Spain - Taxation of cross-border mergers and acquisitions
Taxation of cross-border mergers and acquisitions for Spain.
Taxation of cross-border mergers and acquisitions for Spain.
This report explains how recent tax measures, and, in general, Spanish in force law could affect the approach to mergers and acquisitions (M&A) in Spain. The report then addresses three fundamental decisions faced by a prospective buyer.
- What should be acquired: the target’s shares or its assets?
- What should be used as the acquisition vehicle?
- How should the acquisition vehicle be financed?
Tax is, of course, only one part of transaction structuring. Company law governs the legal form of a transaction, and accounting issues are also highly relevant when selecting the optimal structure. These areas are outside the scope of the report. Some of the key points that arise when planning the steps in a transaction are summarized later in the report.
Recent Spanish tax developments
The Spanish government has approved several regulations that contain significant tax measures that could result, generally, in an increase in taxation and compliance complexity. The most relevant, in terms of their potential impact on M&A transactions, are summarized hereto.
Tax measures in General State Budget Law (“GSB Law”) – Main amendments to the Spanish Corporate Income Tax (CIT) Law
The most relevant measures for CIT purposes established in the GSB Law (with effect as from the tax periods commencing on 1 January 2021 and thereafter) that could affect M&A transactions relate to the Spanish participation exemption (PEX) regime.
The CIT Law in force until 1 January 2021 stated a PEX (of 100 percent) regime for dividends and capital gain obtained by a Spanish holding entity derived from either Spanish or non-Spanish subsidiaries when certain requirements are met.
- The Spanish entity must hold, directly or indirectly, at least 5 percent of the share capital or equity of the Spanish or foreign companies or, failing this, an acquisition value of at least 20 million euros (EUR).
- A 1-year uninterrupted holding/maintenance period is met.
- The subsidiary is subject to a minimum level of (nominal) taxation of 10 percent under a foreign corporate tax system similar to the Spanish CIT (non-resident subsidiaries only). This requirement is deemed to be met when the foreign subsidiaries are resident in a country that has signed a tax treaty with Spain that includes an information exchange clause.
The CIT Law also introduced a system for calculating exempt dividends and gains derived from multi-tiered structures where some of the entities within the chain of ownership are not compliant with the participation exemption requirements.
This exemption does not apply to capital gains derived directly or indirectly from:
- entities passively holding assets
- Spanish or European Union (EU) economic interest group
- controlled foreign companies (CFCs) obtaining more than 15 percent of ‘passive income’ as defined by the CFC rules (which may imply checking compliance with the substance requirement at the level of the CFC).
The exemption does not apply to any gains on the transfer of holdings in entities resident in a country or territory classified as a tax haven, unless they reside in an EU member state and can demonstrate that their formation and operations are based on valid economic reasons and they engage in economic activities.
The GSB Law amends the current Spanish PEX regime from 1 January 2021, as follows.
- The Spanish participation regime would be limited to 95 percent in relation to dividends and capital gains from domestic and non-resident subsidiaries, giving rise to an effective tax of 1.25 percent (i.e. 5 percent of dividends taxed at the Spanish CIT rate of 25 percent) on those dividends and capital gains. The abovementioned effective 1.25 percent taxation on dividends would not be eliminated within a tax group, so there appears to be no safe haven from this measure.
- The reduction of the Spanish participation exemption regime from 100 percent to 95 percent would not apply to entities with a net turnover falling below EUR40 million that (i) are not assets-holding entities, (ii) do not form part of a commercial group, and (iii) do not hold a stake of at least 5 percent in the share capital or equity of other entities. Under this scenario, the PEX reduction shall not apply for dividends and profit-sharing (this measure does not seem to extend to the positive income derived from the transfer of shares), coming from a subsidiary, Spanish-resident or not, incorporated after 1 January 2021 and fully owned, but only for a limited 3-year period since the date of the incorporation of the subsidiary.
- The minimum holding requirement for the application of the Spanish participation exemption regime is also amended. The 5 percent minimum holding requirement continuous to apply; however, the Spanish participation exemption regime will no longer be available in relation to subsidiaries in which the acquisition cost of the shares is above EUR20 million (if the holding stake does not reach the minimum 5 percent).
- Accordingly, the calculation of the international double tax credit on dividends received from non-Spanish entities is also amended such that the overall amount of the tax credit is generally limited to 95 percent of the gross tax that would have been payable in Spain had such income been earned in Spanish territory, in order to align it with the 95 percent exemption.
Neutralization of the effect of hybrid mismatches — EU ATAD 2
On 30 November 2020, the Spanish Ministry of Finance released a draft bill to implement the EU Anti-Tax Avoidance Directive (Council Directive 2017/952 of 29 May 2017, known as “EU ATAD 2”) into the Spanish CIT and Nonresident Income Tax (NRIT) provisions. As of the current date, ATAD 2 is not yet in force as the draft bill law is still in process of public consultation.
The draft bill law transposes the Directive in line with the wording of the ATAD 2 Directive.
These measures focus on the elimination of hybrid asymmetries generated by: (i) certain payments (such as interest, royalties, etc.) that derive from a different qualification of the financial instruments in the different jurisdictions, (ii) hybrid mismatches that result from differences in the allocation of payments made to hybrid entities or permanent establishment, and (iii) hybrid mismatches that result from differences in the qualification of the hybrid entity.
Spanish Bill to prevent and combat tax evasion
This Bill includes, among other measures, certain amendments to Spanish CFC rules and exit tax with the aim of entirely aligning them with the EU ATAD. These rules are not yet in force.
Although the Spanish domestic rules already included most of the measures required by the ATAD, some adjustments in terms of the CFC regime and exit tax were required to entirely align the Spanish provisions with the Directive.
Regarding Spanish domestic earnings-stripping rules, it must be pointed out that they allow that dividends received from qualifying subsidiaries increase the tax EBITDA limit. To the extent that the domestic earnings-stripping rules are ‘equally effective’ to the interest limitations rules foreseen in article 4 of the ATAD, Spain has been allowed to consider the qualified dividends for the tax EBITDA purposes until 1 January 2024.
Amendments in the CFC regime: Following article 7 of the ATAD, CFC rules will be extended (i) to foreign holding companies, which are currently excluded from this regime, and (ii) to income obtained by a foreign permanent establishment that is below the minimum taxation threshold (75 percent of the tax that would have been paid in Spain), which applies to foreign companies. Additionally, new types of passive income are included within the scope of the CFC rule. Finally, the scope of the safe-harbor clause for EU tax resident subsidiaries is broadened to include companies that are resident in the European Economic Area (EEA).
