Spain must abolish tax measures that subsidize domestic firms for foreign acquisitions, EU regulators say

European Union regulators have warned Spain against its tax subsidies for Spanish firm’s involved in stake acquisitions outside of the EU. The EU regulators said the subsidies amount to unfair advantage. According to an EU communiqué, the tax provision amounts to a clear and unjustified advantage to the Spanish-based companies. Spain must recover aid granted through the tax measure since December 2007, the EU regulator said.

The commission, the 27-country EU’s executive arm, has been investigating the tax provisions since October 2007 because of concerns that they may distort competition. Spain already scrapped measures for acquisitions in other EU countries after being told to do so by the commission in 2009.

Spain will be allowed to continue to apply the measure for stock purchases in India and China, the commission said. These two countries have “fiscal and other legal obstacles” that justify the Spanish measure, it said. Spain’s finance ministry didn’t immediately respond to an e-mail seeking comment, said the Bloomberg report.

In 2002, Spain incorporated a provision in its corporate tax law which provides an advantage to Spanish companies making acquisitions in non-EU countries. The EU has ordered that Spain abandons that provision. The European Commission initiated a formal investigation in December 2007 to determine whether the provision favored Spanish companies acquiring foreign companies and whether this amounted to a distortion of competition.

The Spanish income tax code states that a Spanish company may amortize the financial goodwill resulting from the acquisition of a shareholding of more than 5% in a foreign company over the 20 years after the acquisition.

The amortization of financial goodwill allows the deduction of the difference between the acquisition cost of the shares and the market value of the target’s assets, from the tax base of the acquiring company. This is usually permissible in full mergers, and cannot discriminate between foreign and national firms.

This provision, even in cases where the acquiring and acquired companies are not combined into a single business entity, meant the scheme stood as an exception from the general Spanish tax.
The European Commission is the executive body of the European Union. The body is responsible for proposing legislation, implementing decisions, upholding the Union's treaties and the general day-to-day running of the Union. Its directive means Spain may have to reconsider the Tax provision.

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