Economic motivation in a company merger transaction

This ruling, no. 08/09472/2015 of the TEAR of Catalonia, analysed whether there were valid economic reasons for rationalisation or the restructuring of economic activity that were suffcient to permit the application of the special tax deferral regime in the company merger operation.

The case we have:

1. a company (A) incorporated in 2005, which had been providing personal assistance services for guests; and
2. a company (B) incorporated in 2006, whose corporate purpose was the design, creation and marketing of websites, as well as the sale of computer hardware and software.

In February 2010, the two companies merged through the absorption of A by B, and this action was covered by the special administration of Chapter VIII of Title VII of the Companies Act at the time. The accounting retroaction of the operation was set at 31 July 2009 – in other words, from this date, all operations of the absorbed company (A) were considered to have been carried out by the absorbing company (B).

The merger was subsequently reviewed by the tax authorities via the tax inspectorate, which considered that there has been no valid economic reason for the merger, as in the inspector’s opinion, the only reason for the merger was to take advantage of the absorbed company’s negative tax bases. Moreover, the absorbed company had ceased to have any commercial activity, so it would be diffcult for it to take advantage of these negative tax bases.

The tax inspector therefore considered that the merger should be governed by the application of Article 15 of the Corporate Income Tax legislation.

Decision of the TEAR

There are two relevant issues in this case:

1. The absorbed entity was an inactive company at the time of the merger.
2. The absorbed company had hardly any valuable assets that could be transferred to the acquiring company (with the exception of tax claims against the tax authorities).

It was concluded that there was no valid economic reason to allow the merged company to benefit from the special tax neutrality regime, and the liquidation proposed by the tax inspector and penalty proceedings were confirmed.

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