Global Tax Alert | 11 July 2013

Spanish tax authorities issue ruling on cancellation of debt income

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On 5 July 2013, the Spanish tax authorities issued a ruling regarding the corporate income tax implications derived from the capitalization and/or forgiveness of shareholder loans.


Under Spanish GAAP, the capitalization and/or forgiveness of loans by a shareholder to its wholly-owned subsidiary generally qualifies as a shareholder contribution to the net equity of the subsidiary. When this is the case, the subsidiary does not register income in its P&L account and the shareholder increases the basis of its investment in such subsidiary.

However, Spanish GAAP provides that differences between the book value of the debt and its fair value must be registered by the subsidiary (the borrower) as income in its P&L account. In the absence of a tax provision, since Spanish tax follows accounting, where income is registered by the subsidiary as a cancellation of debt, the argument may be made that it is taxable at the standard corporate income tax rate.

The Spanish tax authorities have now issued a ruling stating that where income is recognized under Spanish GAAP by the subsidiary in a capitalization or forgiveness of the loan by the shareholder, this income is not taxable if the following circumstances exist:

  • The shareholder holds 100% of the Spanish subsidiary; and
  • The tax value of the receivable held by the shareholder is equal to the tax value of the payable at the subsidiary's level.

Conversely, the ruling provides that where the debt that has been capitalized or waived by the shareholder had been purchased from a third party at a discount, the difference between the value of the liability in the subsidiary's books and the tax basis of the receivable for the shareholder, if booked as income by the subsidiary, is fully taxable.


The ruling is relevant as it addresses situations that are fairly common under the current environment and facilitates the recapitalization of entities in need of additional shareholding funding with no adverse tax consequences. This notwithstanding, a case-by-case analysis must be carried out to ensure that the interpretation made in the ruling is applicable to particular situations. Cancellation or capitalization of debt may still give rise to the recognition of accounting and taxable income where the subsidiary has more than one shareholder or where the tax value of the receivable is different at the subsidiary's and parent company's level.

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

Ernst & Young Abogados, Madrid
  • Laura Ezquerra
    +34 91 5727 570
  • Rocio Reyero
    +34 91 572 7383
  • Sonia Diaz Perez
    +34 91 572 7867
Ernst & Young LLP, Spanish Tax Desk, New York
  • Inigo Alonso Salcedo
    +1 212 773 8692

EYG no. CM3637