Contrary to the Commission’s position as expressed in the opening Decision, Article 12(5) TRLIS does not constitute an exception to the Spanish corporate tax system since (i) the Spanish accounting system is not an appropriate point of reference on which to base the existence of an exception to the tax system; and (ii) even if it were, the characterisation of financial goodwill as a depreciable asset over time has historically been a general feature of the Spanish accounting and corporate tax system.

Firstly, because of the lack of harmonisation of accounting rules, the accounting result cannot serve as a reference point for establishing the exceptional nature of the contested measure. Indeed, in Spain, the tax base is calculated on the basis of the accounting result, adjusted according to tax rules. Therefore, in the case at hand, accounting considerations cannot, in Spain’s view, serve as a reference point for a tax measure.

Thirdly, the Spanish authorities point out that the contested measure does not constitute a true economic advantage since, in case of sale of the acquired shareholding, the amount deducted is recovered by taxation of the capital gain, thus placing the taxpayer in the same situation as if Article 12(5) TRLIS had not been applied.

The Spanish authorities point out that the Commission also incorrectly refers to Article 12(3) TRLIS to establish an alleged advantage under Article 12(5) TRLIS: Article 12(3) applies to situations of depreciation in case of an objective loss recorded by the target company, whereas Article 12(5) TRLIS complements this provision and reflects the loss of value attributable to depreciation of the financial goodwill.

Finally, the 30 interested parties also consider that if the contested measure constituted an advantage, the ultimate beneficiaries would be the target company’s shareholders since they would receive the price paid by the acquiring company benefiting from the contested measure.

Secondly, according to the Spanish authorities and the 30 interested parties, in its opening Decision the Commission mixed up the concept of selectivity and the objective conditions of the contested measure which refer only to certain transactions (i.e. shareholding in a foreign target company). Indeed, the Commission alleges that Article 12(5) TRLIS is selective since the same treatment is not granted to comparable investments in Spanish companies. However, the Commission fails to recognise that the selectivity criterion is not determined by the fact that the beneficiary of the contested measure is a group of companies or a multinational company that has a share in a target company. The fact that a measure benefits only companies that comply with the objective criterion laid down in the contested measure does not in itself make it selective. The selectivity criterion implies that subjective restrictions should be imposed on the beneficiary of the contested measure. The selectivity criterion created for this procedure is inconsistent with previous Commission practice and too vague and broad. Taking this concept further would lead to the erroneous conclusion that most tax-deductible expenses fall within the scope of Article 107(1) TFEU.

Thirdly, as regards the 5 % threshold, this level does not set a minimum amount to be invested and therefore the contested measure does not benefit only large undertakings. As for the fact that there is no requirement for the seller to pay for capital gains in order for the contested measure to apply, the Spanish authorities consider this to be irrelevant since control of income received abroad by a seller who is not liable for tax in Spain lies outside their field of competence. Lastly, limiting the scope of a measure — for fiscal technical reasons — to shareholding acquisitions in target companies is consistent with the situation resulting from the implementation of various Community Directives.

To conclude, the contested measure is designed to remove the tax barriers that the Spanish tax system generates in investment decisions by penalising share acquisitions in foreign companies as opposed to acquisitions in domestic companies. The contested measure guarantees the same tax treatment for both types of acquisition (direct acquisitions of assets and indirect acquisitions by purchasing shareholdings): goodwill arising from both of them (direct goodwill and financial goodwill) can thus be identified in order to promote the integration of the different markets, until factual and legal barriers to cross-border business combinations have been removed. The Spanish authorities thus ensure that taxpayers can opt to invest at local or cross-border level without being affected by these barriers. Article 12(5) TRLIS basically restores fair conditions of competition by eliminating the adverse impacts of the barriers.

The Spanish authorities state that the Commission has not established, to the requisite legal standard, that Article 12(5) TRLIS restricts competition, as (i) the alleged ‘market for the acquisition of shares in companies’ does not constitute a relevant market for the purposes of competition law; and (ii) even if this were the case, the amortisation of financial goodwill does not in itself affect the competitive position of Spanish undertakings.

First, the Commission qualified the contested measure as an anti-competitive advantage on the grounds that Article 12(5) allows Spanish taxpayers to obtain a premium for the acquisition of significant shareholdings in a target company. However, the Commission did not carry out any benchmarking study on the economic circumstances of Spanish and international companies.

