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Splitting of braches of activity for sale, taking into account accumulated losses

Some believe that tax compliance is easy, until the tax audit starts

Restructuring of a major German group, with division of branches of activity in Spain, without renouncing any of the losses accumulated in Spain.

A Spanish company belonging to a powerful German group that supplies engines and machinery has two subsidiaries in Spain, with which it forms a tax group. Accumulated losses total many millions of Euros. With the aim of separating the two different branches of the business in Spain − to sell one to an investment fund − different options were explored, with the main objective of avoiding the loss of the accumulated negative tax bases.

The first option examined was to wind up the Spanish parent company and create two new companies, each with a different activity. In such cases, Spanish legislation allows for negative tax bases to be transferred to the new companies depending on how these originated, provided that such losses had not already been flowed through to the parent of the wound-up company – in this case located abroad – by depreciating the value of the subsidiaries’ equity. In the case of our client, neither of the two new companies was finally able to receive losses from the wound-up company, and the tax group they formed also had to be dissolved.

The other option involved the division of one of the branches of activity from the Spanish parent. In such case, it would not be possible to transfer the losses to the new company, regardless of whether equity had been depreciated by the parent company or not. The advantage to this is that the accumulated losses of the Spanish parent company, from which a branch of activity is split off, are not affected. The other advantage is that the existing tax consolidation can be maintained in the branch of activity that is not spun off.

Logically, the limit to all of these operations is the need for a “valid economic reason” that would justify the tax deferral when restructuring business operations.

In the end, other options were also examined in order to design an appropriate structure for the group in both Spain and Germany, as to make it attractive for acquisition by an investment fund. As these were related undertakings with significant losses, it was necessary for the affected companies to be appraised by independent auditors.

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