Interpretative developments in restructuring operations

The recent rulings issued by the Central Economic-Administrative Court 1 have generated considerable interest in the field of corporate taxation. These decisions, which consolidate doctrine, represent the Central Economic-Administrative Court's first pronouncement following binding consultation V2214-23 carried out with the General Directorate of Taxes, which grants them special significance in the tax landscape.

The consultation submitted to the General Directorate of Taxes outlined a case in which an individual, holding 60% of the share capital of one company (A), intended to contribute their shares to another company (B) of which he was the owner.

Company A had accrued undistributed profits amounting to approximately 2 million euros, and there was no intention to sell A's shares, neither before nor after the contribution operation. Additionally, it was noted that the consultant's participation in Company A held significant implicit gains, raising concerns regarding the taxation of the transaction.

The consultation raised two crucial issues. Firstly, it inquired about the consideration of tax advantage in the context of the restructuring operation. Specifically, it questioned whether the improvement in the tax position compared to the previous situation would constitute a tax advantage and whether this consideration included the elimination of the taxation itself resulting from the transaction. Secondly, it inquired about the taxation of the implicit gains of the shares of A contributed in case the special tax regime was not applied.

The General Directorate of Taxes responded affirmatively to the consultation, indicating that the special tax regime provided for in the corresponding regulations could be applied considering the existence of valid economic reasons for the restructuring of the company. Among the valid economic reasons were the following:

• Simplifying the consultant's business structure.
• Centralizing decision-making in a single company.
• Enhancing the economic capacity of the holding company.
• Separating the consultant's personal assets, limiting potential personal liabilities, as the holding company would undertake the management of the subsidiary companies.

However, subsequent Central Economic-Administrative Court rulings revoke this interpretation, stating that the operation does not meet the requirements established for the application of said regime.

Therefore, one of the main differences between what was raised in the consultation and the Central Economic-Administrative Court rulings lies in the interpretation of valid economic reasons. While the consultation argued for the existence of such reasons, the Central Economic-Administrative Court determines that these are not sufficient to support the operation from a fiscal perspective.

According to the Corporate Income Tax law, the special restructuring tax regime only applies when operations are motivated by valid economic reasons and not by the pursuit of a tax advantage. As valid economic reasons were not found in the case presented, the Central Economic-Administrative Court concludes that the operation is not eligible for special tax treatment.

Central Economic-Administrative Court rulings meticulously examine the arguments presented in the General Directorate of Taxes consultation and establish a clear interpretation of valid economic reasons. In this specific case, it is determined that the reasons presented by the taxpayer are not sufficient to fully justify the operation from a fiscal point of view. This pronouncement unifies doctrine in this matter and establishes an important precedent for future business operations.

The Central Economic-Administrative Court, in its rulings, thoroughly analyzes each of the valid economic reasons alleged in the General Directorate of Taxes consultation to deny their concurrence.

In conclusion, the Central Economic-Administrative Court establishes that in the absence of valid economic reasons, the regularization of the obtained tax advantage is necessary. It is based on the concept of "unconsummated, only prepared or planned fraud," indicating that the correction of abusive effects must be carried out as they occur, avoiding taxing an abuse that has not yet materialized.

To achieve this, it proposes a liquidation system that combines the taxation of capital gains with deferred payment, determining the amount of the effectively produced tax evasion.

This innovative interpretation by the Central Economic-Administrative Court sets clear guidelines for future business operations and their tax treatment.

MAY 2024

Alejandro Puyo

1 Resolutions of the Central Economic-Administrative Court numbers 00/06448/2022/00/00 and 00/06452/2022/00/00, respectively