Second, since the contested measure is open to any Spanish company with no restrictions, it cannot distort competition. Indeed, any company in the same situation as a beneficiary of the contested measure can benefit from the measure, thus reducing its tax burden, which cancels any competitive edge that might derive from it. In addition, a lower rate of taxation in a Member State that can increase the competitive edge of local companies should not come under the State aid rules as long as it is of a general nature.

The Commission’s allegations are not only far removed from reality but also out of touch with the investment situation of Spanish companies. The contested measure neither distorts competition nor adversely affects intra-EU trading conditions to an extent contrary to the common interest.

In a non-harmonised market, as a result of competition between tax systems, identical operations have a different fiscal impact depending on where traders are resident. This situation distorts competition even if the national measures at stake are general measures. In other words, this distortion is not the result of State aid but of a lack of harmonisation. If the Commission’s reasoning were followed through, it would have to open formal investigations into hundreds of national measures, which would create a situation of legal uncertainty that is highly detrimental to foreign investment.

According to the two parties, Article 12(5) TRLIS is exceptional in nature because the Spanish tax system, with the exception of this provision, does not allow any amortisation of financial goodwill but only a deduction in the event of an impairment test. Until the introduction of Article 12(5) TRLIS the Spanish corporate tax legislation did not allow the amortisation of shareholdings regardless of whether or not there had actually been an impairment. They stress that Article 12(5) TRLIS is probably unique in the European context, as no other Member State has a similar system for cross-border transactions not involving the acquisition of controlling shares.

Under the Spanish tax system, goodwill can be amortised only if there is a business combination — the sole exception is the contested measure, which allows amortisation in an exceptional case: if a minority shareholding is acquired in a target company. This diverges from the general tax system since amortisation is possible not only without there being a business combination but also in cases where the purchaser does not even acquire control of the foreign target company. Article 12(5) TRLIS thus confers a benefit on certain Spanish companies vis-à-vis (i) other Spanish companies that operate only at national level and (ii) other EU operators that compete internationally with the Spanish beneficiaries of the contested measure.

From an economic point of view, the Spanish authorities are not only providing an interest-free loan that will be drawn over a period of 20 years (interest-free tax deferral), but also effectively leaving the repayment date of the interest-free loan to the discretion of the borrower — if indeed the loan is repaid. If the investor does not transfer the significant shareholding, the effect is the same as cancellation of the debt by the Spanish authorities. In this case, the measure turns into a permanent tax exemption.

One of the two parties estimates that, as a result of the contested measure, Spanish acquirers, for instance in the banking sector, are able to pay some 7 % more than they would otherwise be able to. However, it also recognises that as the offer price is a combination of various additional elements, the contested measure is not the only factor, although probably one of the most decisive factors behind the aggressiveness of potential Spanish bidders benefiting from the contested measure. This party considers also that the measure provides a definite advantage to Spanish bidders in international auctions.

Furthermore, only enterprises of a certain size and financial strength with multinational operations can benefit from Article 12(5) TRLIS. Although the company’s balance sheet discloses the book values of assets, it is unlikely that it also reflects the tacit market values of assets. Therefore, in practice, only operators with a controlling interest in target companies have sufficient access to a company’s records to ascertain the tacit market value of the company’s assets. Consequently, the 5 % threshold favours companies that perform multinational operations.

Moreover, only a Spanish operator with existing business in Spain has a Spanish tax base and can benefit from the depreciation. Therefore, only companies resident in Spain with a significant Spanish tax base can in practice benefit from it, since the potential benefit is linked to the size of the Spanish operation rather than of the acquisition. Although Article 12(5) TRLIS is drafted to apply to all operators established in Spain, in practice only a limited and identifiable number of companies with a Spanish tax base, which make foreign acquisitions in the relevant tax year and have a sizeable tax base against which to offset the financial goodwill deduction, can benefit from the application of the measure on an annual basis. As a result, the contested measure in fact gives a different tax treatment even to Spanish operators in the same position of making acquisitions abroad.

