Global Tax Alert | 26 September 2013

EU Commission invites comments by 7 October 2013 regarding its decision on Spanish financial goodwill tax amortization

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Executive summary

A press release dated 17 July 2013 announced that the EU Commission opened an investigation procedure1 regarding the tax deductibility of the “indirect” financial goodwill on the acquisition of shares in non-Spanish resident companies.

The EU Commission has now invited all interested parties to submit comments to its decision. The period to submit comments ends on 7 October 2013.

Detailed discussion

The financial goodwill tax facility

Effective 1 January 2002, Spain introduced legislation allowing Spanish companies to take the tax amortization embedded in shares of non-Spanish companies (the financial goodwill) as a tax expense irrespective of its accounting treatment (book-to-tax adjustment). As a result, a Spanish company acquiring at least a 5% stake in a foreign subsidiary could deduct from its taxable base the difference between the acquisition cost of the shares and the market value of the underlying assets of the foreign company during the 20 years following the acquisition.

Until 2012, the Spanish tax authorities took the position that only financial goodwill related to first tier subsidiaries could benefit from this tax deduction; this approach has been disputed by taxpayers, in the courts. The amortization of financial goodwill derived from “indirect acquisitions,” i.e., where the Spanish entity acquired the shares of a holding company owning, in turn, the shares in the foreign operating entities was not allowed for tax purposes.

EU Decisions on the financial goodwill tax amortization

On 28 October 2009 and 12 January 2011, the EU Commission issued two Decisions stating that the Spanish financial goodwill amortization legislation constituted unlawful State aid as it resulted in significant advantages for Spanish companies over their competitors when acquiring shares in EU and non-EU companies.

However, the Commission understood that, due to the existence of legitimate expectations of the beneficiaries of the tax measure, the recovery should not apply with regard to acquisitions made before 21 December 2007 for EU acquisitions, and 21 May 2011 for certain other non-EU acquisitions.

The new investigation procedure

In 2012 the Spanish tax authorities issued two binding rulings, dated 21 March and 26 October, taking the position that the tax amortization of financial goodwill corresponding to second and lower-level subsidiaries is also allowed for tax purposes.

The EU Commission2 took the preliminary view that the interpretation made by the Spanish tax authorities in these two rulings constitutes unlawful State aid. The announcement now published (i) reiterates the initial view that the Commission considers that the new administrative interpretation constitutes new aid; (ii) states that the legitimate expectations recognized in the Decisions of 2009 and 2011 cannot be retroactively extended to indirect acquisitions; and (iii) enjoins Spain to suspend the application of the new administrative interpretation until the Commission has taken a decision on the compatibility of the amended scheme with the internal market.

Implications of the EU Decision

It appears that there are legal arguments to oppose the position taken by the EU Commission, which is grounded on a misunderstanding of how tax rulings work under the Spanish legal system. In essence, the Spanish tax authorities are not entitled to modify the scope of Article 12.5 of the Corporate Income Tax (CIT) Act, but only to issue a reasoned construction of it through binding rulings; this interpretation is finally subject to scrutiny in the ordinary courts of justice.

Therefore, the change in the administrative position through the issuance of a new binding ruling, in favor of the application of the financial goodwill embedded in lower-tier subsidiaries, should not be seen as an amendment of the tax provision or a broadening of the scope of an illegal scheme in accordance with EU Law. The change in the tax authorities' position is simply an explicit acknowledgement that the previous criterion was not correct.

It is worth noting that Spanish courts have still not ruled out “indirect” financial goodwill, although it is a topic under discussion in a number of proceedings. Therefore, it should not be argued that the Spanish tax authorities have enlarged the application of an illegal scheme.

In light of the above, Spanish companies that are taking advantage of the “indirect” financial goodwill should have legitimate expectations with respect to its tax effects under the CIT Act, and should be covered by the scope of the original measure at the time of the adoption of the 2009 and 2011 EU Commission Decisions, under which (i) the recovery of the state aid was limited and (ii) the “indirect” financial goodwill was not carved out.

Next steps

The investigation has now been formally published in the EU Official Journal; taxpayers that are affected by the same may submit observations by 7 October 2013.

Should the EU Commission issue a Decision taking the stand that the financial goodwill amortization derived from said indirect acquisitions constitutes unlawful state aid, taxpayers affected by the same may appeal the Decision with the Court of Justice of the European Union within the following two months.


1. IP/13/701.

2. See press release issued on 17 July 2013.

For additional information with respect to this Alert, please contact the following:

Ernst & Young Abogados, Madrid
  • Maximino Linares Gil
    +34 91 572 7123
  • Laura Ezquerra
    +34 91 572 7570
  • Alfonso Puyol
    +34 91 572 5010
  • Juan Cobo de Guzmán
    +34 91 572 7216
  • Inigo Alonso Salcedo
    +34 91 572 5890
Ernst & Young LLP, Spanish Tax Desk, New York
  • Cristina de la Haba
    +1 212 773 8692

EYG no. CM3832