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Juan Reig |
In Spain, a commonly accepted view is that the tax impact of a debt for equity swap is dictated by its accounting treatment. The swap can be made by increasing capital through the capitalisation or remission of debt, provided that, in the latter case, the creditor is, in turn, a shareholder of the debtor company (if the remission were agreed to by someone other than a shareholder, it would give rise to a gain). According to Spanish accounting rules, the remission of a debt to a shareholder should be recognised by the debtor directly in equity, with no effect on income. Thus, the rule equates this accounting treatment with that for a capital increase through debt capitalisation, which has traditionally been recognised as a contribution directly to equity.
This rule has been qualified, however, by the Spanish accounting regulator (the ICAC), establishing two further criteria: (i) where there are several shareholders, the recognition of a remission by the creditor shareholder directly in equity will be limited to the amount remitted in proportion to the shareholder's interest, so that any amount in excess of such interest should give rise to a gain at the debtor company, and (ii) an equivalent accounting treatment would apply to a remission between sister companies within the same group, so that (a) the creditor sister company would derecognise its account receivable and recognise a refund or distribution of its equity, (b) the debtor sister company would derecognise the corresponding account payable and recognise a direct contribution to equity, and (c) the parent company would record its holdings in the debtor and creditor companies in a manner consistent with the accounting treatment given by those companies.
To complete the Spanish accounting picture, the ICAC issued a 2012 ruling, according to which the increase in the debtor's equity should be equal to the fair value of the extinguished debt. Accordingly, if this fair value were lower than the carrying amount, it would give rise to a gain at the debtor company. The consequence would be a taxable gain at the debtor company. The most contentious part of this ruling is that it also extends its conclusion to intragroup debt for equity swaps, a conclusion that may be highly debatable depending on the circumstances.
The recognition of a gain requires that the fair value of the debt be reliably measurable. In the absence of reliability, the carrying amount of the debt would prevail, thereby preventing recognition of this gain. For these purposes, if there were transfers of debt (or of the shares received in the swap), the price agreed on in such transactions could be indicative of this fair value.
Against this backdrop, we may encounter the following situations:
Swap of debt for equity by a creditor from outside the group who becomes a shareholder of the debtor company. According to the ICAC's position, the debtor company should recognise a gain if the fair value of the financial liability were lower than its carrying amount.
Acquisition by a group company of debt where the creditor does not belong to the group. If, when the account receivable is acquired, a discount is applied to the carrying amount at the debtor company and the debt is subsequently swapped for equity, the discount could give rise to a gain at the debtor company.
Debt for equity swap where the debt has been intragroup debt from the outset. If its fair value were reliably measurable and were lower than its carrying amount, in the ICAC's view the debtor should recognise the difference as a gain. Among the factors to be considered when measuring this fair value, regard should be had to any impairment of the account receivable at the creditor shareholder or any losses on intragroup transfers of this receivable. I do not share the view taken by the ICAC, since such difference should be recognised directly in equity and not as a gain.
The nub of the issue is that, in Spain, the use of tax loss carryforwards has been limited for 2012 and 2013, and this could give rise to taxation as a result of a gain in these cases, despite the existence of such losses.
In this context, although the policy applied by the directors in the financial statements of the debtor company is important, any controversy over this issue does not end with an unqualified auditors' report, but rather when the tax year in which the debt for equity swap was made is no longer open to a tax audit, given the Spanish tax authorities' power to adjust the accounting treatment given if they consider that it is not in keeping with a correct application and interpretation of the accounting rules.
Juan Reig (juan.reig@garrigues.com)
Garrigues Taxand
Website: www.garrigues.com