Amendments in the ‘exit tax’ regime: In line with article 5 of the ATAD, the current deferral rule that applies to Spanish companies that move themselves or their assets to other jurisdictions in the EU or EEA (the Spanish ‘exit tax’ is only paid if the company subsequently moves itself or its assets outside of the EU or EEA within the next 10 years) will be replaced by payment in instalments over 5 years (with an obligation, in some cases, to provide a guarantee of such payment to the Spanish tax authorities). In addition to this, the Bill includes the transfer of the activity of a permanent establishment in the Spanish territory to another state as a new exit tax scenario for NRIT purposes, in line with ATAD.
Additionally, the Bill introduces very significant changes to the Spanish list of tax haven jurisdictions to refer to ‘non-cooperative jurisdiction’, in line with the concept now prevailing in the international tax environment. The concept can include, as per the wording of the Bill, not only states and territories but also preferential tax regimes, in line with Action 5 of base erosion and profit shifting (BEPS).
Directive on administrative cooperation
In May 2018, the
Economic and Financial Affairs Council configuration (ECOFIN) adopted amendments to the DAC6 (EU Directive on cross-border tax arrangements), which introduce mandatory disclosure requirements for tax intermediaries of certain reportable cross-border arrangements to their local tax authorities. Effective from 25 June 2018, DAC6 should had been transposed into the legislation of each member state by 31 December 31 2019, and the obligation to report would had begun 1 July 2020.
As per severe COVID-19 circumstances, the Council of the EU announced on 26 June2020 that it has agreed to an optional DAC6 deferral, allowing member states to defer by up to 6 months the time limits for the filing and exchange of relevant information. Spain opted for this deferral.
On 29 December 2020, Spain finally passed the law that implemented DAC6, in a very executive way, substantially referring to the list of hallmarks contained in the Annex IV of the Directive. It is expected that regulations and guidance are provided by Spanish tax authorities, during the first months of 2021 (but both are not available yet). Accordingly, although a further development regulating the different hallmarks is still pending to be issued, as of 1 January 2021, DAC6 has become applicable for new transactions that shall then be examined on a case-by-case basis. The regulations, which are not enacted yet, would clarify timelines for the submission of operations in retrospective period and the timing on submission of new transactions as of 1 January 2021 (i.e. tax returns models to submit DAC6 events have not been submitted yet).
To be reportable, an arrangement must be cross-border, involving one or more member states, and include, at least, one ‘hallmark’.
Financial transaction tax (FTT)
The FTT (known as the Tobin tax) was approved in October 2020 by the Spanish parliament, allowing Spain to tax the acquisition of listed shares issued by Spanish companies. The purpose of the FTT is to tax transactions that are not subject to any current indirect taxation.
The Spanish FTT will be charged at a rate of 0.2 percent on the acquisition of listed shares issued by Spanish companies admitted to trading on a Spanish or other EU-regulated market, or on an equivalent market of a non-EU country, with a market capitalization exceeding 1 billion euros (EUR). It will also apply to the acquisition of shares represented by depositary receipts or acquired by e.g. exercising an option to convert convertible bonds.
Digital services tax (DST)
The Spanish DST has finally been approved.
The rate of the DST is 3 percent. In general terms, services subject to the tax include digital services developed by large multinational companies having a connection or nexus with Spain, based on the existence of users located in the Spanish territory. Companies that operate globally and have a ‘significant digital footprint’ in Spain will be subject to the DST if two thresholds are satisfied (at the consolidated group level):
- net turnover of more than EUR750 million (globally)
- total revenues from taxable provisions of digital services in Spain of more than EUR3 million.
Digital services subject to the tax include:
- online advertising services targeted at users
- online intermediary services
- data transmission services.
There are various situations when the digital services will not be taxable.
On 7 June 2017, Spain signed the Multilateral Instrument (MLI) and is currently in the process of ratifying this instrument, but at this date, the MLI has not effectively entered into force in Spain. Below is summarizing the provisional position of Spain regarding this Convention.
Spain submitted its MLI position at the time of signature, listing its reservations and notifications and including 86 tax treaties that it wishes to be covered by the MLI.
It should be noted that certain countries with which Spain has important trade relations have not joined the Convention (US, Brazil, Morocco and Ecuador, among others) or have excluded their treaties with Spain from the list of treaties affected by the Convention (as has Switzerland, for example).
Spain has opted for the principle purpose test as the standard for combating abusive tax practices. There is a clear intention on the part of the Spanish tax authorities to prevent abuse of the treaty by denying application of tax breaks to business decisions made strictly for tax reasons.
Spain has chosen to extend an arbitration procedure to cover its treaties for avoidance of double taxation that obliges authorities to correct situations of double taxation.
Spain has also included clauses to prevent abuse due to the use of hybrid mechanisms and clauses aimed at avoiding the artificial circumvention of permanent establishment (PE) status.
Spanish Tax measures affecting M&A transactions
Spanish general earnings-stripping rules and limitation for leveraged buy-out (LBO)
As of 1 January 2012, two limitations affecting the tax deductibility of financial expenses were introduced in the Spanish CIT Law:
- so-called ‘earnings-stripping’ tax rules, which derogated and substituted the previous ‘thin-capitalization’ regime
- a specific limitation preventing the deductibility of financial expenses incurred on acquiring participations from other group entities or for making capital contributions into other group entities.
CIT Law also introduced an ‘anti-leveraged buy-out’ (anti-LBO) provision restricting the deductibility of acquisition financing as of 1 January 2015. The CIT Law provides for a rule that limits the tax-deductibility of interest accruing on acquisition debt, where such interest can be offset against the taxable profits of the target entities acquired (through the applicability of the tax consolidation regimen or a post-acquisition merger).
Under the anti-LBO rule, for purposes of assessing the 30 percent operating profits threshold applicable under the earnings-stripping rules, the operating profits of the target entities acquired (and which were included in the acquirer’s fiscal unity, or merged with or into the acquirer) should be excluded.
Several limitations to this rule should be considered.
- This rule only applies within the 4 years following the leveraged acquisition (i.e. the inclusion of an entity in a fiscal unity, or the performance of a post-acquisition merger after the fourth anniversary of the acquisition, should not trigger the anti-LBO rule).
- Under an ‘escape clause’, this rule does not apply if the portion of the purchase price financed with debt does not exceed 70 percent of the total purchase price. In later FYs, the applicability of the escape clause requires the amortization of the principal amount of the acquisition debt on an annual basis (at a 5 percent rate) until the principal amount is reduced after 8 years to 30 percent of the purchase price.
Restrictions on carryforward of tax losses
For tax periods starting on or after 1 January 2016, limitations on carryforward of tax losses were introduced for large companies.
- Taxpayers with turnover in the 12 months before the beginning of the relevant FY of at least EUR60 million may only offset 25 percent of their positive tax base, before the capitalization reserve.
- This threshold rises to 50 percent for companies whose turnover in the 12 months before the beginning of the relevant FY is between EUR20 and EUR60 million.
