Capittal's view: I have sold my company, what do I do with the money?

Quick answer

Capittal's view is that this decision is not taken after closing, it is taken before. The structure you sell through determines whether the price lands in your personal account or in a holding company's account, and that choice cannot be undone once the deed is signed. The expensive mistake is not picking the wrong investment: it is having been paid through the wrong vehicle. What follows is general information, not individual tax advice.

Why does this question arrive too late once the money is in the bank?

Because the question has two halves and only one is still open after closing.

The first half is where you get paid. That closed on signing day: either the individual was paid or the company was paid. The second half is what you do with the money once received. That is still open, but it is decided within the limits set by the first half.

If you sold your shares as an individual, the money has already passed through your personal income tax and already sits in your personal estate. Setting up a holding company the next day rewinds nothing, because the gain has already been taxed. If your holding company sold, the money sits inside a company and taking it out to personal hands carries a cost you have not yet paid.

Owners reach this conversation at the wrong moment. They ask about the investment when the relevant question was the structure, and that one can no longer be reopened.

Am I paid, or is my company paid? The practical difference

• You sell as an individual. The capital gain is taxed in the savings base of your Spanish personal income tax (IRPF) in the year of the sale, on the difference between the price and the acquisition cost. You pay once and the money is then available, with no further toll gates.
• A holding company that owns the trading business sells. The gain arises in the holding company's corporate income tax, where the participation exemption on gains from shareholdings under article 21 of Spain's Corporate Income Tax Act may apply. The money stays inside the company.

The article 21 exemption is not automatic. It requires a shareholding of at least 5 % in the company sold, held without interruption throughout the year before the disposal, plus further conditions where the subsidiary is itself a holder of securities or a non-resident. Nor is it a full exemption, because the legislation reduces the exempt amount to account for the cost of managing the shareholding.

Selling through a holding company is neither better nor worse. It is different. If you want the money to live on, being paid as an individual is usually simpler and cheaper overall. If you want the money to reinvest in another business, the holding company avoids decapitalising the operation along the way.

What is tax deferral, and why is it not the same as not paying?

Article 21 does not erase the tax on the money you want to spend: it postpones it. The gain is exempt at company level, but the money still belongs to the company. The moment you want it in your own hands, a second tax is waiting.

That is deferral, and it is a genuine advantage on one condition: that the money is going to be reinvested. If your plan is to be paid and live on it, deferral saves you no tax. It only changes the year you pay it and adds a company that has to be maintained, accounted for and filed every year.

The question that settles the structure is not a tax question, it is a personal one: how much of this money do you need in your own pocket over the next five years. That amount is the part that should not end up trapped inside a holding company.

What does it really cost to get the money out of the holding company?

The normal route is a dividend from the holding company to the shareholder. That dividend is taxed in the savings base of the shareholder's personal income tax, on the same progressive scale as any other investment income. There is no clean shortcut.

• Dividend. The ordinary and safest route. Taxed in your personal income tax in the year you receive it.
• Director's or executive salary. Taxed as employment income and requires genuine duties and market-level pay.
• Loan from the company to the shareholder. Not a way of getting paid. It must be documented, bear market interest and be repaid; otherwise it is recharacterised.
• Capital reduction or return of share premium. It has its own tax rules and does not turn the money tax free.

Adding the tax at company level to the tax at shareholder level, the total cost of moving the money into your own hands from a holding company is higher than selling directly as an individual. What the holding company buys is time and reinvestment capacity, not a free ride.

What can I do with the money if it stays inside the holding company?

There are three common destinations and each changes the company's risk profile and tax position.

• Buying another trading business. This is the destination that fits a holding company best: the money moves without passing through your personal income tax, and the new shareholding can qualify under article 21 again when you sell it. In exchange, you take on business risk once more and you need time and a team.
• Property. More predictable income and lower risk, but delicate in tax terms. If the holding company becomes mainly a portfolio of rental property with no staff or organisation of its own, it stops looking like a company carrying on an economic activity.
• Financial portfolio. Immediate liquidity and diversification. It is also the option that most quickly turns the holding company into a mere securities-holding vehicle, with the consequences set out below.

One practical point about the dividends the holding company receives from its trading subsidiaries: those can also fall under article 21 where the requirements are met. That makes a holding company a good container for accumulating cash generated by several businesses. That is its natural use, not custody of a fund portfolio.

What is the risk of my holding company becoming a passive asset-holding company?

This is the least understood risk in the whole decision. Under Spanish corporate tax law a company is treated as an asset-holding entity when more than half of its assets consist of securities or of items not used in an economic activity. After a sale, with the sale proceeds sitting inside and no business underneath, a holding company crosses that line easily.

The consequences go beyond corporate income tax.

• Exemption under Spain's wealth tax. The exemption for shareholdings in companies requires, among other conditions, that the company's main activity is not the management of a securities or property portfolio, together with genuine management duties and a minimum shareholding percentage.
• Family business relief under Spain's inheritance and gift tax. The relief on transfers of shareholdings rests on those same conditions. If the holding company becomes passive, your children may inherit it without that relief.
• A future sale of the holding company itself. The article 21 exemption does not work the same way on disposals of shares in asset-holding entities.

Put bluntly: the holding company set up to protect the family estate can, through cash build-up and absence of activity, stop protecting precisely what it was meant to protect.

What is decided in the months before the sale and no longer after it?

• Who the seller is. The individual or a holding company. This is the decision that fixes all the others.
• Whether to incorporate or reorganise the holding company, and when. Share contributions and share exchanges have their own tax regime and require a valid business reason beyond the tax advantage itself. Doing it once the letter of intent is signed is late and draws attention.
• The holding period of the shareholding. The one-year test in article 21 is counted backwards from the disposal. It cannot be improvised in the final quarter.
• The split between shareholders and family. Who sells, in what proportion, and whether there are gifts that are better dealt with before rather than after.
• How much money you need personally. Setting that figure before signing is what stops the entire price ending up inside a company.
• The intended destination of the money. Reinvesting in another business, living off the income or dividing it among heirs are three answers that lead to three different structures.

After closing, all that is left is administering what was already decided.

What is the next step?

Before signing anything, write down three figures: the expected price, the acquisition cost of your shares, and the amount you want available personally over the following five years. With those three figures you can compare the total cost of selling as an individual against selling through a holding company, including the toll of later taking the money out. That analysis is done case by case, on your own numbers, and it has to be done before signing rather than in next year's tax return. This article does not replace that work and is not individual tax advice.

At Capittal Transacciones we raise this conversation at the start of the mandate, while it is still possible to decide who sells, rather than at the end. We are a mid-market M&A boutique operating in the approximate range of 3 to 250 million euros, with eight offices in Spain (Barcelona as headquarters, Madrid, Girona, Lleida, Tarragona, Palma, Zaragoza and Valencia) and we are part of the NRRO group. The tax and legal side is covered by NRRO (Navarro Tax & Legal), the group's firm. The partner handles each mandate directly, including the decision on which vehicle receives the price.

Keep reading

• Guide: every decision you face when selling your company
• From headline price to bank account: what you actually take home
• How long you have to stay on after selling

Sort the wealth plan before signing, not after: talk to Capittal