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Corporate Division: Commercial and Tax Aspects
The segregation and creation of subsidiaries are addressed exclusively in the Law on Structural Modifications (hereinafter, LME), with no mention of these types of division in tax regulations. For this reason, there has been considerable debate over the years regarding the application of the special regime in Title VII, Chapter VII of the Corporate Income Tax Law (hereinafter, LIS).
Segregation, in accordance with the provisions of Article 71 LME, is understood as the transfer in block by universal succession of one or more parts of the assets of a Company that form an economic unit, to one or more Companies, receiving in return the segregated Company shares or participations of the beneficiary Company or Companies.
Unlike a partial spin-off, the beneficiary is the transferring or spun-off Company, and not its partners.
We show a graphic example of Segregation:
On the other hand, in accordance with the provisions of Article 72 of the Spanish Companies Act (LME), we understand the creation of a subsidiary as an operation whereby a Company transfers all of its assets to a newly created Company, with the transferring Company receiving all of the shares of the acquiring Company in return. The creation of a subsidiary, therefore, results in the creation of a Company wholly owned by the original Company.
Graphically, the subsidiarization can be exemplified as follows:
Once the segregation and subsidiary operations have been defined from a graphic and commercial point of view, we must consider the following: Does the transfer of an economic unit as a whole (in the case of segregation) or of the entirety of the assets to a newly created Company (in the case of subsidiary creation) always have to be carried out through these operations?
The reason for the question we are raising stems from considering other possible alternatives for carrying out the operation that generate the same result. Thus, to achieve the result of a spin-off, we could, for example, carry out a capital increase through a non-cash contribution without needing to follow the specific spin-off procedure outlined in the Spanish Companies Act (LME). Similarly, if we want to obtain the result offered by a subsidiary creation, we could directly establish a new Company, contributing all of the assets as a non-cash contribution.
In this way, through the non-monetary contribution route, we would avoid having to go through the entire procedure contemplated for the division, and the administrator’s report provided for non-monetary contributions would suffice.
The only difference lies in the fact that, through segregation and subsidiary operations, the transfer of assets will take place through universal succession, with the transfer as a whole of all the legal relationships in which the transferred economic unit was involved, which will not take place if the operation is carried out through a non-monetary contribution, and consent must be obtained, one by one, for each existing legal relationship.
Therefore, we must assess each specific case to determine the best way to carry out the transaction, as there is no clear and unified ruling from the Directorate General for Security and Public Faith, nor from the Supreme Court, on whether the commercial registrar must register the transaction as a non-monetary contribution if the procedure stipulated for segregation in the Spanish Companies Act (LME) is not followed, which is the same procedure established for spin-offs. It is true, however, that most legal scholars believe the transaction can be carried out through a non-monetary contribution. For example, the Resolution of the Directorate General of Registries and Notaries of July 22, 2016, allows for the contribution of a branch of activity through an increase in share capital without triggering the effect of universal succession.
In any case, regardless of the method chosen to segregate part or all of the Company’s assets, we can take advantage of the special deferral regime as long as we meet the requirements of the rule for non-monetary contributions or contributions of a Branch of Activity, in addition to justifying a valid economic reason.
What we absolutely must keep in mind for any type of spin-off or corporate restructuring operation is that, if we want to benefit from the special regime of Title VII, Chapter VII of the Spanish Corporate Income Tax Law (LIS), we must pay close attention to the requirements of the Corporate Income Tax Law and justify a valid economic reason. Therefore, we cannot rely solely on the Law on Structural Modifications when carrying out a spin-off.
Therefore, if you are considering carrying out a spin-off, it is highly recommended to have the necessary legal advice so that, in addition to complying with all the legal requirements for the spin-off, you can take advantage of the benefits of this special tax regime.
