Capital Increase by Debt-to-Equity Conversion: Tax Treatment in Spain

A capital increase by offset of debts — also known as a debt-to-equity conversion — allows a company to convert debt into equity capital without any cash disbursement by the creditor. It is a common instrument in refinancing situations, group restructurings, and transactions where a shareholder or third party has financed the company and wishes to convert their creditor position into a company shareholding. The apparent simplicity of the transaction from a corporate law perspective contrasts with the tax complexity surrounding the valuation of the debt, the potential implicit write-down, and the tax treatment of the creditor who receives the new shareholding.

Legal framework

Corporate law: art. 301 LSC

Art. 301 of Royal Legislative Decree 1/2010 (LSC) specifically regulates capital increases by offset of debts. It establishes the following requirements:

• At least 25 % of the debts being offset must be liquid, due and enforceable at the date of the capital increase resolution. The remainder may consist of debts not yet due if the general meeting approves this.
• The administrative body must produce a report on the nature and characteristics of the debts, their certainty, liquidity, and enforceability (art. 301.2 LSC).
• In an SA, the administrator’s report must be accompanied by a report from a statutory auditor appointed by the Commercial Registrar on the reality of the debts and whether the assets are sufficient to cover the increased capital. In an SL, no auditor’s report is required — the administrator’s report alone suffices.
• The capital increase resolution requires the reinforced majority provided in the articles of association or, in their absence, the legal majority established by the LSC for statutory modifications.

Tax regime: LIS art. 17

Art. 17 of Law 27/2014 on Corporate Income Tax establishes the general principle of market-value pricing for non-monetary contribution transactions. When the contributed debt has a market value below its face value, two tax effects arise:

1. At the creditor level (legal entity): it records as income for the tax period the difference between the market value of the shareholding received and the book value of the contributed debt. This difference may be positive (income) or negative (tax loss), depending on the financial situation of the issuing company.
2. At the issuing company level: it receives the debt at its market value, regardless of the face value. If the market value is lower than the face value, the difference constitutes income for the issuing company equivalent to the write-down obtained.

IS treatment: the implicit write-down

The implicit write-down is the central tax concept of this transaction when the contributed debt has suffered a loss in value. The AEAT examines whether the fair value of the debt at the time of contribution equals its face value or whether, given the financial situation of the debtor company, there is a difference that must be recognised for tax purposes.

Illustrative example (no specific client figures):

A creditor entity holds a claim against the debtor company for a face value of 100. The debtor company is in financial difficulty and the fair value of the debt is 70. If the creditor increases capital by contributing the nominal debt (100) and receives shareholdings valued at 70:

• The creditor has contributed a nominal debt of 100 with a real value of 70.
• It receives shareholdings worth 70.
• The implicit write-down of 30 constitutes income for the issuing company (debtor), which no longer owes that amount.
• The creditor recognises a negative result of 30 (difference between the book value of the contributed debt and the market value of the shareholdings received).

This symmetrical recognition is what the LIS requires in the period of the transaction, even though no cash has changed hands.

VAT and ITP-AJD treatment

VAT

A capital increase by offset of debts is not, in itself, a transaction subject to VAT, as it does not involve a supply of goods or a provision of services for consideration. The contribution of the debt in exchange for a shareholding falls outside the scope of the tax.

However, if the offset takes place in the context of a broader transaction involving asset transfers, the VAT effects of those transfers must be analysed separately.

ITP-AJD: Corporate Operations (OS) modality

Capital increases are generally subject to the Corporate Operations (Operaciones Societarias — OS) modality of ITP-AJD. However, art. 45.I.B) of Royal Legislative Decree 1/1993 (TRLITPAJD) establishes a broad exemption for transactions including incorporations, capital increases, mergers, and demergers under the legally prescribed conditions.

In practice, most capital increases by offset of debts qualify for this exemption, but the specific case must be verified — particularly when non-resident entities are involved or when special conditions exist that might exclude the exemption.