The two parties consider that they have not been able to identify any objective or horizontal criterion or condition that justifies the contested measure. On the contrary, they are of the view that the basic intention of the measure is to give a benefit to certain Spanish operators. In addition, if the contested measure is inherent in the Spanish tax system, foreign shareholdings acquired prior to that date should also qualify for the measure, which is not the case since the tax relief is granted only for shareholdings acquired after 1 January 2002.

The contested measure is clearly discriminatory as it gives Spanish operators a clear fiscal and monetary benefit that foreign operators are not able to enjoy. In a situation of an auction or other competitive procedure for the acquisition of a company, such an advantage makes a significant difference.

Takeover bids usually presuppose the payment of a premium over the share price of the target company that would almost always result in financial goodwill. On several occasions, the financial press has reported on large acquisitions by Spanish companies and the respective tax benefits accruing from the Spanish tax rules on the amortisation of financial goodwill. For one of those acquisitions by an investment bank, the tax benefit resulting from Article 12(5) TRLIS was estimated to be EUR 1,7 billion, or 6,5 % of the offer price. Another report indicated that the Spanish acquirer had been able to bid about 15 % more than non-Spanish competitors.

The contested measure is of benefit to undertakings that meet certain requirements and enables them to reduce their tax base and thereby the amount of tax that would normally be due in a given year if this provision did not exist. It therefore provides the beneficiary with a financial advantage, the cost of which is directly borne by the budget of the Member State concerned.

Providing specific tax treatment for cross-border shareholding acquisitions would, according to these authorities, be necessary to ensure the neutrality of the Spanish tax system and to prevent more favourable treatment for domestic shareholding acquisitions. Therefore, the Spanish authorities and the 30 interested parties consider that the correct reference framework for the assessment of the contested measure would be the tax treatment of goodwill for foreign acquisitions.

In the previous Decision, the Commission maintained the procedure in order to allow the Spanish authorities to provide new information as regards the existence of explicit legal obstacles to cross-border business combinations in non-EU countries.

In this context, and essentially on the basis of the elements contained in the reports, the Commission has investigated the legislation of various non-EU countries simply in order to check the Spanish authorities’ allegations about the existence of explicit legal obstacles to cross-border combinations. This examination does not, however, constitute recognition of the fact that such obstacles could justify a different reference system in the present case. In the course of this examination, the Commission checked mainly whether a Spanish parent company had the legal capacity to combine with a subsidiary resident in a non-EU country.

• first, the Commission checked whether, as stated in the previous Decision54, Spanish companies face an explicit legal barrier, attributable to a non-EU country and not to Spain55, that prevents them from converting a foreign subsidiary into a branch. Such legal provisions can only constitute a barrier, however, if the company concerned would have been able to exercise effective influence, most notably by means of a majority shareholding, over the target company to such an extent that it would be able to impose a merger if the obstacles were not there. Hence, legal provisions in non-EU countries which prevent a Spanish taxpayer from acquiring control over a target company in that country cannot be regarded as a relevant explicit legal barrier in the sense alleged by the Spanish authorities: as a result of such provisions, Spanish companies/taxpayers can never fulfil the condition of effective influence since they will always be minority shareholders of the target company. Therefore, they can never have the necessary effective capacity to impose a business combination. The Commission would like to point out that the condition of control was assessed at the level of the beneficiary of the measure (and not of the group to which it may belong) in line with the Spanish tax system. Following the same line of reasoning, the Commission considers that an explicit prohibition on non-resident entities directly owning specific assets (for instance, property on the coast) cannot constitute an explicit legal barrier in the context of this exercise.
  The Commission considers that a mere administrative burden or formality56 required of non-resident companies by non-EU countries cannot be regarded as an explicit legal barrier simply because it generates additional costs — which may be tax-deductible under the Spanish tax system — but does not make the business combination impossible,

• second, an allegation that there are no known examples of cross-border business combinations between Spanish companies and companies from certain non-EU countries cannot constitute sufficient evidence or demonstrate the existence of obstacles. The elements taken into account by companies when deciding to carry out a business combination are diverse and not limited only to the capacity of the companies concerned to combine their business activities. This is clearly illustrated by the fact that some of the 30 interested parties own numerous fully-controlled Spanish subsidiaries without having combined their Spanish businesses, even though the Spanish authorities recognise that there are no obstacles to domestic business combinations. Therefore, the Commission considers that, of the elements in the reports, only explicit prohibitions of cross-border business combinations set out in the laws of non-EU countries can be accepted. Indeed, as already indicated in paragraph 93 of the previous Decision, if unsubstantiated elements of a general nature were taken into account, this analysis would risk becoming largely arbitrary.

