Corporate restructuring (mergers, divisions, exchanges of securities, or contributions from the branches of activity) is a common practice in the business environment. However, these transactions can result in unwanted tax burdens when they involve unrealized capital gains on the transferred assets. In order to ensure that the tax cost does not constitute an obstacle to the execution of these operations, our legal system provides a special tax regime that allows the deferral or elimination of the resulting taxation. In order to take advantage of this “neutrality regime”, it is essential that the transaction be carried out for valid economic reasons and not for the purpose of obtaining a fiscal advantage.
Lately, the Tax Administration has been denying the application of this neutrality regime to numerous restructurings by arguing that they are carried out mainly to achieve tax savings, which has generated uncertainty around these operations.
However, recently, the General Directorate of Taxes (DGT) issued a resolution (number V2214-23) that analyses an exchange of securities transaction. In this transaction, an individual transfers its holdings in one entity (A) to another entity (B), so that after the transaction, the individual owns only holdings in B. While B, in turn, owns only holdings in A. This exchange transaction brings out an important unrealised capital gain and therefore, seeks to benefit from the special regime of neutrality. Two years later, entity A will distribute a dividend to entity B.
It should be noted that this dividend will be exempted from Section 21 of the IS (Participation Exemption) Act, which would not have happened if the dividend was received by the individual.
The tax ruling concludes that, when the main purpose of the transaction is to obtain tax advantages, the neutrality regime is not applicable, and the tax advantages pursued should be eliminated. However, the novelty of this resolution lies in the fact that the tax advantage to be eliminated is not the tax deferral derived from unrealised capital gain; that it is an inherent characteristic of the regime itself. ERGO, tax deferral is allowed and this is not the tax advantage that should be eliminated.
In the analysed case, the tax advantage to be identified and eliminated would be, for example, the savings obtained in the personal income tax (IRPF), as it benefits from the participation exemption by not being taxed on the dividend after restructuring.
The DGT aligning with the precedents set by the Supreme Court and the EU Court of Justice is a positive development for taxpayers. When the Administration considers that the neutrality regime is not applicable because the transaction is mainly for fiscal advantages, it cannot eliminate the unrealised capital gain that is deferred since it is an inherent characteristic of the regime (i.e., the “allowed” tax advantage). Instead, it must identify and, if the case, eliminate other tax advantages (i.e., “prohibited” tax advantages).