Mergers by absorption may qualify for tax neutrality if they comply with the LIS

Planning business reorganization operations requires a rigorous analysis of current regulations to avoid unforeseen impacts on the tax base. Recently, the Directorate General of Taxes (DGT) has addressed the feasibility of applying the tax neutrality regime in merger by absorption processes.

What the DGT has ruled

The advisory body has determined that a merger by absorption may qualify for the special tax neutrality regime as long as the operation is carried out within a commercial scope and complies with the provisions of Article 76.1 a) of the Corporate Income Tax Law (LIS).

If these requirements are met, the regulations establish the following consequences:

• Income generated by the transferring company will not be integrated into the tax base.
• Shareholders of the absorbed company will not have to integrate income into their own tax base due to the operation.
• The values and seniority of the assets of the disappearing company will be maintained.

However, the DGT warns that this tax benefit is voided if it is proven that the main objective of the operation is tax fraud or evasion.

What this means for you

For companies considering merger processes, this criterion confirms the possibility of carrying out reorganizations without an immediate taxable event occurring from the transfer of assets or the dissolution of the company. This allows the value of the assets to be transferred to the absorbing company without a tax revaluation that increases the tax burden at the time of the merger.

Likewise, the shareholders of the companies involved obtain legal certainty by knowing that, provided the law is complied with, the operation will not trigger personal tax obligations derived from the integration of income.

What should be done

Since the application of this regime strictly depends on the commercial nature of the operation and the absence of elusive purposes, it is necessary to conduct a prior analysis of the economic substance of the merger. Correct documentation of the operation will be fundamental to demonstrate that the reorganization responds to legitimate economic motives and not to a tax evasion strategy.