Stamp Duty — Documented Legal Acts (AJD)

The public deed of capital increase is subject to the AJD fixed duty. The variable duty (0.5–1.5 % at the general rate, depending on the autonomous community) applies to the increased capital only if the transaction is not subject to the OS modality. Since OS and AJD (variable duty) are mutually exclusive, the OS exemption does not automatically trigger AJD variable duty. The specific circumstances must be analysed.

Related-party transaction considerations (art. 18 LIS)

Capital increases by offset of debts between related parties — the most common case being shareholder-company or between entities of the same group — are subject to the related-party regime of art. 18 LIS. The most relevant practical aspects are:

• Valuation of the contributed debt: it must be demonstrated that the market value of the debt equals the value at which the contribution is made. If the debt has suffered a write-down and is contributed at face value, the AEAT may adjust the transaction to market value and assess both the creditor and the company.
• Documentation: under art. 18.3 LIS and RD 634/2015, related-party transactions must be documented with a transfer pricing file. For smaller groups, simplified documentation is sufficient, but it must exist and be consistent with the valuation adopted.
• Bilateral adjustment: any value correction made by the AEAT on the debt offset transaction must be applied bilaterally — adjusting both the creditor and the company — to avoid economic double taxation.
• Prior interest on the debt: if the debt includes accrued interest (not just principal), the nature of each component must be analysed separately, as interest has a different tax treatment from principal at the creditor level.

Typical scenarios

Shareholder financing and subsequent conversion: a shareholder has financed their company through participating loans or a shareholder current account. When the company achieves financial stability, it is agreed to convert the debt into capital, avoiding the liquidity outflow that cash repayment would require. Valuing the debt at market price is the first step.

Debt restructuring in multi-level groups: a parent company has provided intragroup financing to several subsidiaries. As part of a reorganisation, it is agreed to capitalise the loans in the subsidiaries to strengthen their equity and improve their solvency ratios. Each bilateral transaction must analyse the market value of the loan and the IS effects for each entity.

External creditor entering as shareholder: a supplier or external financier agrees to capitalise their debt in exchange for a shareholding. In this case there is no prior related-party relationship, but the valuation of the debt and the proportionality of the shareholding received are equally relevant from the creditor’s tax perspective.

Common errors identified by the AEAT

1. Failing to produce the administrator’s report: art. 301.2 LSC requires the report on the reality and enforceability of the debts. Its absence may affect the corporate validity of the transaction and, consequently, its tax effectiveness.

2. Contributing the debt at face value without analysing market value: when the debtor company has accumulated losses or negative equity, the fair value of the debt does not match its face value. Contributing at face value without recognising the implicit write-down generates differences that the AEAT adjusts by applying art. 17 LIS.

3. Failing to declare the income from the write-down in the issuing company’s IS return: the company that receives the offset debt at an amount below its face value obtains income for the difference. Its omission in the Modelo 200 is a frequent error in debt restructurings.

4. Confusing the OS exemption with non-applicability: most capital increases are exempt from the ITP-AJD OS modality, but the exemption must be expressly applied in the corresponding self-assessment. Failing to file it on the basis that the transaction is not subject to the tax can trigger examinations.

5. Failing to document the related-party transaction: for intragroup or shareholder-company capital increases, the absence of a transfer pricing file exposes the company to a penalty of 15 % of the value of the undocumented transactions, regardless of whether any tax loss occurred.

Conclusion

A capital increase by offset of debts is a fiscally neutral instrument when executed at market value and properly documented. Its complexity lies in the valuation of the debt: where impairment exists, the implicit write-down generates symmetrical tax effects in both the creditor and the debtor that must be recognised in the period of the transaction. The administrator’s report, a reasoned debt valuation, and the transfer pricing documentation file are the three pillars that determine whether the transaction will withstand an AEAT examination.

Related service: Tax planning at BMC | Corporate governance and restructurings