The domestic regime applicable in Spain to reorganizations of businesses is essentially based on the neutrality principle (or deferral principle) imposed by EU Directive 2009/133/EC, of 19 October, (the “Merger Directive”) and does not distinguish between domestic and transnational reorganizations. What varies is the treatment of the consequences of the reorganization, depending on the residence of the shareholders and the location of the assets.
Mergers are defined by article 83.1 of the CITL which sets out three types of mergers: (i) mergers where the acquiring company already exists; (ii) mergers where the acquiring company is a new company, and (iii) upstream mergers.
Article 83.2 sets out three types of divisions: (i) a company is divided among different companies; (ii) a company transfers one or more parts of its businesses, provided they constitute one or more branches of activity, to one or more companies, while keeping at least one branch of activity within the company; and (iii) financial divisions, where a company transfers to another company a part of its business that consists of major shareholdings in a third company. In the case of two or more acquiring companies, the attribution to the shareholders of shares in the receiving companies in a proportion different from the one they had in the transferring company will require that the assets received by the companies are branches of activity.
Under Spanish law, a transfer of assets means a transaction whereby a company transfers, without being dissolved, assets that constitute one or more branches of activity, to another company, either newly incorporated or already existent. In exchange, the transferring company receives shares in the receiving company. For these purposes, a “branch of activity” means all the assets which, from an organizational point of view, constitute an independent business, capable of functioning by its own means. The liabilities incurred for the organization or functioning of the assets transferred may also be transferred with them.
The direct tax consequences of mergers, divisions and transfer of assets are governed by articles 84, 85 and 86 of the CITL.
These articles set out the following rules of the special regime, which is optional and which consists of deferral of the capital gains as long as Spain keeps the power to tax the assets in the future:
- Capital gains arising from the transfers (the difference between the real value of the assets and liabilities and their value for tax purposes) will not be included in the taxable income in the following cases:
- Spanish transferring company and Spanish receiving company;
- Spanish transferring company and non-resident receiving company only as far as the assets transferred remain allocated to a permanent establishment located in Spain (should these assets be later transferred abroad, the capital gain will be included in the last fiscal year of the permanent establishment);
- Spanish transferring company and Spanish receiving company in the case of permanent establishments of the first company located in a non-EU Member State;
- Non-resident company transferring a permanent establishment located in Spain in respect of the assets that remain allocated to a PE in Spain (the residence of the receiving company is irrelevant). Also in this case, should these assets be later transferred abroad, the capital gain will be included in the last fiscal year of the permanent establishment;
- Spanish transferring company and EU receiving company with regard to permanent establishments located in an EU Member State, provided they comply with the requirements set out in the Merger Directive.
- Valuation of the assets in the receiving company: if the transaction has enjoyed the neutral treatment, the assets will be given, by the receiving company, the same value and the same acquisition date they had in the transferring company.
- Valuation of the shares received in exchange of a branch of activity: the shares received in exchange of the transfer of a branch of activity will be valued as the book value of the branch of activity.
- When the receiving company has a minimum 5% holding in the capital of the transferring company, capital gains derived by the receiving company on the cancellation of its holding will not be included in the taxable base. In this case, no credit for domestic double taxation (see Sec. 6.6.) will be available. However, the financial goodwill arising from the transaction (the difference between the price of acquisition of the shareholding and the net worth of the transferring company which cannot be attributed to specific assets or rights) will be fiscally deductible from the tax base at a 1% yearly rate, under certain conditions (goodwill resulting from a merger no longer deductible from 2015).
Article 88 provides for the taxation of the shareholders in case of mergers and divisions:
- Capital gains derived from the attribution of shares of the receiving company to the shareholders of the transferring company will not be included in their taxable base only if the shareholders are resident of Spain or of an EU Member State. If the shares attributed are those of a Spanish resident company, then the residence of the shareholders is not relevant (because Spain keeps its taxing powers in the future).
- The shares received will be valued, for tax purposes, at the same value as the shares they had prior to the merger or division (increased or diminished by the cash compensation, when applicable) and will keep the acquisition date of the old shares.
- If, after the transfer, the shareholder ceases to be a resident of Spain, the capital gain will be included in the taxable base. However, the shareholder may defer payment of the tax until the shares are actually transferred, provided a guarantee is given.
- The capital gains will be included in the taxable base of the shareholders in all transactions that involve tax havens.
The exchange of shares is defined by article 83.5 as the transaction by which one company acquires a participation in the share capital of another company which allows the first company to:
- either acquire the majority of the voting rights in the second company; or
- if it already has such majority of voting rights, to acquire a higher participation
by attributing to the shareholders of the second company, in exchange for their shares, shares in the first company, and if necessary to match the amount, a cash compensation that does not exceed 10% of the value of the shares.
Its tax consequences are set out in article 87 of the CITL as follows:
- Capital gains will not be included in the taxable base of the shareholders (be they individuals or companies) when the following requirements are met:
- The shareholders that exchange the shares are residents of Spain or of another EU Member State;
- If the shares received correspond to entities resident in Spain, the regime will apply even if the shareholders are resident in a third country;
- If the company which acquires the shares is a resident of Spain or is covered by the provisions of the Merger Directive;
- The capital gains will be included in the taxable base in all transactions that involve tax havens.
- Valuation of the shares:
- the shares received by the company will be valued at the same value they had in the hands of the shareholders, except if their normal market value were lower.
- the shares received by the shareholders will be given, for tax purposes, the same value and the same acquisition date they had prior to the transaction. The value will increase or diminish by the amount of the cash compensation paid or received;
- if, after the transfer, the shareholder ceases to be a resident of Spain, the capital gain will be included in the taxable base. However, the shareholder may defer payment of the tax until the shares are actually transferred, provided a guarantee is given.
- In those cases where the transferring company ceases to exist, the receiving company inherits all tax rights and liabilities of the transferring company. If the transferring company does not disappear, only those rights and liabilities connected to the assets transferred will be also transferred to the receiving company.
- Outstanding losses of the transferring company will be transferred to the receiving company. If the receiving company has a holding in the transferring company or if both are part of a tax group, the losses will be reduced by the positive difference between the value of the contributions made by the shareholders related to the holding and its book value.
- The reorganizations that may enjoy the special regime are not subject to any indirect tax (except for the municipal tax on the increase of value of the land).
- The receiving company must include in the yearly accounts all information related to the reorganization and the same must be done by corporate shareholders. Such information must be given as long as the assets or shares are kept by the receiving company or by the shareholders.
Article 96.2 contains an anti-abuse clause which denies the application of the deferral regime when the reorganization has fraud or tax evasion as its main purpose and especially when the reorganization is not carried out for economic valid reasons, but with the main purpose of obtaining a tax advantage.