Reverse mergers may qualify for the tax neutrality regime

The application of the tax neutrality regime in business restructuring operations has been subject to analysis by the tax administration. Specifically, the viability of this regime in the case of reverse mergers and the presence of negative tax base balances has been addressed.

What the DGT has ruled

The Dirección General de Tributos (DGT) establishes that a reverse merger operation may qualify for the special regime provided for in Chapter VII of Title VII of the Corporate Income Tax Law (LIS). For this treatment to be possible, the operation must be carried out within a commercial scope and comply with the provisions of Article 76.1 of the LIS.

A key point of the ruling is that the existence of negative tax bases in the absorbed company does not invalidate the application of the neutrality regime. However, the administration conditions this benefit on the merger reinforcing the resulting activities and ensuring that the utilization of said tax credits is not the preponderant purpose of the operation. The regime will be excluded if it is determined that the main objective is fraud or tax evasion, in accordance with Article 89.2 of the LIS.

What it means for you

For companies, this interpretation allows for the execution of restructuring processes and mergers without the need to include capital gains in the tax base, which avoids an immediate tax burden that could compromise the entity's liquidity. The key lies in the economic motivation of the operation.

Likewise, for the partners of the entities involved, the regulations establish that they shall not include in their tax base the income derived from the attribution of values of the acquiring entity, provided that the requirements demanded by the Corporate Income Tax Law are met.

What should be done

Since the administration monitors that the utilization of negative tax bases is not the sole reason for the merger, it is necessary to have documentation that supports the economic reason for the restructuring. The validity of the regime will depend on the operation reinforcing the business activity and not being interpreted as a maneuver to evade tax payments.