Restructuring operations: Creating a holding company and ensuring that the subsequent distribution of dividends is not considered fraudulent

A controversial ruling by the Central Administrative Economic Court (TEAC) is the latest case to draw attention in Spain. The ruling concerns business restructurings where a holding company is established, and which subsequently receives dividends from its subsidiaries.

The TEAC seeks to alter three significant aspects, namely:

1. Dividend distributions made by subsidiaries to the parent company (holding) are intended for tax savings and should be interpreted as if they were destined for the individual shareholder.

Nothing could be further from the truth. This assertion would undermine all European regulations applied to date. Dividend distributions to the holding company, provided they meet the legal requirements, should remain 95% exempt (previously 100% until 2021). Otherwise, the movement of capital between companies for reinvestment in the business sector would not be possible and would be penalised. 

The interpretation that these distributions are to be made to individual shareholders is a legal absurdity. The wealth tax regulations already address such scenarios. If we meet the requirements, there should be no doubt about the exemption. 

These requirements generally include:

Owning at least 5% of the subsidiary's shares;

Holding these shares for more than 12 months; and

Ensuring that the subsidiary engages in an economic activity rather than merely managing assets.

2. There should be no time limit for reviewing future dividend distributions because the deadlines for reviewing the operation should begin when the dividends are distributed.

It seems that current obligations to carry out transactions at the notary, submit a special declaration to apply the special regime to the Spanish tax agency, and settle the corresponding tax at the relevant community tax office are considered insufficient. 

On top of this, the TEAC proposes that the time limit for reviewing the operation should be indefinite or that the four-year period should start when the taxpayer undertakes any action with the company that may yield a tax benefit. This is, quite frankly, outrageous.

3. Establishing the holding company is the first step in fraud, as the taxpayer is preparing for future embezzlement when distributing dividends.

This approach essentially labels everyone as fraudsters, disregarding the principle of the presumption of innocence. It implies that the taxpayer must prove they are not defrauding, and they are pre-emptively considered criminals simply for establishing the holding company.

Clearly, this perspective lacks legal grounds. However, the authorities argue that it is the taxpayer who must demonstrate valid economic reasons and assert their rights.

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Jesús Ruíz Ballesteros is the Founder and Director of Ruiz Ballesteros.