Improper mergers may qualify for tax neutrality for valid economic reasons

The application of the tax neutrality regime in merger operations is not limited exclusively to mergers of companies within the same group that follow a traditional reorganization logic. The Directorate General of Taxes (DGT) has clarified the scope of this regime in the context of improper mergers.

What the DGT has resolved

The administration has determined that a merger operation may qualify for the tax neutrality regime provided in Chapter VII of Title VII of the Corporate Income Tax Law (LIS), provided that the requirements of article 76.1 c) are met and the operation is carried out for valid economic reasons.

A key point of this resolution is the clarification regarding the presence of negative tax elements. The DGT points out that the existence of tax loss carryforwards or tax credits in the companies involved does not invalidate the application of the special regime. However, the administration conditions this possibility on the merger benefiting the activities resulting from the operation and ensures that the exploitation of said credits or losses is not the preponderant motive of the transaction.

What it means for you

For companies operating with subsidiaries or related entities, this criterion allows for merger and absorption processes without the need to include capital gains in the taxable base, which avoids an immediate tax burden on the operation.

The key to the success of this application lies in the justification of the operation. Tax neutrality is not an automatic right if the transaction lacks a clear business reason. If the main objective of the merger is fraud or tax evasion, or if it is detected that the sole purpose is the exploitation of tax benefits without an improvement in economic activity, the administration will reject the neutrality regime.

What should be done

In the event of a potential merger operation that includes tax loss carryforwards, it is necessary to exhaustively document the economic reasons that justify the transaction. The existence of a business logic that transcends mere tax benefit is the determining element to ensure the application of the tax neutrality regime in accordance with current regulations.