Partial demergers of business lines may qualify for tax neutrality

Corporate restructuring through the segregation of assets is a common tool for optimizing corporate organization. However, for these operations not to trigger immediate tax effects, they must strictly comply with current regulations regarding Corporate Income Tax (IS).

What the DGT has ruled

The Dirección General de Tributos (DGT) has clarified that, for a partial demerger to qualify for the tax neutrality regime provided for in Article 76.2 of the Corporate Income Tax Law (LIS), specific conditions regarding the segregated assets and the resulting entity must be met:

• Autonomous economic unit: The assets being segregated must constitute a business line capable of operating on its own.
• Continuity of the demerged entity: The company performing the demerger must maintain, in its assets, at least one other business line distinct from the one being segregated.
• Nature of the matter: The existence of these business lines is a fact that must be proven to the Tax Administration.

If these requirements are met and the operation is not intended for tax fraud or evasion, Articles 77, 78, and 81 of the LIS will apply, guaranteeing tax neutrality for both the companies involved and their partners.

What this means for you

If your company is considering segregating part of its business, such as a real estate rental portfolio, to create a new company, tax neutrality is not automatic. The Administration will require proof that the segregated business line is truly independent and self-sufficient. For the partners of the demerged company, compliance with these provisions is essential to avoid the integration of income into their taxable base.

What should be done

Before executing a demerger, it is necessary to conduct a technical analysis that demonstrates the operational autonomy of the business line intended for segregation. The ability of the new unit to function with its own resources is the critical point that the Administration will verify. It is recommended to exhaustively document the organizational and operational structure of both business lines to facilitate accreditation before the Administration.