– Buying a loss-making company –

Since 2015, the legislator has restricted the requirements to be able to take advantage of the Losses[1] of one company in another, on the occasion of the purchase of the former, in such a way that in some cases the right to be able to take advantage of said Negative Taxable Bases (hereinafter, BIN), in the acquiring company, is restricted.

Article 26 of Law 27/2014, of 27 November, on Corporate Income Tax, is the one that legislates on NIBs, however, we find an interesting limitation in paragraph 4 of said article. It states that BINs cannot be offset against positive results when the following circumstances are met, all at the same time:

1. When the majority of the share capital of the entity or of the rights to participate in its results is acquired when it has been acquired by a person or entity or by several related persons or entities, after the end of the tax period in which such BIN have been generated.
2. When, prior to the generation of the BIN, an interest of at least 25% is not held in the acquired company.
3. When the acquired company is in any of the following situations:
   • The acquired company was not carrying out any economic activity in the three months prior to its acquisition.
   • It carries out an activity in the two years following its acquisition that is different or additional to the one it had been carrying out and which represents an increase in the INCN (net turnover) in those years of more than 50% of the INCN of the two years prior to the acquisition.
   • It is an asset-holding company. For this purpose, it is important to check that more than 50% of the company’s assets are used for economic activity.
   • The company has been deregistered from the index of entities: this occurs when the company has not filed a corporate tax return for the last three financial years.

Therefore, if the company being acquired is in any of the above situations, the right to take advantage of all the negative tax bases will be lost.

Focusing on what all of the above means:

It is intended to limit the fact of buying a company, individually or jointly with other related parties, with the sole intention of taking advantage of losses from previous years, i.e. in the past there was a lot of buying and selling of companies that was carried out only because an inactive company that had lost a lot of money and instead of being liquidated had simply remained inactive was being transferred, well, this type of buying and selling of companies that are not in operation is also penalised, hence the Net Turnover rules.

Let’s take an example:

Company A acquires 100% of the shares of company B in 2017. Prior to this purchase it did not own any shares. Company B has been carrying out uninterrupted economic activity. The negative taxable income was generated prior to the acquisition of the shares. Once the company has been acquired, it ceases the activity it has been carrying out to date and registers in another economic activity different to the previous one (with a different CNAE). The INCN for the two years prior to the date of acquisition is €150,000, while the INCN for the two subsequent years is €250,000. It is not an asset-holding company and it is not deregistered in the entity index.

In accordance with the premises of the example, requirements 1) and 2) of Article 26.4 of the LIS are met, i.e. the majority of the company’s share capital is acquired and, in addition, it had a holding of less than 25% at the time of the end of the tax periods to which the BIN correspond. In addition, the requirements of point 3(a), (c) and (d) are met. However, letter b) is not fulfilled since in the two years following its acquisition it carries out a different activity which means that the INCN increases by more than 50% of the INCN of the two years prior to its acquisition.

Therefore, in our example, he would not be entitled to offset the INCN generated prior to his acquisition, losing all of them.

[1] Losses: we use the word losses because we intend to write for those who understand tax law and those who do not understand tax law. It is correct to speak of Negative Taxable Bases, as we may find ourselves with Profits and at the same time with Negative Bases, which we abbreviate as BIN.