Reverse mergers may apply tax neutrality if economic motives exist

The application of the tax neutrality regime in business restructuring operations has been subject to analysis by the Tax Administration. Specifically, the possibility of applying this treatment in reverse merger scenarios, where a subsidiary absorbs its parent company, has been addressed.

What the DGT has ruled

The Dirección General de Tributos (DGT) has determined that the merger operation may benefit from the tax neutrality regime provided for in Chapter VII of Title VII of the Corporate Income Tax Law (LIS), provided that the requirements of article 76.1 a) of said law are met.

The criteria establish that the existence of tax loss carryforwards in the company to be absorbed does not invalidate the application of this regime. However, the Administration conditions this possibility on the merger being carried out within a commercial scope and the benefit of the operation falling upon the resulting activities. The regime will be excluded if it is proven that the predominant purpose of the structure is the exploitation of said tax losses or if the main objective is tax fraud or evasion, in accordance with article 89.2 of the LIS.

What it means for you

For companies executing restructuring processes, this resolution confirms that tax neutrality is not prohibited by the fact that the absorbed company presents accumulated tax losses. This provides greater legal certainty in consolidation operations of groups where the subsidiary holds a negative tax position.

However, the burden of proof lies in the economic substance of the operation. The mere legal structure is not enough; it is necessary for the merger to respond to a business logic and not be a vehicle for managing tax loss carryforwards without real commercial justification.

What should be done

In the event of a possible reverse merger, it is necessary to document the economic motives that justify the operation. The existence of a solid business reason is the element that will allow for the defense of the application of the tax neutrality regime in the face of a potential inspection. It must be evaluated whether the resulting structure adds value to the business activities to prevent the Administration from interpreting the operation as a measure of tax evasion or fraud.