European Union tax: Commission requests that Spain abolish rule favoring Spanish acquisitions of companies in other Member States

The European Commission has requested that Spain abolish a corporate tax provision that allows Spanish companies to amortize goodwill derived from acquiring a stake in a non-Spanish company (i.e. amortizing the excess price paid for the acquisition of a company over its net book value after fair value adjustments to the assets in accordance with Spanish accounting rules on consolidation).

Since 2002, Spain's Corporate Income Tax Act has allowed tax amortization of the difference between the purchase price of a holding in a nonresident company and the book value as of the purchase date that is not attributable to the assets and rights of the nonresident entity. This financial goodwill may be deducted from the tax base of the purchaser, subject to an annual maximum limit of 5% (i.e. it is amortized over 20 years) and without the amortization charge having to be recorded in the accounting books.

On 21 December 2007, the European Commission published its decision to initiate a formal investigation of the tax scheme under article 88(2) of the EC Treaty. According to a press release dated 28 October 2009, the Commission has concluded that the Spanish scheme distorts competition within the EU's Single Market because it confers an unjustified advantage on Spanish companies, especially in the context of competitive takeover bids. The Commission has urged Spain to recover any unlawful aid granted since 21 December 2007 as regards European acquisitions. The Commission will continue its investigation on the application of the provision to acquisitions outside the EU, although aid granted before 21 December 2007 probably will not be affected. The press release also notes that the Commission and Spain are discussing the design of a future tax regime (given Spain's concern that specific obstacles to mergers persist).

The press release does not address, however, the relevance of the acquisition date, i.e. whether the tax benefit arising from EU acquisitions where the transaction took place before 21 December 2007 may be taken in their entirety (i.e. the full 20-year amortization period). Given that the Commission's decision has not yet been published, release of the actual decision will hopefully reveal further details and allow for an in-depth analysis of the decision's impact.