Partial demergers and mergers may maintain tax neutrality

Corporate reorganization operations, such as financial partial demergers and mergers by absorption, benefit from a tax neutrality framework that seeks to avoid immediate tax burdens during restructuring processes. A recent resolution from the Directorate General of Taxes (DGT) clarifies the limits and conditions for these operations to benefit from such treatment.

What the DGT has resolved

The tax authority has determined that it is possible to apply the tax neutrality regime in two specific scenarios:

• Financial partial demerger: It may qualify for this regime as long as it is classified as a commercial demerger and complies with the requirements of Article 76.2.1º c) of the Corporate Income Tax Law (LIS).
• Merger by absorption: It may apply neutrality if the operation is carried out under the terms of Article 76.1 c) of the LIS.

A key point of the resolution is the management of tax losses. The DGT clarifies that the existence of tax loss carryforwards does not invalidate the application of tax neutrality, provided that the main objective of the operation is not the exploitation of said losses.

What this means for you

For companies undergoing reorganization processes to optimize their structure, this clarification provides legal certainty. It means that the presence of tax loss carryforwards on the balance sheet does not, in itself, constitute an impediment to accessing the neutrality regime, provided that the economic substance of the operation is legitimate.

However, the criteria regarding the intent of the operation are strict. The neutrality regime will be excluded if it is determined that the predominant objective of the demerger or merger is tax fraud or evasion.

What should be done

In the event of a corporate restructuring, it is necessary to verify that the operation strictly complies with LIS regulations and that the classification of the demerger as commercial is solid. It is fundamental to document the economic purpose of the reorganization to demonstrate that the exclusive aim is not the exploitation of tax loss carryforwards, thereby preventing the Administration from considering the operation a fraudulent maneuver.