Mergers and spin-offs are very complex business operations in accounting and tax terms. In this article we will try to list their main particularities so that you can take them into account from the beginning of the negotiations.
What is a corporate merger?
Merger is the process by which two different companies are brought together, transferred en bloc and become a single new company.
They must therefore initiate a dissolution process without liquidation whereby the two initial companies cease to exist, but neither the inventory nor their assets are sold. Because these will be used to create the new company.
What is a corporate spin-off?
A spin-off is the opposite of a merger. It is an operation whereby an entity divides its entire corporate assets and transfers them en bloc to two or more companies. In this case, the final companies may be new or existing companies.
As in the case of a merger, the company is also dissolved without liquidation in the case of a demerger.
Tax regime for mergers and spin-offs
The special regime for mergers and spin-offs is set out in Law 27/2014, of 27 November, on Corporate Income Tax. The main points of this regime are outlined below.
Income derived from the transfer
The income derived from mergers and spin-offs that are the result of the following will not be included, i.e. will not be taxed in the tax base:
- Transfers carried out by entities resident in Spanish territory;
- Permanent establishments in EU and non-EU states in favour of entities resident in Spanish territory;
- The transfer of items that are assigned to a permanent establishment located in Spanish territory.
Tax valuation of the shares or units received as consideration for the contribution
The shares or holdings received shall be valued, for tax purposes, at the same tax value as the branch of activity or the assets and liabilities contributed.
Tax valuation of acquired assets
The assets and rights acquired shall be valued at the same values they had in the company where they were generated, before the merger or spin-off operation was carried out. In the resulting company, the acquisition date of the transferring entity shall be maintained.
Taxation of partners
Provided that the shareholders are resident in Spain or in another EU Member State, the income derived from the attribution of securities from the acquiring entity to the shareholders of the transferring entity will not be included in the tax base. Likewise, they will not be included if the shareholders are resident in a non-EU country if the securities are representative of the share capital of an entity resident in Spanish territory.
Securities received are valued at the tax value of those delivered, determined in accordance with corporate income tax, personal income tax or non-resident income tax rules, as applicable.
Fraud and tax havens
The regime does not apply where the transaction is not carried out for valid economic reasons, but with the intention of obtaining a tax advantage and committing tax evasion or avoidance. In this case the effects of the tax advantage arising from the merger or spin-off will be eliminated.
Lastly, it should be noted that income obtained in transactions involving entities domiciled or established in tax havens will be included in the taxable base for corporate income tax, personal income tax or non-resident income tax purposes.
This is a general guide to the special tax regime for mergers and spin-offs. However, the regulations are full of exceptions and special cases. In these cases, the advice of a law firm specialised in M&A and taxation is essential.