Emilio Cuatrecasas is a lawyer and Managing Partner of Cuatrecasas.
Tax reforms and other legislation have transformed the landscape of family business in Spain, as a lawyer explains
When I became a lawyer 25 years ago, Spaniards generally did not hold the role of entrepreneurs and businessmen in very high regard.
That was not a passing perception. For more than 10 centuries, Spanish history was basically one of continuous territorial conquest. First came the "Reconquista" or quest to drive the Arabs out of the Iberian peninsula, then Spanish armies battled for control of various European territories, and later Spain fought to colonise and defend the huge "New World" (the Americas), as well as other African and Asian territories.
Driven by a permanent need to repopulate and create settlements in the newly-conquered territories, Spain and its rulers paid more attention to working the land – awarded by the kings to the "conquistadors", who thus became large landowners – than to the development of manufacturing industries, commerce or finance. During long stretches of Spanish history, these activities were left to foreigners. The Spanish kings did not pay much attention or afford special protection to those who engaged in them, in contrast to other nations.
Except in some areas such as Catalonia or the Basque country, where the industrial revolution first took hold in Spain around the middle of the 19th century, having to work for a living was considered demeaning and a sign of not being "noble" enough. In Spain the middle class was slow to develop and members of the upper class either joined the army or the clergy, or lived as landed gentry. The picture started to change in the middle of the 20th century, during the Franco period, when the dictator's government decided to develop the country's basic industries and build a modern infrastructure network.
The new Spain, the democratic Spain of Juan Carlos I, was born with the constitution of 1978, in the midst of a world economic crunch (the oil crisis). Political efforts were directed mainly towards restoring democracy, creating a modern state based on the rule of law and giving back to the Spanish people the freedoms and civil rights they had lost under the Franco regime. The economy remained in the background.
It was not until 1986, when Spain joined the European Economic Community (now the EU), that the Spanish economy and the interest of Spaniards in the country's economic performance took a new turn. During a period of substantial world economic growth, Spain started to develop a much more favourable and pragmatic attitude towards business. Businessmen ceased to be viewed unfavourably as "capitalists, and began to be regarded as "creators of wealth and jobs". Spanish citizens started to notice the important role that business played in improving their quality of life. Gradually, specialist economic magazines and newspapers began to carry stories of success (and failure) in business. Thanks to the growing interest in such stories, these magazines and newspapers enjoyed a considerable boom for the first time.
However, during the initial stage following Spain's accession to the EU, Spanish entrepreneurs – who mostly owned middle-sized companies whose operations were heavily concentrated in the domestic Spanish market – yielded easily to bids from larger foreign-based multinational companies seeking to consolidate a strategic position in Spanish-speaking markets. The selling trend, which reflected little confidence on the part of Spanish entrepreneurs in the economic prospects offered by the EU, was offset by increased buying overseas in the early 1990s, and was fully reversed towards the end of the decade.
The new circumstances resulted in the Spanish discovering the native entrepreneurs, most of whom worked at the helm or as the driving force of family businesses (FBs). Until that time, the term "business" or "enterprise" usually brought to mind an image associated with the large multinational companies operating in Spain, while the word "businessman" or "entrepreneur" was used inaccurately to describe a wide variety of not always comparable situations.
Paradoxically, this ideological change took place at the height of the socialist government of Felipe González (1982-1994). Taking advantage of the period of strong economic growth, the government overhauled the tax system and substantially increased the domestic tax burden, which rose to nearly 50% of GDP in 1992 from 21% in 1982 – one of the sharpest increases in any OECD country.
The almost unbearable effect of such an increase in the tax burden, compounded by labour market rigidity, drove the main Spanish FBs to form an association called the Instituto de la Empresa Familiar (IEF) in 1991. The IEF has played a key role in the development of all that concerns FBs in Spain. From the outset, it has had very clear objectives and has worked effectively to achieve them: i) to improve taxation of FBs; (ii) to report on the best legal, financial, management and other methods of promoting, strengthening and preserving FBs; and (iii) to encourage research and studies of FBs, and make these known to a wide audience (universities, post-graduate centres, specialist magazines, law firms, consultancy firms, social groups, etc).
