Spain: Subrogation to tax rights and obligations in mergers

Despite the many changes seen in recent years to Spanish corporate income tax legislation, the element discussed in this article, subrogation to the tax rights and obligations in mergers, spinoffs and asset contributions, has remained unaltered.

Originally, the corporate income tax legislation included a separate chapter for the regime envisaged in Directive 90/434/EEC (now, Directive 2009/133/EC) for business reorganisation transactions (neutrality regime), and for the transactions defined therein, it expressly envisaged subrogation of the transferee (of the assets rights and liabilities transferred in those transactions) to all the tax rights and obligations held by the transferor.

Spanish corporate income tax legislation contains also a definition of the treatment of income arising in any transfer of assets and/or rights, which encompasses mergers, spinoffs or asset contributions (general regime), and makes no mention, in this case, of subrogation to the tax rights and obligations of the companies transferring their assets rights and liabilities in these transactions. This regime applies where, for any reason, transactions are not carried out subject to the neutrality regime.

Unrelated to whichever tax regime is applied in each case, the Spanish corporate legislation contains its own definitions, on the matters falling within its scope, for mergers, spinoffs and asset contributions. While these definitions share many points in common with those in Directive 2009/133/EC (the types of transactions qualifying for the neutrality regime), they are not completely identical in all cases. Despite also having been amended in recent years, the corporate legislation has always expressly provided for universal succession by the transferee to the transferor's rights and obligations in some of those transactions, without making any exceptions for tax rights and obligations.

What we may find, therefore, is that the neutrality regime may be applied to some transactions but not to others; and for many of the latter, regardless of their tax regime, corporate law provides for subrogation of the transferee to the transferor's rights and obligations.

The Spanish tax authorities have traditionally defended a self-serving, systematic interpretation of Spanish law, whereby because tax subrogation is envisaged in the neutrality regime, it follows, by logical inference, that under the general regime, the transferor's tax rights and obligations are not transferable to the transferee.

That systematic interpretation might be questionable, however, in that the express recognition that subrogation to the tax rights and obligations comes into play in transactions under the neutrality regime might not be sufficient to displace the right to subrogation existing in every transaction on which corporate law confers the effects of universal succession.

This interpretation was adopted by the Spanish Supreme Court in a judgment rendered on March 9 2017, rejecting the tax authorities' position in a case where they denied the continuity of a tax benefit that had been elected by the absorbed company in a merger (deferred taxation of a gain on condition that the amount obtained would be reinvested and the investment held in the following years).

Besides the effect it may have on decision making in restructuring transactions, this court decision could also impact cases where, due to interpretation differences, the tax authorities have rejected the continuity of tax benefits or advantages in transactions already performed, regardless of whether the neutrality regime has been elected.