity shareholders of at least 5% of an SCR constitutes an asset eligible for the application of the family business regime, it will be necessary to determine whether the SCR can be considered as an entity that manages movable assets, i.e. whether the majority of its assets are made up of securities.

In this regard, the Directorate General of Taxes (DGT) has considered in several binding rulings that the securities included in the mandatory investment ratio of the SCR do not count as such for the classification of the activity as wealth management, i.e., that they should be considered as assets subject to tax, regardless of the percentage of participation held by the SCR.

However, in the most recent resolution issued on this subject, the DGT has clarified that it will not be understood that the participations held by the SCR while it is in any of the cases provided for in the LECR in which it is not mandatory to comply with the mandatory investment ratio (for example, during the first three years from its registration), are held to comply with legal and regulatory obligations.

Given that the aforementioned resolution refers to article 17 of the LECR, which provides for cases of temporary non-compliance with the mandatory investment ratio, the question arises as to whether this interpretation only refers to cases in which the SCR has failed to comply with the mandatory ratio or, on the contrary, whether it should be interpreted that during the first three years of incorporation of the SCR it is not possible to consider the securities included in the mandatory ratio as assets subject to the ratio per se.

On the other hand, securities that are not included in the mandatory investment ratio will not count as securities for the classification of the activity as asset management, only if the requirements set out above are met, which require that (a) they are holdings in operating companies in which a percentage of voting rights of more than 5% is held, (b) the SCR has the minimum material and personal resources to manage such holdings.

In relation to this last point, the DGT has not made a clear statement on the means required by the SCR, nor on whether the delegation of management to a management company can be considered as “sufficient means”. In response to various binding consultations, the DGT has stated that there should be sufficient organizational means, not to control the management of the investees, but to exercise the rights and comply with the obligations arising from the status of partner, as well as to make decisions relating to the participation itself.

Once it has been determined that the SCR is an asset eligible for exemption, it will be necessary to analyze what part of the value of the participation in the SCR qualifies for the purposes of the exemption in the IP and the reduction in the ISD, for which it will be necessary to determine which assets of the SCR can be considered as assets necessary for the exercise of the economic activity.

Although the DGT has not made a clear pronouncement on this issue, it is reasonable to conclude that the securities covered by the mandatory investment ratio that are considered to be an affective asset, as well as the control portfolio, should be considered necessary assets that, therefore, qualify for the purposes of the effective application of the aforementioned benefits.

In relation to the rest of the securities, it should be determined on an individual basis whether they are necessary to obtain returns from the SCR. The DGT [5] has considered that the adequacy and proportionality of the elements in question to the rest of the assets of the entity, the type of activity it carries out, the volume of operations and the rest of the economic and financial parameters of the entity must be weighed.

In accordance with the above, SCRs can be investments that count favorably for the application of the family business regime, although each investment must be analyzed individually for the purpose of verifying compliance with all the requirements demanded.