- Taxpayers with turnover below EUR20 million in the 12 months before the beginning of the relevant FY may only offset 60 percent of their positive tax base (70 percent for FYs starting in 2017).
- In any case, a EUR1 million threshold of tax losses applies.
When entities are included in a tax group, the above limits apply to the taxable base of the group.
Limitation on generated or carried forward tax credits
To avoid domestic or international double taxation, for taxpayers with turnover of EUR20 million or more in the 12 months before the beginning of the relevant FY, the amount of tax credits generated in the FY or carried forward from previous FYs cannot jointly exceed 50 percent of the tax payable (before deducting the tax credits).
The excess can be deducted in following FYs, together with the tax credits generated in the relevant FY, subject to the thresholds noted above but without any timing limitation.
Recapture of losses of non-Spanish PEs
Before 2013, losses from a PE abroad could be considered as tax-deductible for CIT purposes.
For tax periods starting on or after 1 January 2016, limitations apply when a taxpayer transfers a PE at a gain. In this case, the tax-exempt amount equals the gain reduced by the sum of net losses incurred by the PE before FY2013 that exceed the net profit generated by the PE from FY2013 onward.
Losses on transfer of shares and PEs qualifying for participation exemption
For tax periods starting on or after 1 January 2017, losses on the transfer of shares qualifying for the Spanish PEX regime are not tax-deductible for CIT purposes. The same tax treatment is given to the losses derived from the transfer of shares in non-Spanish resident entities that are tax haven residents or do not comply with the so-called ‘subject-to-tax’ requirement (i.e. the non-Spanish resident entity must be subject to a CIT similar to the Spanish CIT at a minimum 10 percent rate). The Spanish CIT Law presumes that this test is passed when the company is resident in a country that has signed a tax treaty with Spain with an exchange of information clause.
Losses arising on the liquidation of a subsidiary are tax-deductible unless the liquidation is part of certain types of reorganizations (regardless of whether the tax rollover regime applies). In any event, any loss that is deductible for CIT purposes must be reduced by dividends received in the previous 10 years in which they were exempt or entitled to claim a tax credit. Similar tax treatment is given to the losses derived from the sale of a PE so that they are no longer deductible, while losses derived from closing a PE may be considered as tax-deductible for CIT purposes. In the latter case, the loss is reduced by the sum of the profit from the PE that benefited from the PEX in earlier years.
Period to review tax losses and tax credits
The statute of limitations period is 10 years from which an entity generates tax losses and/or tax credits (the general limitation period is 4 years). Once this 10-year limitation period has elapsed, the Spanish tax authorities cannot review the correctness of the calculation of carried forward tax losses (or tax credits), but the taxpayer should be able to provide:
- the tax return of the tax period in which the carried forward tax loss (and/or tax credit) was generated
- the official accounting records of the FY when the tax loss (or tax credit) were generated filed with the Spanish Commercial Registry.
Neutralization of the effect of hybrid mismatches
Spanish CIT Law introduced certain amendments to anti-abuse rules in accordance with the Organisation for Economic Co-operation and Development (OECD) BEPS project.
In this respect, the deductibility of expenses is disallowed with respect to related parties that, due to a different classification for tax purposes, do not generate income, generate exempt income or are taxed at a rate of less than 10 percent (hybrid transactions).
Additionally, intragroup profit-participating loans (PPLs) are characterized as equity instruments for Spanish tax purposes. Consequently, interest payments with respect to PPLs granted as of 20 June 2014 by an entity belonging to the same group would be assimilated to dividend distributions, so they would not be considered as a tax-deductible expense, regardless of the tax residency of the lender. (Under previous tax legislation, interest accrued under PPLs was tax-deductible where it complied with the general tax rules for the deductibility of financial expenses.)
Regarding ATAD 2 considerations, refer to ‘Recent Spanish tax developments – Neutralization of the effect of hybrid mismatches EU ATAD 2’.
The capitalization reserve is a tax benefit effective as of 1 January 2015. Under this benefit, companies can reduce their taxable base in an amount equal to 10 percent of the increase of their net equity during a given year, provided they book a non-disposable reserve for the same amount and keep it on their balance sheet for 5 FYs.
For a tax group, the tax deduction of the capitalization reserve is calculated on a tax group basis, although the accounting reserve can be recognized by any of the tax group’s entities.
Tax neutrality regime
Spanish CIT Law incorporates the tax regime for mergers, spin-offs and other reorganization transactions covered in EU directives. Generally, asset transfers carried out through such transactions do not have any tax implications (either from a direct, indirect or other Spanish tax perspective) for the parties involved (transferor, beneficiary and shareholder) until a subsequent transfer takes place that is not protected by this regime.
When applying for the benefits of this regime, it is critical to have a relevant sound business reason for the merger, other than merely achieving a tax benefit (i.e. tax saving or deferral).
As of FY2015, this tax neutrality regime was amended as follows.
- The tax neutrality regime is now the general regime for reorganizations unless the taxpayers elect for the general tax regime (taxable).
- Where the Spanish tax authorities challenge the application of the tax neutrality regime on the basis that the transactions have not been carried out for valid business reasons but mainly to obtain a tax advantage, the CIT Law expressly provides that the tax authorities can only regularize the tax advantage unduly taken; they cannot claim the tax charge on the unrealized gains of the dissolved entity.
- The CIT Law expands the scope of the definition of ‘partial spin-off’ (‘escisión parcial’) that can benefit from the tax neutrality regime. Spanish CIT Law allows the regime’s application when the transferring entity keeps a controlling stake in a subsidiary.
- Merger goodwill or the step-up of assets on a merger no longer has tax effects (deferred tax liabilities [DTLs] may crystallize in this case). The CIT Law included transitional rules for acquisitions of shares before 1 January 2015. Double taxation can arise where the shares are purchased from Spanish resident individuals.
- Carried forward tax losses can be transferred together with a branch of activity to the acquiring entity. Under prior legislation, this was only possible if the company owning the tax losses was extinguished (mergers and total spin-offs).
This regime could be modified; for more detail refer to ‘Foreseeable tax measures under the new Spanish government’.
Rule for share premium redemption
As of 1 January 2015, the repayment of the share premium to non-resident shareholders and individuals is deemed as a dividend distribution to the extent of the positive reserves generated during the holding period. If no positive reserves exist, the share premium redemption would not have Spanish tax effects (i.e. it would reduce the tax cost of the shares).
Impairment of tangible, intangible and real estate assets
As of 1 January 2015, losses on the impairment of tangible, intangible and real estate assets, which were previously tax-deductible under certain circumstances, are deductible only if they are sold to third parties or if they are depreciated during their useful life.
Asset tax depreciation
For tax periods starting in 2013 and 2014, Spanish tax law imposed a limitation for ‘large-sized companies’ (i.e. companies with a turnover, or that are part of a mercantile group with a turnover, exceeding EUR10 million in the preceding financial year). These entities may only take 70 percent of the maximum depreciation rates for tax purposes corresponding to fixed assets.