• United States of America:

  1. (i)
     first of all, the Commission notes that, in a report presented by the Spanish authorities58, when assessing whether there are any precedents for cross-border business combinations, the author states ‘Not found, but it is likely that this event happened in Delaware’. In contradiction with the Spanish authorities’ main arguments, the conclusion in one of the reports59 regarding this country seems to be that there is no general, explicit legal prohibition on cross-border business combinations;
  2. (ii)
     second, under the general rules of company law60 and tax law61, there is no explicit prohibition on business combinations with foreign entities;
  3. (iii)
     third, specific company law provisions62 apply to domestic business combinations. There is, to the Commission’s knowledge, no explicit prohibition on applying those provisions to cross-border business combinations, even though the applicable administrative formalities may differ. The Commission points out that at least the State of Delaware makes cross-border business combinations63 explicitly feasible on condition that the inverse is permitted by the legislation of the country where the foreign company is resident. Therefore, if such a transaction is not feasible between companies located respectively in Delaware and Spain, the Commission considers that the obstacles are attributable to Spain, and therefore not relevant for the present assessment. This finding should be looked at in the context of the importance of the State of Delaware for the location/incorporation of companies in the USA64;
  4. (iv)

     fourth, specific tax provisions apply to domestic business combinations in order to avoid unfavourable taxation when carrying out restructuring operations. There is, to the Commission’s knowledge, no explicit prohibition on applying them to cross-border business combinations, even though the applicable administrative formalities may differ;

  5. (v)

     finally, the Commission did not find any case law by the competent US courts that would contradict its conclusion regarding the absence of explicit legal obstacles to cross-border business combinations with a company resident in the United States.

• Mexico:

  1. (i)
     first of all, the Commission notes that Article 8(3) of the tax convention65 between Spain and Mexico, signed on 6 October 1994 and still in force, explicitly provides for cross-border business combination transactions. As a consequence of this provision, such transactions benefit from roll-over relief since unrealised capital gains are not taxed. As far as the Commission can see, the purpose of this international tax convention is to remove the possible exclusion66 of cross-border business combinations from the benefit of the specific tax rules applying to domestic business combinations;
  2. (ii)

     second, under Mexican legislation (company law and tax law), and taking into account the above tax convention, there is no explicit legal prohibition on business combinations with Spanish entities;

  3. (iii)

     finally, the Commission did not find any case law by the competent Mexican courts that would clearly contradict its conclusion regarding the absence of explicit legal obstacles to cross-border business combinations with a company resident in Mexico.

• Brazil:

  1. (i)
     first of all, the Commission notes that a precedent of a cross-border business combination (not with Spain) was found by the Spanish authorities67;
  2. (ii)
     second, under the general rules of company law and tax law68, there is no explicit legal prohibition on business combinations with foreign entities, although administrative formalities may differ69;
  3. (iii)
     third, some explicit legal restrictions apply to the performance of economic activities in certain sectors70 by entities controlled by foreign companies. However, as stated above (see paragraph 114), legal provisions in non-EU countries preventing a Spanish taxpayer from taking control of a target company in that country cannot be regarded as a relevant explicit legal barrier in the sense alleged by the Spanish authorities: as a result of this provision, Spanish companies/taxpayers can never fulfil the condition of effective influence since they will always be a minority shareholder in the target company. As far as the Commission can see, this is precisely the situation which arises from the Brazilian legislation referred to in the two reports;
  4. (iv)

     finally, the Commission did not find any case law that would contradict its conclusion regarding the absence of explicit legal obstacles to cross-border business combinations with a company resident in Brazil.

