Spanish General Directorate of Taxes: important ruling on Corporate Income Tax exemptions on the sale of subsidiaries
Published on 6th Jun 2023
The Spanish General Directorate of Taxes has published a binding ruling that the income generated on the transfer of shares of an entity that has not materially commenced its activity but has obtained all the necessary permits for its commencement is exempt from Corporate Income Tax.
The decision
The new binding ruling by the Spanish General Directorate of Taxes (GDT) allows the application of the exemption from Corporate Income Tax on the income generated on the transfer of shares even where the transferred entity has only carried out the preparatory activities (obtaining permits and licences) for the commencement of the relevant economic activity.
The facts
The facts of this ruling by the GDT concerned a consulting entity (A) which helds a 100% stake in another entity (S) which was dedicated to the operation of online gaming licences. In order to carry out its activity, the entity (S) had obtained the necessary administrative licences, incurring significant expenses. The value of the licences exceeded 50% of the value of the assets of the entity (S). Once the licences had been obtained, entity (A) intended to transfer all the shares of entity (S) to an un-related entity. It was accepted that entity (A) owned its interest in entity (S) continuously for the year preceding the day on which the transfer was to take place. Entity (A) requested confirmation on the application of the tax exemption established in article 21.3 of the Corporate Income Tax Law on the positive income generated in the transfer of 100% equity stake in the entity (S).
The GDT concluded that, to the extent that the activity carried out by entity (S) has determined the existence of an organisation, on its own account, of its own or third parties' means of production or human resources, for the purpose of intervening in the production or distribution of goods or services on the market, entity (A) may apply the exemption of article 21 of the Corporation Income Tax Law with respect to the positive income derived from the transfer of its shareholding in entity (S) (ruling reference: CV 0863/23).
Change of approach by the GDT
This new decision represents a change of approach compared with the 2021 binding ruling CV 2265/21 (analysed here) where the GDT considered that the transfer of 100% of the shares in an entity owning a plot of land on which the necessary permits for the installation of a solar plant were being processed, was not exempt of Corporate Income Tax, insofar as the economic activity had not materially commenced.
In this regard, it should be noted that the tax authorities of Navarra had already deviated from the ruling CV 2265/21 criteria as expressed by the GDT in their ruling dated 17 October 2022 (CV 2265/21). In a case where the facts were very similar to those in ruling CV2265/21, the Navarra tax authorities decided that the Corporate Income Tax exemption should apply.
Osborne Clarke comment
This is a welcome decision by the Spanish General Directorate of Taxes regarding the Corporate Income Tax exemption. It hopefully dispels some of the doubts that had been created and, in our opinion, the new position is the correct one.
However, although this new ruling clarifies the situation, it is important to analyse each case on its facts. To reduce the risk of the tax authorities disputing the application of the exemption, it will be important to ensure that all economic activity carried out up to the time of the transfer of entities has been correctly declared.
We will continue to monitor the situation and will report further on any future rulings relating to the issue.