The depreciation expense considered non-tax-deductible according to the above is deductible on a linear basis over a 10-year period or, optionally, over the remaining lifetime of the assets, for FYs starting in 2015 and later.
To mitigate adverse tax consequences from the reduced CIT rate (which was 30 percent before FY2015), the Spanish CIT Law introduced a tax credit that would apply on the recapture of accounting depreciations that were not deducted in FY2013 and FY2014. The rates of this tax credit are 2 percent for 2015 and 5 percent for 2016 and future years. Unused tax credits may be carried forward indefinitely.
Tax treatment of intangible assets and goodwill
Intangible assets, such as patents, may be amortized if they depreciate and have a limited useful life.
Under certain circumstances, goodwill and intangible assets with an indefinite life are amortizable for tax purposes. As of 1 January 2015, the maximum annual depreciation rate is 5 percent. As of 1 January 2015, it is possible to deduct goodwill amortization even in the case of an acquisition by group companies.
Notwithstanding the above, Audit Law 22/2015, dated 20 July 2015, modified the tax treatment of intangible assets as follows.
- Intangible assets recognized in the accounts fall within a single category: ‘intangible assets with a defined useful life’. However, a new subcategory is created: ‘intangible assets whose useful life cannot be reliably estimated’. These assets will be amortized over 10 years unless a different period is provided for in another law.
- Goodwill may be included as an asset when it is acquired in ‘onerous basis’ and, in principle, will be amortized over 10 years.
As a result of these amendments, for tax years starting in 2016 and later, the amortization expense of intangible assets must be recognized for accounting purposes in order to be tax-deductible.
The difference between the accounting percentage (in principle, 10 percent) and the tax percentage (5 percent) requires book-to-tax adjustments in order to determine the taxable base for CIT purposes.
Tax consolidation rules
As of 1 January 2015, in line with several EU court cases, Spanish CIT Law allows the application of the tax consolidation regime to those structures where two Spanish companies have a direct or indirect common non-resident shareholder, as long as the latter is not resident in a tax haven for Spanish tax purposes, thereby allowing so-called ‘horizontal tax consolidation’. The non-resident shareholder should comply, among others, with the following requirements.
- It owns, directly or indirectly, at least 75 percent of the other company’s share capital (70 percent for companies quoted on the stock exchange), and it maintains such ownership and a minimum 50 percent of voting rights in such entities for the entire tax year of consolidation.
- It is not a subsidiary of another company fulfilling the requirements to be regarded as the controlling company.
Finally, PEs of foreign companies will also be able to form part of a tax group, not only as the dominant entity but also as a member of the group.
As of 1 January 2015, the Spanish CFC rules were amended to include, among others, additional substance requirements to be met by the foreign subsidiary in order to avoid the imputation of the foreign low-taxed income. For potential amendments to the CFC rules, please refer to ‘Recent Spanish tax developments’.
EU directives: anti-abuse rules
The requirements for the application of the EU Parent-Subsidiary Directive and EU Royalties Directive were modified in FY2015 to prevent abusive situations in which the majority of the participation in the parent company was held by non-EU resident companies. Under the amendment, it is necessary in such cases to prove the existence of valid economic purposes and solid business reasons for incorporating the EU parent company.
The CIT Law abolished the reinvestment tax credit (which reduced the effective CIT rate of a capital gain if certain requirements were met) and the environmental tax credit. The tax incentives for intangibles (i.e. research and development [R&D] tax credit, patent box regime) are retained. Certain quantitative and temporary limitations must be considered to apply these tax credits.
Patent box regime
Under a tax allowance included in Spanish CIT Law, only 60 percent of income obtained from, among others, the transfer of the ‘qualifying intangible assets’ (e.g. rights to use or exploit patents, drawings or models, plans, formulas and know-how) is net income (‘qualifying income’) for tax purposes, where certain requirements are met.
Taxpayers applying this allowance can request an ‘agreed prior assessment’ from the Spanish tax authorities validating the qualification and valuation of the assets assigned or transferred.
The Spanish patent box regimen was amended to align it with the OECD requirement, specifically, with the recommendations under Action 5 of the OECD BEPS project, which provide a framework for the patent boxes regimes. These standards aim to ensure that these regimes reward only substantial activity (‘nexus approach’).
The main amendments included in the Spanish patent box regime are as follows.
- Know-how is removed from the list of intangible assets eligible for this tax incentive.
- The coefficient to determine the reduction is kept at 60 percent but clarifying that the tax reduction applies only to ‘profits’, rather than gross income. Therefore, qualifying income is now calculated as the difference between the income derived from the intangible asset and the costs incurred by the company, directly related to the creation of the assets.
- Negative income obtained in a tax period is also subject to reduction if positive income of the same nature was obtained in previous tax periods to which the reduction has been applied.
- Additionally, two further requirements have been introduced under the new regulations:
- the obligation to differentiate the ancillary services now also applies to the ancillary supply of goods
- the obligation to keep accounting records to determine the direct income and expenses relating to the assets transferred.
Documentation requirements have changed for periods starting on or after 1 January 2016, based on full implementation of the OECD BEPS Action 13 recommendations. For tax periods beginning on or after 1 January 2016, two types of documentation must be maintained:
- a global document for the group (master file)
- a document for each group entity (local file).
The documentation covers domestic and international transactions, except for:
- transactions within the same tax group
- transactions with a single related party not exceeding EUR250,000.
Additionally, country-by-country (CbyC) reporting obligations apply to Spanish tax resident entities that are the ‘head’ of a group (as defined under the Spanish commercial law) and that are not at the same time a dependent of any other entity, to the extent that the consolidated group’s net turnover in the immediately preceding FY exceeds EUR750 million.
The transfer pricing documentation does not have to be submitted within the Spanish tax authorities but must be available to them on request as of the deadline for filing the annual corporate tax return (i.e. generally 25 July of the next FY for entities following the calendar year).
Failure to comply with the documentation requirements may result in specific penalties for not maintaining the correct documentation or for not applying the arm’s length principle (i.e. setting transfer prices at market value).
Asset purchase or share purchase
Generally, a transaction can be performed as a share deal, in which the shares in the target entity are sold, or as an asset deal, in which the assets (and normally the associated liabilities) are the objects of the transaction.
The transfer of shares may allow the seller to mitigate its capital gains tax for companies through participation exemption rules (take into consideration the amendments for FY2021) and for individuals through capital time-based gains reliefs. However, the buyer cannot step-up the tax basis in the assets of the target and inherits any hidden capital gains and contingencies. Losses derived from an intragroup transfer may be compensated with certain limitations.
