Tax neutrality in mergers by absorption of wholly-owned subsidiaries
The Dirección General de Tributos (DGT) has issued a relevant ruling regarding the application of the tax neutrality regime in merger by absorption operations. The analysis focuses on the viability of these operations when the absorbed company is wholly owned by the absorbing company.
What the DGT has ruled
The administration establishes that, if the operation is carried out within a commercial context in accordance with Royal Decree-Law 5/2023 and meets the requirements of Article 76.1.c) of the Corporate Income Tax Law (LIS), it is possible to avail of the tax neutrality regime provided for in Chapter VII of Title VII of the LIS.
In improper merger scenarios where there is 100% ownership, the DGT points out that no income will be recognized for the cancellation of said shareholding, in accordance with Article 82.1 of the LIS. Likewise, the absorbing entity may subrogate into the negative tax bases of the absorbed company, provided that the limits established in Article 84.2 and the Tenth Transitional Provision of the LIS are respected.
However, the body warns that this regime will not be applicable if it is determined that the main objective of the operation is tax fraud or evasion, in accordance with the provisions of Article 89.2 of the LIS.
What it means for you
For companies executing restructuring processes, this ruling confirms the possibility of maintaining tax values and avoiding the recognition of income at the time of the merger. This allows the operation to not generate an immediate tax burden, facilitating the continuity of the absorbed company's tax elements within the absorbing company.
What should be done
It is necessary to verify that the operation has economically valid motives and is situated within a commercial context to prevent the Administration from considering that the purpose is merely fiscal. A detailed analysis of the shareholding and the existence of negative tax bases must be conducted to ensure that subrogation complies with current regulations.
Frequently asked questions
- Can negative tax bases be maintained after the merger?
- Yes, the absorbing entity may subrogate into them as long as the limits of Articles 84.2 and the 10th DT of the LIS are met.
- What happens if the merger is intended to avoid taxes?
- If the main objective is tax fraud or evasion, the neutrality regime will not be applicable according to Article 89.2 of the LIS.