Spain: The Spanish Tax Authorities clarify the special CIT deferral regime for mergers and facilitate business reorganisations

In its recent binding ruling V2214-23, dated 27 July 2023, the Directorate General for Taxation of the Spanish Ministry of Finance has clarified a fundamental aspect of the special corporate income tax deferral regime for mergers: under no circumstances may capital gains arising from the merger be taxed even if the tax authorities consider that the requirements for the application of this regime are not met.

The rationale behind the special merger regime for corporate tax purposes

Business reorganisations can be of many different types: they can consist in the incorporation of a holding company to which the shares of other pre-existing companies are transferred (so that the latter become dependent on the former), mergers, spin-offs, stock swaps, etc. In all these cases, business assets or company shares are transferred, and if their value at the time of restructuring is higher than the value at which they were acquired (which is usually the case for real estate and shares in companies that have accumulated profits), a capital gain arises that must be taxed. Taxation of these capital gains would discourage reorganisation operations due to their high tax cost.

The special merger regime (also known as the deferral or neutrality regime) tries to avoid this problem: by fulfilling its requirements, the taxation of the capital gain is deferred, i.e. taxation will not occur with the restructuring, but when the specific asset is disposed of in the future (i.e. when it exists the corporate group). Thus, the transaction is tax neutral.

The key to the special deferral regime: valid economic reasons

The application of the special regime, following the EU Directive creating it, is conditional on the restructuring operation being carried out for valid economic reasons, i.e. its purpose must not be solely or mainly to obtain a tax advantage. If this requirement is not met, the law states that the Tax Agency can only eliminate the effects of the tax advantage obtained by the taxpayer, but does not indicate what those effects are.

Traditionally, the Tax Inspectorate has interpreted this requirement very restrictively, and on countless occasions has rejected the economic reasons put forward by the taxpayer for carrying out the transaction, considering that the objective of tax savings prevailed, especially because of the deferral of taxation of the capital gain revealed in the restructuring. The general practice of the Tax Agency, once the economic motives had been rejected, was to make the taxpayer pay tax on the capital gain arising from the restructuring transaction.

Clarification from the Directorate General for Taxation: the capital gain cannot be taxed

However, the Directorate General for Taxation’s binding ruling V2214-23 has settled the issue: if the Tax Agency considers that the special merger regime should not be applied because its requirements are not met (in particular, the valid economic reasons), the deferral of the taxation of the capital gain remains unaffected. Only the tax advantages obtained by the taxpayer other than such deferral can be corrected. The deferral is inherent to the special regime, and the prohibited tax advantage must necessarily be different.

Moreover, the binding ruling notes that a valid economic reason is not even a necessary condition for the application of the special tax regime; at most, its absence constitutes a presumption that the transaction could have been carried out with the main purpose of tax avoidance or evasion, a presumption which is rebuttable if indeed no tax advantage other than the deferral of taxation of the capital gain has been achieved.

The ruling binds the Tax Administration

This decision by the Directorate General for Taxation, which is binding on all the bodies of the Tax Administration (including the Inspectorate and the Economic-Administrative Courts), will undoubtedly encourage business restructuring operations, once the greatest of the risks to which they were exposed until now has disappeared: taxation on the gains arising from the reorganisation. This achieves the objective pursued by the special regime: that taxation should not be an obstacle to companies’ decisions on restructuring operations.

Autor: Carlos Fernández