• Argentina:

  1. (i)
     first of all, the Commission notes that Article 5 of the tax convention71 between Spain and Argentina, signed on 26 August 1994 and still in force, explicitly provides for cross-border business combinations. As a result of this provision, cross-border restructuring operations cannot give rise to unfavourable taxation;
  2. (ii)
     second, under the general rules of company law72 and tax law73, there is no explicit legal prohibition on business combinations with foreign entities although the applicable administrative formalities may differ;
  3. (iii)
     third, the Commission did not find any case law that would contradict its conclusion regarding the absence of explicit legal obstacles to cross-border business combinations with a company resident in Argentina. Moreover, the Commission does not agree with the interpretation in the two reports of the rulings74 issued by the tax administration in certain planned cross-border transactions. These rulings simply clarify the conditions of the Argentinian tax roll-over arrangements. They do not mention the existence of a general and explicit prohibition on applying these arrangements to cross-border restructuring operations. Moreover, the interpretation given in the reports of these specific rulings contradicts the general provision in the above-mentioned tax convention75 between the Kingdom of Spain and the Argentine Republic.

• Ecuador:

  1. (i)
     first of all, the Commission notes that, under the general rules of company law and tax law, there is no explicit legal prohibition on business combinations with foreign entities76;
  2. (ii)
     Second, the Commission notes that a report presented by the Spanish authorities77 recognises that a cross-border business combination is feasible provided that the Spanish acquirer has set up a branch in Ecuador beforehand.

• Peru:

  1. (i)
     first of all, the Commission notes that, under the general rules of company law and tax law, there is, to the Commission’s knowledge, no explicit legal prohibition on business combinations with foreign entities78;
  2. (ii)
     second, the Commission notes that Article 2074 of the Peruvian Civil Code sets out the principles applicable to cross-border business combinations and the General Companies Law allows business combinations involving a branch of a foreign entity and a company resident in Peru79;
  3. (iii)
     third, the Law on Income Tax ensures neutral treatment of business combinations involving a branch of a foreign entity and a company resident in Peru80;
  4. (iv)

     the Commission therefore considers that a cross-border business combination is in any case feasible provided that the Spanish acquirer has set up a branch in Peru beforehand.

• Colombia:

  1. (i)
     first of all, the Commission notes that the Superintendencia de Sociedades 81 explicitly confirms that cross-border business combinations are feasible under Colombian legislation82;
  2. (ii)
     second, under the general rules of company law and tax law83, there is no explicit legal prohibition on business combinations with foreign entities even though the applicable administrative formalities may differ;
  3. (iii)
     third, the Commission notes that a report presented by the Spanish authorities84 recognises that cross-border business combinations are feasible provided that the Spanish acquirer has set up a branch in Colombia beforehand.

The Spanish authorities submitted information on the laws of eight other non-EU countries. As already stated in paragraph 107, the Commission considers that the above findings are sufficient to confirm that, in any event, even if one were to admit that the existence of legal obstacles to cross-border business combinations are significant, the reference system is the rules on the tax treatment of financial goodwill in the Spanish system. Nonetheless, applying the same methodology and criteria as described in paragraphs 114 et seq., the Commission considers, on the basis of the information available, that no explicit legal obstacles to cross-border business combinations of a general nature exist in the laws of Chile, Venezuela, Algeria, Canada, Australia, Japan or Morocco.

Therefore, on the basis of the above findings, the Commission cannot agree with the Spanish authorities that each potential individual beneficiary of the contested measure is faced, be it only in practice, with insurmountable obstacles to cross-border business combinations.

More precisely, as regards China, the 2005 Company Law applying to mergers involving only limited liability companies or joint stock limited companies incorporated in China, and Articles 2 and 55 of the regulation entitled ‘Provisions on Acquisitions of Domestic Enterprises by Foreign Investors’ issued by the Chinese Ministry of Commerce on 22 June 2009, explicitly exclude non-resident companies from the scope of application of the business combination rules so that a Spanish company would not be able to combine its business with a Chinese-controlled subsidiary.

With reference to the legislation in force in India, Articles 391 to 394 of the Indian Companies Law of 1956 explicitly exclude non-resident companies from the scope of application of the business combination rules so that a Spanish company would not be able to combine its business with any Indian-controlled subsidiary.

That being said, because of the fiscal nature of the contested measure, the existence of an exception must be assessed in comparison with the reference tax system, and not merely on an accounting basis. In this context, the Commission notes that the Spanish tax system has never permitted the amortisation of financial goodwill, except under Article 12(5) TRLIS. In particular, no such amortisation is possible for domestic transactions. This is clear from the following:

Given all the above considerations, the Commission concludes that the contested measure derogates from the reference system. As will be demonstrated in paragraphs 153 to 163, the Commission considers that neither the Spanish authorities nor the 30 interested parties have put forward sufficiently coherent arguments to alter this conclusion.