The sale of assets normally produces a taxable capital gain for the selling company (25 percent CIT rate), which might be difficult to mitigate (although some tax benefits may be available). However, the acquiring entity gains a stepped- up tax basis. The buyer of shares assumes the liabilities of the company acquired (although they might be covered by indemnities in the sale and purchase agreement), while, in general terms, the acquirer of individual assets does not assume the tax risks of the selling company unless the acquisition is made by one or several persons or entities that continue a going concern.
However, in an asset deal in which a complete business unit is transferred, the liabilities connected to the business are also transferred. In this case, the buyer may limit its liability by obtaining a certificate from the Spanish tax authorities showing the tax liabilities and debts. The liabilities transferred would then be limited to those listed in the certificate.
Purchase of assets
Most tangible assets, except land, can be depreciated for tax purposes and spread over the period of their useful economic life, provided the depreciation is based on the asset’s recorded historical cost or on a permitted legal revaluation.
Special rules establish the specific depreciation percentages in force, which depend on the type of industry and assets involved. A maximum percentage of annual depreciation and a maximum depreciation period are established for each type of asset.
As of tax years starting in 2016, intangible assets recognized in the accounts fall within a single category: ‘intangible assets with a defined useful life’. However, a new subcategory is created: ‘intangible assets whose useful life cannot be reliably estimated’. These assets are amortized over 10 years for accounting purposes, unless a different period is provided for in another law.
Consequently, the amortization expense of intangible assets whose useful life cannot be reliably estimated must be recognized for accounting purposes in order to be tax deductible.
The difference between the accounting percentage (in principle, 10 percent) and the tax percentage (5 percent) will imply book-to-tax adjustments in order to determine the taxable base for CIT purposes.
As of tax years starting in 2016, goodwill may be included as an asset when it is acquired in ‘onerous basis’ and, in principle, is amortized over 10 years for accounting purposes.
Consequently, the amortization expense of the goodwill must be recognized for accounting purposes in order to be tax deductible.
The difference between the accounting percentage (in principle, 10 percent) and the tax percentage (5 percent) will imply book-to-tax adjustments in order to determine the taxable base for CIT purposes.
Special rules specify maximum depreciation percentages and periods for specific industries and types of asset.
Depreciation rates higher than the officially established or approved percentages can be claimed as deductible expenses where the company obtains permission from the tax authorities or can support the depreciation applied. As of FY2015, the limitation of the tax deduction for the depreciation of assets established during FY2013 and 2014 is eliminated.
Pending tax losses and tax deduction pools are not transferred on an asset acquisition. They remain with the company or are extinguished. However, in certain cases, under the tax neutrality regime for reorganizations, it may be possible to transfer such tax attributes to the acquiring company.
Value-Added Tax (VAT)
VAT generally applies to the supply of goods or services by entrepreneurs and professionals, as well as to EU acquisitions and the importation of goods by all persons. The standard VAT rate is 21 percent.
Among others, VAT does not apply to transfers of sets of tangible or intangible elements that belong to a taxable person’s business or professional assets and constitute an independent economic activity capable of carrying on a business or professional activity on their own, regardless of any special tax regime that may apply to the transfer.
In general terms, the buyer may deduct the VAT paid on inputs from the VAT charged on outputs and claim a VAT refund where the VAT paid exceeds the VAT charged monthly or quarterly. Alternatively, in case the acquisition is subject to and not exempt from VAT, in order to minimize the financial cost arising from the recoverable amount of VAT paid, the company incurring in this cost could benefit from the monthly VAT refund system.
Corporate reorganizations defined in the tax-neutrality regime for CIT purposes are not subject to the 1 percent capital duty and are exempt from transfer tax and stamp duty. Also exempt from 1 percent capital duty are contributions in cash or in kind to the share capital or equity of a company and the transfer to Spain of the legal seat of a non-EU company.
Sales of real estate exempt from VAT (i.e. a second transfer of a building) are subject to a transfer tax at the rate established by the region in which the real estate is located, unless certain requirements are met and the transferor waives the VAT exemption. Sales of real estate included in a going concern may not be subject to VAT and thus are subject to transfer tax, without the possibility to elect being subject to VAT.
Stamp duty also applies to transactions, such as a sale of real estate, where the sale is subject to VAT and/or the taxpayer waives the VAT exemption on the transfer. There is compatibility between VAT and stamp duty.
Transfers of urban land (whether built on or not) are subject to a municipal tax on the increase in the value of urban land (TIVUL). TIVUL tax due depends on the holding period of the property and the land’s cadastral value. The taxable base of the tax is determined by applying to the cadastral value of the land at the disposal date a certain percentage determined by multiplying the number of years the land was held (maximum 20 years) by a coefficient ranging from 3 to 3.7. The tax rate may be up to 30 percent.
It is worth noting that this tax has been declared unconstitutional in cases where no profit is generated at the time of transfer.
Purchase of shares
Due diligence reviews
In almost all cases of share purchases, a tax due diligence process is carried out. The main objectives of a tax due diligence process are: (i) define the tax control environment of potential target company/ies, (ii) review historical tax procedures, (iii) identify tax contingencies, (iv) validate tax credits, and (v) confirm deferred tax position of the Target with the aim of (i) changing management of tax affairs, if needed (ii) seek protection against tax contingencies, (iii) reflect tax inputs in the financial model for valuation purposes, and (iv) define pre- and post-deal actions.
Local or state taxes
In general terms, no local or state taxes are payable on the purchase of shares.
Tax indemnities and warranties
In negotiated acquisitions, it is common practice for the buyer to ask the seller to provide indemnities or warranties for any undisclosed liabilities of the company to be acquired.
Tax losses under Spanish law can be carried forward without temporal limitation.
The tax losses cannot be offset where:
- the majority of the capital stock or of the rights to share in the income of the entity has been acquired by a person or entity or by a group of related persons or entities after the end of the tax period to which the tax losses relate
- such persons or entities hold less than 25 percent at the end of the tax period to which the tax losses relate, and
- the acquired entity:
- has not performed any economic operations in the 3 months before the acquisition, or
- has performed a different or additional economic activity during the 2 years after the acquisition that generates a net turnover value over the 50 percent of the net turnover corresponding to the 2 prior years, or
- is a ‘passive holding company’ as defined in the Spanish CIT Law, or
- has been removed from the index of organizations for not filing its CIT return for 3 consecutive periods.
As of FY2016, there are quantitative limitations on carryforward of the tax losses (see ‘Restrictions on carryforward of tax losses’ earlier in this report).
VAT and transfer tax are not payable on the transfer of shares, except in certain cases mainly involving the sale of shares as a means of selling real estate. In such cases, where more than 50 percent of the company’s assets by value consist of real estate not linked to its business activity and the acquirer receives more than 50 percent of the company’s voting rights directly or indirectly, the transfer of the shares may be subject to VAT or transfer tax, to the extent that the parties involved in the transfer of shares act with the intent of avoiding the tax otherwise due on the transfer of immovable properties.
