Spanish Tax Breaks For Foreign Acquisitions ‘Lawful’

The General Court of the European Union has ruled in Spain’s favor regarding the country’s use of tax breaks to support companies acquiring foreign shareholdings.

According to the Spanish law on corporation tax, where a company which is taxable in Spain, acquires a shareholding in a “foreign company” of at least five percent and holds it without interruption for at least one year, the goodwill resulting from that shareholding may be deducted through amortization of the basis of assessment for the corporation tax for which the undertaking is liable. The law states that, to qualify as a “foreign company,” a company must be subject to a similar tax to the tax applicable in Spain and its income must derive mainly from business activities carried out abroad.

Spanish tax law does not allow the goodwill resulting from the acquisition of a shareholding in a company established in Spain by a company which is taxable in Spain to be entered separately in the accounts for tax purposes. By contrast, Spanish tax law also provides that goodwill may be amortized where undertakings are grouped together.

In a statement on October 15, 2014, the Commission had said that it had found that the measure provided the beneficiaries with a selective economic advantage which cannot be justified under European Union state aid rules, and which must now be repaid to the Spanish state.

Three Spanish companies – Autogrill España, Banco Santander and Santusa Holding – subsequently brought an appeal before the General Court, asking for the Commission decisions to be annulled.

On November 7, 2014, the Court ruled in favor of the companies and the Spanish rules, stating that “the Commission failed to establish the selective nature of that regime.”

It explained that “the Spanish regime is not aimed at any particular category of undertakings or the production of goods, but a category of economic transactions… the regime applies to all shareholdings of at least five percent in foreign companies held without interruption for at least one year.” It added: “The Spanish regime does not exclude, a priori, any category of undertaking from taking advantage of it, since its application is independent of the nature of an undertaking’s activity. In addition, the Spanish Government does not set any minimum amount in respect of the minimum five percent shareholding threshold. The regime, therefore, does not, in fact, restrict the undertakings which can take advantage of it to those which possess sufficient financial resources to do so.”

The Commission recently initiated a European Union-wide crackdown on the use of tax breaks that give an unfair advantage to companies. It has the right to appeal against the General Court’s ruling within a two-month period.