Under Article 12(5) TRLIS, part of the financial goodwill deriving from the acquisition of shareholdings in foreign companies can be deducted from the tax base by way of derogation from the reference system. Therefore, by reducing the tax burden of the beneficiary, Article 12(5) TRLIS provides them with an economic advantage. It takes the form of a reduction in the tax to which the companies concerned would otherwise be liable. This reduction is proportionate to the difference between the acquisition price paid and the market value of the underlying booked assets of the shareholdings purchased.

The precise amount of the advantage with respect to the acquisition price paid corresponds to the net discounted value of the tax burden reduction provided by the amortisation that is deductible throughout the amortisation period following the acquisition. It therefore depends on the corporate tax rate in the years concerned and the discount interest rate applicable.

If the acquired shareholdings are resold, part of this advantage would be recouped by means of capital gain taxation. Indeed, by allowing amortisation of financial goodwill, if the foreign shareholding in question is resold, the amount deducted would lead to an increase in the capital gain taxed at the time of sale. However, in the event of such uncertain circumstances, the advantage would not disappear completely since taxation at a later stage does not take the liquidity cost into account. As rightly pointed out by the two parties, from an economic point of view, the amount of the advantage is at least similar to that of an interest-free credit line that allows up to 20 annual withdrawals of one-20th of the financial goodwill for as long as the shareholdings are held on the taxpayer’s books.

Finally, the Commission cannot share the views of the Spanish authorities and the 30 interested parties that the final beneficiary of the contested measure would only be the seller of the foreign shareholding since it would receive a higher price. The Commission rejects this argument after assessing the effect of the contested measure in its current form. First, there is no mechanism guaranteeing that the advantage is passed on in full or in part to the seller. Second, the acquisition price results from a series of different elements, not just from the contested measure. Third, even if the above two conditions were met, the Spanish taxpayer benefiting from the contested measure must still be considered the beneficiary of the measure. Even if an economic advantage were transferred to the seller, the contested measure would still give the acquirer greater capacity to offer a higher price, which is of the utmost importance in the case of a competitive acquisition operation.

Therefore, the Commission concludes that, in any event, the contested measure provides an advantage at the time of acquisition of foreign shareholdings.

Secondly, the contested measure does not constitute a mechanism to avoid double taxation of future dividends that would be taxed upon realisation of future profits and should not be taxed twice when distributed to the company that holds a significant shareholding for the acquisition of which financial goodwill was paid. In fact, the contested measure creates no relation between the dividends received and the deduction enjoyed as a result of the contested measure. On the contrary, the dividends received from a significant shareholding in a foreign company already benefit from both the exemption provided for by Article 21 TRLIS and the direct tax neutrality provided for by Article 32 TRLIS to avoid international double taxation. In this connection, the amortisation of the financial goodwill results in an additional advantage with respect to the acquisition of significant shareholdings in foreign companies.

Fourthly, the Commission notes that the financial goodwill deriving from the acquisition of domestic shareholdings cannot be amortised whereas the financial goodwill of foreign companies is amortised under certain conditions. Different tax treatment of the financial goodwill of foreign companies compared with domestic ones is a differentiation introduced by the contested measure which is neither necessary nor proportionate in terms of the logic of the tax system. In fact, the Commission considers that it is disproportionate for the scheme at hand to impose substantially different nominal and effective taxation on companies in comparable situations just because some of them are involved in investment opportunities abroad.

In the light of the above, the Commission considers that the neutrality principle cannot justify the contested measure. Indeed, as highlighted also by the two parties, the fact that the acquisition of a 5 % minority shareholding acquired after a given date benefits from the contested measure demonstrates that the measure would include certain situations that bear no significant similarity. In this way it could be said that, under the reference system, situations which are both factually and legally different are treated in an identical manner. The Commission considers therefore that the neutrality principle cannot be invoked to justify the contested measure.

Given the above considerations, the Commission must conclude that the selective advantage aspect of the tax scheme under review is not justified by the nature of the tax system. Therefore, the contested measure must be considered as including a discriminatory element in the form of a limitation regarding the country in which the transaction benefiting from the tax advantage takes place, and this discrimination is not justified by the logic of the Spanish tax system.