Taxation of the seller in the sale of a company: individual shareholder vs holding company shareholder
Taxation-wise, the sale of a company can be one of the most significant decisions in an entrepreneur’s business life. It is not merely the completion of a corporate transaction, but rather the culmination of years of effort, strategy, and value creation. For this reason, the seller’s tax position in the transaction is also crucial.
In reality, the price obtained for the transaction will not be the amount stated in the contract, but the figure remaining after the tax authorities have taken their share. And this is precisely where the key question arises, one that can completely change the financial outcome of the sale and the ability to maximise the entrepreneur’s gain: does an individual shareholder pay the same tax as a holding company when disposing of shares or interests?
The answer is simple and unequivocal: no. Among the legal and economic aspects of the transaction, the seller’s tax burden becomes a decisive factor when planning or negotiating the deal, as the difference can be substantial.
Whereas an individual shareholder may face effective tax rates between 19% and 30% under the Personal Income Tax (IRPF), a properly structured holding company may reduce its tax burden to 1.25%, thanks to the participation exemption regime under the Corporate Income Tax.
In this article, we briefly analyse the essential differences in the direct taxation of both scenarios and the tax impact at the shareholder level.
A. Taxation when the seller is an individual
Individuals resident in Spain are subject to Personal Income Tax (IRPF).
The transfer of shares or equity interests by an individual shareholder results in a change in the composition of their personal assets, potentially generating a capital gain or loss for IRPF purposes.
How is the capital gain or loss calculated?
Generally, the gain or loss is determined by the difference between the transfer value and the acquisition value of the shares.
However, the specific valuation rules set out in the IRPF Act must be considered, as special rules may apply depending on the nature of the transaction or the assets transferred.
What tax rate applies?
If the sale gives rise to a capital gain, it will be included in the savings tax base, subject to the following progressive rates:
- 19% for the first €6,000
- 21% from €6,000 to €50,000
- 23% from €50,000 to €200,000
- 27% from €200,000 to €300,000
- 30% above €300,000
Are there any exemptions under IRPF?
There is no general exemption for the sale of shares in a company, without prejudice to the possible application of the exemptions provided for in Article 38 IRPF, relating to reinvestment.
Example:
If a shareholder sells shares for €1,000,000 which were acquired for €200,000, the capital gain is €800,000 and is taxed according to the progressive bands.
The resulting IRPF tax cost would be €221,880.
B. Taxation when the seller is a holding company
When the seller is a legal entity, specifically a holding company owning the shares in the operating company, the tax treatment is different, and generally far more advantageous.
In this case, the gain derived from the sale will form part of the taxable base of the Corporate Income Tax (IS).
How is the taxable gain calculated?
The gain is calculated as the difference between the sale price (at least market value) and the book value of the shares.
What is the tax cost under Corporate Income Tax?
Article 21 of the Corporate Income Tax Act provides for a 95% exemption for income derived from the disposal of qualifying shareholdings in subsidiaries.
This results in an effective tax rate of 1.25%:
25% (general corporate rate) applied to the 5% non-exempt portion of the accounting gain.
The effective rate may be even lower if special regimes for micro-enterprises, small entities or newly-created companies apply.
What are the requirements for applying the exemption?
- A direct or indirect shareholding of at least 5%.
- A minimum holding period of one year.
- Where the subsidiary is non-resident, it must be subject to a similar tax at a nominal rate of at least 10%.
- The subsidiary must carry out an economic activity, and must not be a mere passive holding or asset-owning entity.
Example
If a holding company sells shares for €1,000,000 with a book value of €200,000, the gain is €800,000.
With a 95% exemption, only €40,000 would be included in the taxable base.
Applying the 25% rate, the tax payable would be €10,000, representing an effective rate of 1.25%.
Conclusion
Ultimately, the tax consequences arising from the sale of a company vary significantly depending on the seller’s profile.
While an individual shareholder is taxed at progressive rates, a holding company may benefit from a 95% participation exemption, drastically reducing its tax burden.
It is therefore advisable to review the corporate structure well before the sale and to consider possible reorganisations, always with expert legal and tax advice.
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