Stamp duty is not payable, but brokerage or notary fees, which are normally less than 0.5 percent of the price, are applicable.
Choice of acquisition vehicle
Several potential acquisition vehicles are available to a foreign buyer, and tax factors often influence the choice.
Local holding company
A local holding company is the most common vehicle for transactions. There are two main types of limited liability companies: Sociedad Anonima (SA) and Sociedad de Responsabilidad Limitada (SL).
Both entities have their own legal status (legal personality). Each has a minimum share capital (EUR60,000 for an SA and EUR3,000 for an SL) and may have one or more shareholders. Both are governed by Royal Legislative Decree 1/2010, dated 2 July 2010, on Corporate Enterprises.
Foreign parent company
Spain does not charge withholding tax (WHT) on interest and dividends paid to EU recipients (see the European Council Interest and Royalties Directive 2003/49/EC and the EU Parent-Subsidiary Directive 90/435/EEC), although some anti-abuse rules must be considered.
Some tax treaties reduce the applicable WHT rates, which are normally 19 percent for interest and dividends and 24 percent for other income.
Non-resident intermediate holding company
It should be noted that Spain has opted for the principle purpose test as the standard for combating abusive tax practices. There is a clear intention on the part of the Spanish tax authorities to prevent abuse of the treaty by denying application of tax breaks to business decisions made strictly for tax reasons. Moreover, certain Spanish treaties contain anti-treaty shopping provisions that may restrict the ability to structure a deal in a way designed solely to obtain tax benefits. Similarly, where the non-resident intermediate holding company reduces the Spanish WHT rate otherwise applicable, Spanish tax authorities may apply general anti-avoidance tax rules (GAAR) to challenge this structuring.
The target company’s assets or shares can be acquired through a branch. Although branches are taxed in a similar way to resident companies, they have the advantage of not attracting WHT on remittance of profits abroad, provided the foreign company resides in a tax treaty country or in the EU (with some exceptions).
Joint venture (and other vehicles)
Spanish partnerships engaged in business activities (Sociedad Colectiva or Sociedad Comanditaria) are treated as corporate taxpayers.
Choice of acquisition funding
A buyer using a Spanish acquisition vehicle to carry out an acquisition for cash needs to decide whether to fund the vehicle with debt, equity or a hybrid instrument that combines the characteristics of both. The principles underlying these approaches are discussed below.
The investment may be financed on either the local or a foreign market. No limitations apply to local financing, provided the borrower is a Spanish resident. If the loan is granted by a non-resident, under the current exchange control system, the borrower must declare the loan to the Bank of Spain. Previously, the borrower had to obtain a number of financial operations by filing the appropriate form (PE-1 or PE- 2), depending on the amount of the loan.
The principal advantage of debt is the potential tax-deductibility of interest (see ‘Deductibility of interest’ later in this report), whereas the payment of a dividend does not give rise to a tax deduction. Another potential advantage of debt is the deductibility of expenses, such as guarantee fees or bank fees, in computing trading profits for tax purposes.
If it is decided to use debt, a further decision must be made as to which company should borrow and how the acquisition should be structured. To minimize the cost of debt, there must be sufficient taxable profits against which interest payments can be offset.
Normally, the pushdown of debt has been a structuring measure to allow the offsetting of the funding expenses against the target’s taxable profits.
Debt pushdowns implemented as intragroup transfers of shares are restricted as of 1 January 2012. Interest expenses are not deductible when derived from intragroup indebtedness incurred to acquire shares in other group companies, whether resident or not, unless the taxpayer provides evidence that the transaction is grounded in valid business reasons.
Additionally, the CIT rule introduced an anti-LBO article. According to this rule, for purposes of assessing the 30 percent operating profits threshold applicable under the earnings-stripping rules described earlier, the operating profits of the target entities acquired (and which were included in the acquirer’s fiscal unity, or merged with or into the acquirer) should be excluded.
Both joint stock companies (SA) and limited liability companies (SL) are barred from providing financing, fund assistance or guarantees for the acquisition of their own shares/participation or the shares/participation of their parent company. This restriction does not apply to companies lending in the ordinary course of their business or to loans made to employees.
Deductibility of interest
In addition to transfer pricing rules, there are other limits on the deduction of interest expenses on debt used to finance an acquisition, such as the general limitation on financial expenses and GAAR.
As of 1 January 2012, the deductibility of a company’s net financial expenses is limited to up to 30 percent of the EBITDA. Undeducted expenses may be carried forward without temporal limit. Where the net interest expenses of a taxable year are below the 30 percent limit, the unused difference (up to 30 percent of earnings before income taxes, depreciation and amortization — EBITDA) can be carried forward for 5 years. The 30 percent limit does not apply to net expenses up to EUR1 million.
Additionally, there are several situations in which a tax deduction for interest payments can be denied under increasingly complex anti-avoidance legislation. In particular, Spanish transfer pricing legislation, which applies to interest expenses and principal amounts, can restrict interest deductibility when the level of funding exceeds that which the company could have borrowed from an unrelated third party or where the interest rate charged is higher than an arm’s length rate.
Transactions caught by the rules are required to meet the arm’s length standard. Thus, where interest paid to an overseas (or Spanish) parent or overseas (or Spanish) affiliated company is in an amount that would not have been payable in the absence of the relationship, the transfer pricing provisions deny the deduction of the payments for Spanish tax purposes. According to the literal wording of the law, where both parties to the transaction are subject to Spanish tax, the authorities can adjust the results of the party whose benefits have been increased, so that there is usually no impact on the cash tax payable by the group (although losses can become trapped in certain situations).
The tax authorities could also reject the tax-deductibility of interest expenses under the anti-avoidance clauses in the general tax law (i.e. re-characterization of debt into equity).
WHT on debt and methods to reduce or eliminate it
Generally, the payment of interest and dividends by Spanish residents is subject to 19 percent WHT. The WHT may be credited against the recipient company’s income tax liability. Where certain requirements are met, the WHT on dividends is eliminated where the acquiring company holds a participation of more than 5 percent and uninterrupted period of more than 1 year after the date of acquisition.
Additionally, this tax may be reduced or eliminated for dividends, interest and royalties, where the beneficiary is a resident of a tax treaty country.
Checklist for debt funding
- The use of bank debt may avoid transfer pricing problems (but not the limitation on interest deductibility) and obviate the requirement to withhold tax from interest payments.
- Interest can be offset against taxable income of other entities within the tax group. Interest that cannot be offset immediately because of net operating losses can only be carried forward for offset against future profits of the entities within the tax group. Interest that cannot be offset immediately due to the general limitation on interest deductibility may be carried forward without temporal limitation.
- Consider whether the level of profits would enable tax relief for interest payments to be effective.
