A recent resolution issued by the Central Economic-Administrative Court (TEAC) introduces additional complexity to the tax treatment of business mergers, restructurings, and reorganisations. In this new resolution, the court argues that it constitutes a form of tax evasion when a shareholder transfers shares to a holding company with the intention of selling them in the future. The reasoning behind this is that the shareholder seeks to avoid paying taxes on the profits from the sale of these shares by shifting the tax burden to the holding company, which could benefit from exemptions under corporation tax laws.
The ruling, issued in November 2024, reinforces earlier decisions from April and May, which clarified that companies involved in mergers or restructurings could benefit from special tax rules allowing them to defer the payment of all relevant taxes to facilitate the reorganisation process. However, if the ultimate or primary purpose of such restructuring is to save taxes rather than being driven by valid economic reasons, the taxpayer will be required to rectify the situation and pay the taxes that were initially deferred.
The Court states that the special tax regime will fully apply as long as there are no clear indications of tax avoidance. This means that, instead of immediately taxing the capital gains arising from a merger or restructuring, the tax benefits will be progressively revoked as signs of abuse emerge and the precise amount of the tax savings is calculated.
What is the key to this issue?
The key issue in this case is the practice of transferring shares to a holding company, which then receives the dividends from those shares. In this scenario, the shareholder avoids paying taxes on the dividends by shifting the responsibility to the company. The court views this as a tax offence, as the shareholder is effectively circumventing taxes they would otherwise be required to pay under personal income tax rules.
The key factor in this court resolution is the tax-saving benefits arising from such restructuring. If valid economic reasons cannot be demonstrated beyond mere tax savings, the magistrates conclude that there would have been no genuine need to carry out the restructuring, and therefore the tax benefits will not be granted.
The court also emphasises the importance of distinguishing between the preparation of tax abuse and its final execution. In this case, while the transfer of shares may be viewed as laying the groundwork for the tax advantage, the abuse is only deemed fully executed once the shareholder begins to benefit from the dividends or capital gains generated by the shares.
To rectify the situation, the court suggests a “double regularisation” process—one for the shareholder who transferred the shares and another for the company that received them. This approach aims to ensure that all tax obligations are met.
Possible Solution to the Tax Authority’s Interpretation Issue?
In any restructuring operation, the reasons for the restructuring operation must be valid, i.e. the operation must not be carried out to avoid paying taxes, it must have a different purpose such as the following:
- Optimisation of the corporate structure.
- Better access to bank finance
- Risk diversification
- Facilitating generational transmission
- Tax optimisation (not tax savings related)
- Increasing investment capacity
- Separation of assets and minimisation of personal risk.
In conclusion, it is crucial to ensure that the transaction is backed by a clear and legitimate economic rationale, and to be prepared to substantiate this if the tax authority conducts an inspection.
