Companies merging by absorption must apply the VAT pro rata rule

The effectiveness of a merger by absorption operation is not immediate upon signing the agreement, but is instead contingent upon a formal milestone. The Dirección General de Tributos (DGT) has specified the exact moment when this corporate transformation impacts the absorbing entity's tax situation regarding Value Added Tax (IVA).

What the DGT has resolved

The advisory body determines that the effects of a merger occur from the moment of its registration in the Mercantile Registry. This is the starting point for the absorbing entity to assume the position of the absorbed entity regarding its tax obligations.

Specifically, if the absorbing entity begins to carry out operations that are simultaneously taxable and exempt—and which do not generate a direct right to deduction—it must apply the pro rata rule. This mechanism, set out in Article 105 of the IVA Law, serves to determine the deduction percentage applicable to the acquisition of goods and services.

What this means for you

For companies executing corporate reorganization processes, this criterion implies that the IVA deduction structure may change drastically at the moment of commercial registration. If the new entity resulting from the absorption combines taxable activities with exempt activities, it will not be able to automatically deduct the entirety of the IVA incurred.

The relevance of this change lies in the need to foresee how the new economic activity will affect the right to deduction. The integration of the absorbed company's activity may alter the pro rata coefficient that the company had been applying, directly affecting its cash flow and cost management.

What should be done

In the event of a merger process, it is necessary to conduct a prior analysis of the activity that the absorbing entity will carry out following registration in the Mercantile Registry. It must be evaluated whether the combination of taxable and exempt operations will mandate the application of the pro rata rule according to current regulations.

It is fundamental to verify the applicable regulations, including Law 37/1992 on IVA and Royal Decree-Law 5/2023, to ensure that the calculation of the deduction percentage is correct from the first moment the merger takes legal effect.