- A tax deduction may be available at higher rates in other territories.
- WHT of 19 percent applies on interest payments to non-Spanish and non-EU entities unless lower rates apply under the relevant tax treaty.
It is possible to finance the acquisition with equity or with a mix of equity/debt. Funding an investment with equity has no Spanish adverse tax implications.
Tax-neutral regime for corporate reorganizations
There is a deferral regime in the Spanish CIT Law for mergers, spin-offs, contributions in kind and exchanges of shares, among others. This was a special regime; however, as of the FY2015, the deferral regime is the general one. In order to not apply the deferral, the Spanish tax authorities must be notified.
This special regime is mainly aimed at achieving the tax-neutrality of corporate restructuring operations by deferring the taxation that could otherwise arise until the acquiring company transfers the assets acquired.
This tax-neutral regime applies provided that the restructuring transaction is supported with valid business reasons other than tax reasons (anti-abuse clause). Where the main purpose of the reorganization is to obtain a tax advantage and the non-tax reasons are ancillary or not sufficiently relevant compared with the tax advantage obtained, the Spanish tax authorities would likely challenge the tax-neutrality regime.
The CIT Law expressly provides that, if the deferral requirements are not met, the tax authorities can only regularize the tax advantage unduly taken but cannot claim the tax charge on the unrealized gains of the dissolved entity.
Three kinds of mergers are possible in Spain according to the tax definition of ‘merger’.
- Mergers where the companies involved are dissolved (without liquidation) and their assets and liabilities are contributed to a newly incorporated company: The shareholders of the dissolved companies receive shares in the new company in exchange for their shares in the merged companies and, if necessary, a monetary compensation that cannot exceed 10 percent of the nominal value of the shares.
- Mergers where an existing company absorbs one or more companies: The shareholders of the absorbed companies receive new shares from the absorbing company and, if necessary, a monetary compensation that cannot exceed 10 percent of the nominal value of the shares.
- Mergers where an entity, on being dissolved without liquidating, transfers its assets and liabilities to the company holding all the securities representing its share capital.
Three kinds of splits are possible in Spain.
- A total split occurs where a company separates its net equity into one or more parts and transfers them as a block(s) to one or more entities (which can be new or pre-existing) as a consequence of its dissolution without liquidation, and the transferring company’s shareholders receive representative participation in the acquiring companies. This participation should be given to the shareholders in proportion to the shares they held in the split company, and, if appropriate, a monetary compensation that cannot exceed 10 percent of the nominal value of the shares.
- A partial split occurs where a company separates part of its assets that represent an autonomous branch of activity and transfers it to one or more entities (new or pre-existing), receiving in compensation participations in the acquiring entity that should be allocated to its shareholders in proportion to their respective participations in the transferring entity’s share capital. Similarly, the transferring entity reduces its share capital and reserves, and, if necessary, the shareholders of the transferring entity also receive a monetary compensation that cannot exceed 10 percent of the nominal value of the shares.
- A financial split occurs where a company separates part of its assets consisting of the majority shares in other companies (maintaining at least a controlling stake in a subsidiary or a branch of activity) and transfers it to a company (new or pre-existing), receiving as consideration shares in the acquiring entity that should be allocated to its shareholders in proportion to their participations in the transferring entity’s share capital. Similarly, the transferring entity reduces its share capital and reserves, and, if necessary, the shareholders of the transferring entity also receive a monetary compensation that cannot exceed 10 percent of the shares’ nominal value.
Where the split involves two or more acquiring entities and the allocation of the shares of the acquiring entities to the shareholders of the transferring company is in a different proportion than their holding in the transferring company, each set of separated assets is required to constitute an autonomous branch of activity.
Contribution in kind
Through a contribution in kind, a company, without being dissolved, transfers an autonomous economic unit of activity to another entity, receiving in exchange shares issued by the acquiring company. The contribution may also consist of individual assets, provided certain requirements are met.
Exchange of shares
In an exchange of shares, an entity acquires a participation in the share capital of another entity that allows it to obtain the majority of voting rights. In exchange, the shareholders of the company acquired are given participation in the acquiring company and, if necessary, monetary compensation that cannot exceed 10 percent of the nominal value of the shares.
Generally, the capital gains derived from the difference between the net book value and the market value of the goods and rights transferred because of the above transactions are not included in the transferor’s CIT tax base.
The goods and rights acquired by an entity as a consequence of any of the transactions mentioned earlier would be valued for tax purposes at the same value they had in the transferring entity before the transaction took place. The payment of taxes is deferred until the acquirer subsequently transfers the assets involved in the transactions.
The income derived from the allocation of the acquiring entity’s participations to the transferor’s partners is not added to their taxable bases in certain situations specified in the legislation. For tax purposes, the participations received have the same value as those delivered.
Step-up and goodwill depreciation
The CIT Law provides that goodwill and other intangible assets arising because of a merger are no longer tax-deductible if the share deal closes in 2015 or later years.
The rationale for this change is that capital gains incurred by Spanish sellers on the disposal of shareholdings in Spanish entities are no longer taxable (due to the PEX regime), so there is no double taxation to be mitigated. The CIT Law provides for transitional rules for shares acquired before 1 January 2015.
All the transactions mentioned earlier, except contributions in kind consisting of individual assets, are exempt from or not subject to transfer tax or the local tax on urban land appreciation. These transactions are not subject to VAT where the assets and rights transferred constitute a ‘branch of activity’, as defined for VAT purposes.
Subrogation in tax rights and obligations
In the above transactions, all of the transferring entity’s tax rights and liabilities are transferred to the acquiring company or, in the case of a partial transfer, only those relating to the goods and rights transferred. Where some of the transactions are covered by the special tax regime, the acquiring company can offset losses from the transferring entity, subject to certain limits.
Consideration should also be given to using hybrids, which are instruments treated as equity for accounting purposes for one party and debt (giving rise to tax-deductible interest) for the other. Following the OECD’s BEPS recommendations, as of FY2015, expenses derived from operations with related parties that, due to a different qualification, do not generate an income or generate income that is exempt or subject to a tax rate under 10 percent, are not deductible.
Additionally, interest on hybrid financial instruments representing share capital of the issuer (e.g. non-voting shares, redeemable shares) and interest on profit-participating loans granted to group entities are characterized as dividends and could benefit from PEX.
The CIT Law also provides a special rule for derivatives when the legal holder of the shares is not the beneficial owner of the dividend, such as stock loans or equity swaps. In these cases, the exemption is granted to the entity that economically receives the dividend (through a manufactured dividend or compensation payment), and not to the formal holder of the shares, provided that certain conditions are met (e.g. accounting recognition of the shares). The PEX does not apply to dividends that are characterized as a tax-deductible expense in the entity distributing the dividend.
