TAX NEWS - January 2010

European Union: EC finds laws favoring Spanish acquisitions of other Member State companies violate state aid rules

The European Commission made a decision available on 7 January 2010 in which it concludes that Spain's corporate tax rules that allow Spanish companies to amortize goodwill derived from acquiring a stake in non-Spanish companies distorts competition because the rules confer an unjustified advantage on Spanish companies, especially in the context of competitive takeover bids (Decision No. C45/2007). Under the decision, Spain is required to recover any unlawful aid granted since 21 December 2007.

Since 2002, Spain's Corporate Income Tax Act has allowed tax amortization of the difference between the purchase price of a holding in nonresident companies 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, up to an annual maximum of 5% (i.e. it is amortized over 20 years) and without the amortization charge having to be recorded in the accounting books. The European Commission initiated a formal investigation of the compatibility of the tax scheme with EU state aid rules on 21 December 2007.

Although the Commission published a press release on its decision on 28 October 2009, the public version, which requires Spain to recover unlawful aid granted on European acquisitions, was not made available until 7 January 2010. The Commission will continue its investigation on the application of the rules to acquisitions outside the EU, although aid granted before 21 December 2007 is unlikely to be affected.

According to the decision, tax reductions enjoyed by beneficiaries with respect to intra-EU acquisitions that are related to rights held directly or indirectly in foreign companies fulfilling the relevant conditions of the aid scheme by 21 December 2007, apart from the condition that the participation be held for an uninterrupted period of at least one year, can continue to be implemented over the entire amortization period provided by the aid scheme.

The Commission's decision must be implemented within four months following the date of its notification (28 October 2009).