Negative income from other economic activities is not computed in the 50% management-functions calculation under the family-business exemption

The High Court of Justice of Catalonia, in its judgment of 29 December 2025 (Contentious-Administrative Chamber, First Section, judgment no. 4794/2025, appeal no. 1432/2023, Judge Rapporteur Laura Mestres Estruch), reiterates a criterion with a direct bearing on family wealth planning: negative income from economic activities unrelated to the entity whose shares are to be exempt is not included in the denominator of the 50% management-remuneration test required by the family-business exemption.

The legal framework is as follows. Article 4.Eight.Two of Law 19/1991 on Net Wealth Tax (LIP) exempts shareholdings in entities where several cumulative requirements are met. One of them is that the taxpayer actually performs management functions in the entity and receives for them remuneration representing more than 50% of his total business, professional and employment income. For the purposes of that calculation, the law excludes income from business activities whose assets qualify for the exemption in paragraph One of the same provision; and article 5.2 of Royal Decree 1704/1999 excludes, where the taxpayer holds shares directly in several entities, the management remuneration received from the other entities.

The facts are straightforward. The deceased held shares in Klonkis, S.L., performed management functions in it and, alongside, received other income: a salary as warehouse manager at a different company and a retirement pension. He also carried on a self-employed activity —signage and screen printing— that produced recurring losses.

The dispute arose over the calculation rule. The heirs, as successors to the deceased in the Net Wealth Tax assessments for 2014 to 2016, argued that the denominator of the 50% ratio should include, by algebraic sum, all of the deceased’s income, including the losses from the signage and screen-printing activity. On that reading the denominator fell and the ratio —the management remuneration from Klonkis— exceeded 50%, so that the exemption applied.

The regional tax inspectorate of the Generalitat de Catalunya rejected that reading and issued the corresponding assessments. The Regional Economic-Administrative Tribunal of Catalonia, in a decision of 16 March 2023, partially upheld the heirs’ claims and accepted that the negative income be included in the denominator. The Catalan Tax Agency challenged that decision before the High Court of Justice.

The High Court upholds the regional authority’s appeal on the basis of four considerations.

The first is the purpose of the regime. The family-business exemption seeks to protect genuine family businesses —those that are the taxpayer’s main source of livelihood— and to prevent the benefit from extending to mere asset-holding vehicles. The 50% threshold is the means of measuring that economic dependence.

The second is interpretive consistency. Including negative income in the denominator by algebraic sum leads to results that the Court describes as manifestly absurd: ratios above 100% or negative ratios. Such results distort the purpose of the provision and run counter to the interpretive principle in article 3.1 of the Civil Code.

The third is the wording of the law. Article 4.Eight.Two LIP uses the term “income” in a context linked to “remuneration received”, which points the calculation towards amounts that generate actual income and excludes negative amounts, which reflect the absence of income rather than its existence.

The fourth is the parallel with Personal Income Tax, for which the Chamber relies on article 32 of the Personal Income Tax Act (LIRPF). As we understand it, the argument suggests that where the legislature wants negative results to be taken into account, it says so clearly, which is not the case in article 4.Eight.Two LIP.

Applying that criterion to the case, the deceased’s management remuneration from Klonkis, S.L. represented 34% of his income in 2014, 33% in 2015 and 35% in 2016 —below the required 50% threshold in every year—. The statutory requirement was not met and the exemption did not apply.

The Court adds a relevant point. The same Chamber and Section had already ruled on identical issues in earlier proceedings (nos. 1082/2022 and 283/2023) concerning the same family and the same company. The cassation appeals prepared against the judgments in those cases were declared inadmissible by the Supreme Court by order of 12 November 2025, which makes those judgments final without amounting to a ruling by the Supreme Court on the merits.

In our view, the Catalan Chamber’s criterion is consistent with the logic of the family-business regime. The 50% threshold measures the taxpayer’s actual economic dependence on the family business. Allowing losses from unrelated economic activities to distort that measurement artificially —shrinking the denominator until the ratio exceeds the threshold, even to the point of negative values— would empty the requirement of content.

For wealth planning purposes, the judgment counsels a careful review of the calculation. Where the taxpayer carries on more than one economic activity —in addition to management functions in the entity whose shares are to be exempt—, it is advisable to prepare an individual calculation of the 50% ratio that (i) excludes from the denominator income from business activities exempt under article 4.Eight.One LIP and, where applicable, management remuneration from other entities in which shares are held (article 5.2 of Royal Decree 1704/1999); and (ii) also excludes negative income from other economic activities, in line with the Catalan Chamber’s criterion.

Contemporaneous documentation of that calculation —payslips with a breakdown, company certificates on the management functions and their remuneration, personal income tax returns for the year— is the best defence in the event of a tax audit. It also makes it possible to assess in advance whether the exemption actually applies or whether the wealth structure should be adjusted before the taxable event.

In short, for the High Court of Justice of Catalonia the 50% management-remuneration threshold under the family-business regime must be calculated on positive income, without including losses from unrelated economic activities. It is a criterion the Catalan Chamber has reiterated and, although it is not Supreme Court case law, it should be kept firmly in mind in succession planning for family wealth.