Potential tax measures to implement EU ATAD 2 into the Spanish CIT and NRIT provisions must be considered.
On deferred settlement or payment by instalments, income and/or gains are deemed to be obtained on a proportional basis as the payments are made, unless the entity decides to use the accrual method of accounting.
Transactions in which the consideration is received, in whole or in part, in a series of payments or a single late payment are deemed to be instalment or deferred price transactions, provided that the period between delivery and the maturity of the last or only instalment exceeds 1 year.
Concerns of the seller
Where a purchase of both shares and assets is contemplated, the seller’s main concern is the reduction or elimination of the gain derived from the sale. Thus, the following factors should be taken into account.
- A major change in shareholding (see ‘Tax losses’) and participation in the transferring company by the acquiring company may reduce the loss carryforward benefit if the target company has been inactive for any length of time.
- The date of acquisition is crucial (for real estate only where the seller is a legal entity and for all assets where the seller is an individual, provided certain requirements are met).
Company law and accounting
Spanish accounting legislation was adapted to European legislation by Law 16/2007, which was designed to reform commercial accounting rules and harmonize them with EU rules.
The General Accounting Plan was approved by the Royal Decree 1514/2007. The Spanish General Accounting Plan has been recently amended with the aim of achieving the homogenization of accounting regulations in Spain with international standards in order to facilitate the comparison of financial information between companies, based on the application of the same accounting criteria and principles.
For accounting purposes, a business combination may be categorized as either an acquisition or an intragroup operation.
In essence, a combination is regarded as a merger where it affects a pooling of business interests (where one company’s equity is exchanged for equity in another company) or where shares in a newly incorporated company are issued to the merging companies’ shareholders in exchange for their equity, with both sides receiving little or no consideration in the form of cash or other assets.
The acquisition accounting may give rise to goodwill. The net assets acquired are recorded on the consolidated balance sheet at their fair values, and goodwill arises to the extent that the consideration exceeds the aggregate of these values. Acquisition accounting principles also apply to purchases of trade and assets.
An important feature of Spanish company law concerns the ability to pay dividends. Distributions of profit may be made only out of a company’s distributable reserves provided that the minimum legal reserve has been recorded. Interim dividends are allowed.
Distribution of pre-acquisition retained earnings of the acquired company, in certain cases, should be recorded as a reduction in the value of the participation acquired (for both accounting and tax purposes).
Finally, a common issue on transaction structuring arises from the provisions for financial assistance. Generally, it is illegal for a company to give financial assistance, directly or indirectly, for the purpose of acquiring that company’s shares.
Law 3/2009 regulating structural modifications of commercial companies also deals with financial assistance. It stipulates that in the case of a merger between two or more companies, a report by an independent expert on the merger plan is required where any of the companies has incurred debt during the previous 3 years to acquire control over or essential assets from another company participating in the merger. The independent expert must pronounce on whether or not financial assistance has been provided.
According to the criteria of the Spanish accounting authorities, certain waivers of loans or conversions of loans into equity made in the context of a debt restructuring process could trigger accounting income for the borrower, which would be included in its taxable income.
Grouping of companies for tax purposes is possible provided that, among other requirements, the dominant company (which can be a resident or non-resident entity in Spain) directly or indirectly holds at least 75 percent (70 percent for listed companies) of the stock of all companies of that group at the beginning of the year in which the tax-consolidation regime is to be applied. This participation must be maintained for the entire FY in which the consolidation regime is applied.
Formerly, the group dominant entity had to be a Spanish entity. However, according to the CIT Law, Spanish sister entities with a non-Spanish parent (and Spanish subs indirectly owned) can form a tax group.
The main rule governing transactions between associated parties is that the transactions should be carried out at prices that would have been agreed under normal market conditions between independent companies (i.e. arm’s length price).
There are no advantages in Spain for a company with dual residency.
Foreign investments of a local target company
Generally, from an exchange control point of view, foreign investments are unregulated and can be freely made, although they must be declared to the foreign investments registry by filing the relevant forms.
Where the foreign participation in the Spanish company is higher than 50 percent, prior communication with the general directorate of foreign transactions is required when the foreign investor is a resident of a tax haven.
Comparison of asset and share purchases
Advantages of asset purchases
- The step-up in the assets acquired can be depreciated or amortized for tax purposes.
- No previous liabilities of the company are inherited (except for tax liens if real estate assets are transferred), unless the acquisitions made by one or several persons or entities constitute a going concern (even in this case it is possible to request a certificate of tax liabilities from the tax authorities and limit the liabilities to those disclosed in the certificate).
- Only part of the business may be acquired.
- Where the selling company has tax losses, capital gains can be offset against the seller’s tax losses, thereby effectively allowing for immediate use of the losses, with certain limitations.
- Not subject to VAT when a branch of activity is transferred.
- A profitable business could use its acquirer’s tax losses.
Disadvantages of asset purchases
- The capital gain derived from the transfer is subject to CIT for the seller unless it arises because of a corporate reorganization protected by the neutrality tax regime.
- A higher capital outlay is usually involved (unless business debts are also assumed).
- Possible need to renegotiate supply, employment and technology agreements, and change stationery.
- Generally, benefit of any losses incurred by the target company remains with the target company.
- Tax liabilities are inherited when acquiring a business unit.
Advantages of share purchases
- Capital gains on a sale of shares by a Spanish company may benefit from PEX if certain requirements are met (take into consideration the amendments for FY2021).
- May benefit from tax losses of the target company (with certain limitations).
- Lower capital outlay (purchase net assets only).
- May gain benefit of existing supply or technology contracts.
- Not subject to VAT or transfer tax (unless anti-avoidance rules apply where real estate, non linked to business activity, is involved).
Disadvantages of share purchases
- Buyer acquires unrealized tax liability for depreciation recovery on difference between market and tax book value of assets.
- Liable for any claims or previous liabilities of the entity.
- Losses incurred by any company in the acquirer’s group in the years before the acquisition of the target cannot be offset against profits made by the target company unless a specific restructuring is performed.
- Less flexibility in funding options (requires debt pushdown strategies to offset interest expense with target’s business profits).
KPMG in Spain
Carlos Marin Pizarro
S.L. Edificio Torre de Cristal
Paseo de la Castellana
259 C, 28046Madrid
T: +34 91 456 34 00
This country document does not include COVID-19 tax measures and government reliefs announced by the Spanish government. Please refer below to the KPMG link for referring jurisdictional tax measures and government reliefs in response to COVID-19.
Click here — COVID-19 tax measures and government reliefs
This country document is updated as of 31 January 2021.
El equipo de especialistas de KPMG trabaja al ritmo de la operación para ayudarte a crear valor a lo largo del cliclo de vida de la transacción.
El equipo de especialistas de KPMG trabaja al ritmo de la operación para ayudarte a crear valor a lo largo del cliclo de vida de la transacción.