The Community of Madrid has launched a new regulation aimed at reducing one of the main risks to the continuity of family businesses: the tax burden that can accompany the transfer of the business between generations. Law 3/2026, Support for the Family Business, was published on June 30 in the Official Bulletin of the Community of Madrid and came into force on July 1.
The main measure is a 99% reduction in the tax base of the Inheritance and Gift Tax when ownership of an individual business, a professional practice, or shares in a company is transferred by inheritance or donation. Until now, the general percentage applicable in these cases was 95%.
The difference can be significant for families that need to reorganize ownership of a small or medium-sized enterprise upon retirement or the founder’s death. However, it should be clarified that the regulation reduces by 99% the base on which the tax is calculated, not necessarily the final tax bill.
More family members will be eligible for the benefit
One of the most notable novelties is the expansion of the circle of people who can benefit from the reduction. In addition to the spouse, descendants and ascendants, the new regulation adds brothers, uncles, nephews and cousins, reaching collateral relatives up to the fourth degree, both by blood and by affinity.
With this change, the Community of Madrid seeks to adapt the tax treatment to a reality common among small and medium enterprises: children do not always want or can continue the business. Often, the person best qualified to take over the activity may be a brother, a nephew, a cousin, or even someone outside the family.
Precisely, the law also opens the door to certain company employees. Eligible are employees or professionals who maintain a contractual link with the business, demonstrate at least ten years of service, and have performed management functions during the four years prior to the transfer.
This measure can be especially important for companies that do not have a successor within the family, but do have trusted executives capable of ensuring continuity.
The activity must be maintained for five years
The tax advantage will not be automatic or unconditional. The heir or donee must retain the goods, rights or shares received for five years after the transfer and maintain their link to an economic activity.
In the case of business shares, no corporate transactions may be carried out that directly or indirectly cause a substantial decrease in the value of what was received. In addition, the entity cannot have as its main activity the management of a portfolio of movable or real estate assets.
To access the incentive for the transfer of shares, the person giving or bequeathing the business must, as a general rule, own at least 5% of the capital individually or 20% together with the family group. The regulation extends that family group to the fourth degree.
Furthermore, the owner or any member of the family group must actually perform management duties and receive compensation for those duties that represents more than 50% of their income from work and economic activities.
When it comes to a sole proprietorship or a professional practice, the activity must have been carried out in a habitual, personal and direct manner. It must also account for more than 50% of the owner’s work and economic activity income, using the period between January 1 and the date of the transfer or the preceding year as reference.
Fewer barriers to donating the business during life
The law largely equalizes the treatment of transfers on death and lifetime donations. This will enable entrepreneurs to plan the generational handover with greater foresight, without waiting for an inheritance to occur.
Among the simplifications introduced, the requirements present in the national regime disappear, such as the donor having reached at least 65 years old. The Madrid regulation also does not expressly require that the donor step down from management or cease receiving remuneration in order to apply the regional reduction.
The goal is to foster a gradual transition. The founder can transfer ownership of the business and, at the same time, continue collaborating for a period with the new generation, facilitating the transfer of know-how, contacts and responsibilities.
The Community of Madrid estimates that the new measures could benefit around 1,500 taxpayers each year and generate total tax savings close to two million euros.
There will be repayment of the savings if conditions are breached
Companies and beneficiaries must pay careful attention to the commitment to permanence. If the assets or shares are sold before five years have elapsed or cease to be linked to an economic activity, the right to the reduction is lost.
In that scenario, the acquirer must inform the Tax Administration of the Community of Madrid of the breach and repay the portion of the tax that would have been due, along with the applicable late-interest. The deadline to regularize the situation is thirty business days from the event that triggers the breach.
It will also be necessary to expressly opt for the regional reduction within the deadline for filing the self-assessment. This benefit is incompatible with the state reductions provided for the same transfer, so it will be prudent to analyze which regime is more favorable in each case.
A tax law despite its broader name
Although its title refers to “Support for the Family Business,” the law mainly focuses on modifying the taxation of inheritances and donations. It does not introduce a general program of subsidies, financing, digitization, or advisory services for these companies.
Its impact will be felt mainly in succession, donation or ownership reorganization transactions. For Madrid’s family SMEs, the new regulation offers more options for choosing a successor and reduces the tax burden of the transfer. However, it requires upfront planning to properly verify kinship, leadership roles, seniority, shareholding percentages, and the maintenance of activity.
The regulation can prevent a viable business from having to sell assets, incur debt, or close to meet the tax generated by a generation shift. But the tax relief does not replace the need to prepare the handover: defining who will take the helm, organizing ownership, establishing family protocols and anticipating possible conflicts will remain essential to keep the business alive beyond its founders.