Before the IEF was founded, there was hardly any awareness of FBs and of the characteristics of such businesses. The subject taught by Professor Gallo, who carried out serious field work on the matter, at business school Instituto de Estudios Superiores de Empresa (IESE) was virtually the only academic reference.
Initially, the IEF directed virtually all its efforts towards mitigating the effect of the tax laws in force during the early 1990s, which seriously threatened the chances of survival of FBs. In those years a business person could pay up to 70% of his or her income from the family business in the form of wealth tax and personal income tax. Furthermore, in the case of death, heirs had to pay up to 41% of the actual value of the family business in inheritance tax if they were children or grandchildren, with higher tax rates for those further removed.
The IEF lobbied persuasively and discreetly for the tax legislation to be amended, mainly with the support of the Catalan political party Convergencia i Unió (CIU), who voted along with the ruling Socialist Party in the Spanish Parliament at the time and with the Partido Popular after the latter won the general election of March, 1996. (Among the Autonomous Communities that form the Spanish state, FBs are most prominent in Catalonia and have traditionally found the most favourable breeding ground there.)
There have been two basic milestones in the process of amending Spanish legislation. One of these is Royal Decree 2481/1994, which specifies the requirements to be met for claiming an exemption from wealth tax in respect of the property and rights needed for carrying on a business. The other has been Royal Order-in-Council 7/1996, granting a 95% rebate in inheritance and gift tax, which may be claimed on the tax assessment basis by those who meet certain requirements, when a family business is transmitted to the spouse and children of a deceased person.
Since 1997, the 95% rebate in the tax assessment basis has been extended to include gifts between living persons, given certain requirements. One of the requirements to be met is that the person making the gift must retire or step down from any executive positions. The process is gradually being completed with various technical improvements.
Act 14/1996, of devolution to the regional governments of certain taxes previously collected by the national government, has resulted in the nationwide rules on transmission by inheritance being adjusted in the various jurisdictions, with such transmissions being granted an even more favourable treatment in some Autonomous Communities.
The tax rules introduced in support of FBs, despite being scattered among a whole array of provisions of various ranks in force, have resulted in the FB concept in Spain nowadays being a pragmatic yet effective concept arising from various laws and regulations. As a result of that, Spain undoubtedly enjoys one of the most attractive and favourable environments for owning and transmitting ownership of FBs in the context of the EU. These have been unavoidable and highly significant steps taken to ensure the continuity of FBs from a financial viewpoint. However, they have not been the only developments.
The boom that the Spanish economy, and FBs in particular, have enjoyed during the 1990s, the efforts on the part of the IEF to increase public understanding of FBs, and the legislative drive for tax measures in support of FBs, have resulted in the legal profession using specific legal methods or tools to take advantage of the tax benefits and to protect the legal position of the members of FBs in relation to each other and to their FB.
One of the most widespread tools used by FB experts during the past 10 years has been the Protocolo Familiar, a memorandum of understanding (MOU) executed between family shareholders to ensure continuity and effective management of the FB over the long term. To that end, the agreement covers points such as traditions and values, planning for succession by the next generation, access to ownership and share transfers, access by family members to jobs with the FB, the governing and managing bodies of the FB, the profit distribution policy and micro-liquidity sources, using know-how, trade marks and other competitive practices, as well as the grounds for splitting up or terminating the FB.
Concerning the degree of effectiveness of a family MOU for maintaining and ensuring the continuity of FBs, the experiences of recent years has been viewed as generally favourable by the IEF and the various regional associations. Such an instrument has also been found to be necessary in Europe. The Communication from the European Commission of 20 March 1998 (on the transmission or transfer of small- and medium-sized companies) calls for implementing this as a suitable means for facilitating the transmission of FBs. A family MOU does not ensure the success of the business or of the entrepreneurial family, but clearly helps a lot.
However, some of the clauses have been found to be unenforceable, and adequate arrangements are not always made to preserve the original cooperative attitude and hopes, as well as ensuring perseverance on the part of the family to put into practice what has been agreed.
