Proportional total demergers may maintain tax neutrality

The application of the tax neutrality regime in total demerger operations has been analyzed by the Dirección General de Tributos (DGT). The ruling addresses the possibility of a company separating its financial assets from its main economic activity without the operation resulting in an immediate tax impact for the company or its partners.

What the DGT has ruled

The tax authority determines that a total demerger can benefit from the special regime regulated in Corporate Tax (IS) if the attribution of values to the partners is carried out proportionally to their previous shareholding in the demerged company. A relevant aspect of this criterion is that it is not mandatory for the demerged assets to constitute differentiated business lines for the operation to be valid under this regime.

However, the DGT warns about the risk of simulation or lack of economic substance. If the demerger is used as a preparatory stage for a subsequent transfer that results in a non-proportional demerger, the operation could fail to meet the requirements of article 76.2.2º of the Corporate Tax Law (LIS), thereby losing the tax neutrality treatment.

What it means for you

For companies, this criterion allows for an asset restructuring, such as the separation of financial portfolios from operating activity, while maintaining tax continuity. For partners, the direct consequence is that they will be able to receive shares in the resulting new entities while maintaining the original values and acquisition dates of their previous holdings, thus avoiding a taxable event at the time of the demerger.

What should be done

In an operation of this type, it is necessary to ensure that the economic motivation for the demerger is real and not a mere strategy to evade the taxation of a subsequent transfer. Proportionality in the distribution of the new assets among the partners must be exact regarding their current holdings to guarantee compliance with current regulations.