Increased knowledge on internal relations among the members of entrepreneurial families, which has been disseminated by well-known consultants mainly based in the USA, has led to applied studies and the development of various legal tools: for example, corporate by-laws, which are a useful tool for controlling political, financial and governance relations between family shareholders; wills made by business persons and other members of their family; prenuptial agreements on marital assets and measures to protect the family estate in the event of separation or divorce; as well as provisions protecting minors or legally incompetent persons and their assets.
The steps and recommendations
A little over a year ago, José Manuel Lara, chairman of the IEF, acknowledging that the lawmakers have sensibly put FBs on a competitive footing with Spanish non-family businesses and with European FBs in recent years, called for an umbrella law to pave the way for the definition of a statute or framework regulation on FBs. In response, the Partido Popular successfully proposed that a committee be appointed to draw up a report on all matters likely to be specifically regulated by law.
The report submitted by the Senate Committee, which was published in the Bulletin of the Spanish Parliament (Senate) on 23 November 23 2001, opposes the idea of enacting an FB statute for several reasons, including the fact that past legislation of the same type in Spain has not brought any innovations or technical improvements, but merely involved a re-ordering of existing rules (the Taxpayer Statute, for example).
Another reason is that if FBs actually have the quantitative weight attributed to them (between 65% and 80% of all Spanish enterprises are said to be FBs, accounting for about 65% of GDP and for between 65% and 70% of existing jobs), then it would rather be a matter of enacting a statute for non-family businesses, as these seem to be the exception.
Furthermore, as there is such a wide variety of FBs, ranging from micro-enterprises to SMEs to multinationals, some of which are owned by individuals while others are organised as corporations, there is a risk that the legislation would have to be diluted. That would threaten the alleged benefits of the proposed statute to FBs, because it would be too complicated technically to regulate such an extensive field of application.
Despite ruling out the statute, the committee has included among its conclusions: (i) a recommendation to the effect that the various levels of the administration approve reporting and disclosure rules for developing and improving the management of FBs, as well as the reorganisation of FBs as corporate bodies to help ensure their continuity and growth; (ii) a recommendation that FBs use Family MOUs to specify a framework for development and the rules of interaction between the FB itself and its owners; (iii) opening up the Mercantile Registry to those aspects of Family MOUs that concern third parties; (iv) a recommendation that family-owned companies be identified in commercial dealings by adding the letter "F" to the company name; (v) developing arbitration or mediation services for settling business/family disputes; (vi) reviewing and reconsidering the legal treatment of non-voting shares so that family groups can keep control of a company under various types of arrangements for financing growth and accessing the capital markets; (vii) spreading knowledge of the specific tax rules, as well as encouraging FBs to be endowed with a sufficient amount of own funds, helping them to access world markets and providing them with the necessary facilities for carrying out R&D activities; and (viii) reviewing and considering the changes required for improving and clarifying the legislation in force so that the directors of FBs may register as participants or beneficiaries with the social security administration.
That is the current situation. Some of the recommendations, such as adding the letter "F" for identifying FBs, seem to have been discarded by the lawmakers. With regard to other recommendations, such as that on non-voting shares, preliminary steps are being taken towards drafting the appropriate legislation. Others have been or are about to be implemented, such as the recommendation on facilities for carrying out R&D activities or on providing specific official support for financing the growth of FBs and helping them to penetrate overseas markets.
Mariano Puig, a member of a successful entrepreneurial family, co-founder of the IEF and currently Chairman of the European Family Business Association, noted in his appearance before the Senate Committee that some member countries of the EU, such as the Netherlands, have been able to attract business holdings from other countries thanks to the differences in legislation.
We have mentioned above that the tax measures introduced by the Spanish government in support of FBs are probably among the most favourable ones in the EU. Now we must add that the European Council Regulation 2157/2001 has given the go ahead to the Statute for a European Public Limited Company, which is to become effective in 2004, giving member states some leeway for regulating aspects that are peculiar to them while respecting its scope of application.
Spain could make use of its goodwill and experience with family agreements having corporate implications and with other FB commercial transactions, and add to the existing tax benefits an attractive legal treatment of companies.
One of the obvious advantages of that, apart from preventing Spanish FBs from migrating to the Netherlands or other European countries, would be to attract European holding companies or corporations to Spain, which could thus look forward to becoming the European equivalent of Delaware for FBs. We shall work to achieve that.