According to the Directorate General of Taxes (DGT), for the calculation of the ratio applicable to leveraged buyouts, the possible splitting of the debt must be disregarded, i.e., any debt assumed by the entities of the acquired group that is used directly or indirectly to satisfy the acquisition price must be considered.
The Corporate Income Tax Act (LIS) regulates certain limits on the deductibility of financial expenses. Among others, Article 16.1 establishes a general limit whereby net financial expenses for the year are deductible up to a limit of 30% of the operating profit for the year, with a minimum of EUR 1 million. This general limit also applies in the tax consolidation regime, where the limit is computed at the level of the group itself.
Article 16 itself, however, establishes an additional limit in paragraph 5 for acquisitions of shareholdings in any type of entity, where the acquired entity merges with the acquiring entity within four years of the acquisition and the tax neutrality regime does not apply (in cases where this regime does apply, the provisions of Article 83 of the rule, which is worded in similar terms, shall apply). Similarly, Article 67(b) of the Law establishes a similar limit when the acquired entity is incorporated into the acquiring tax group in periods beginning in the four years following the acquisition.
This additional limit amounts to 30% of the operating profit of the acquiring entity, not including the profit of the entity being acquired or included in the tax group in that four-year period. This limit is not applicable in the acquisition period if the financing does not exceed 70% of the amount of the acquisition; and in subsequent periods, if the debt is reduced since the acquisition by at least the proportional part corresponding to each of the following eight years, until the debt reaches 30% of the acquisition price (the ratio). Expenses exceeding this additional limit will be subject, in any event, to the general limit.
This regulation has given rise to numerous doubts. In its ruling V1854-24 of 6 August, the DGT analyses a case in which the debt taken on by the acquiring entity coexists with other debt assumed by the acquired entities and also linked to the acquisition.
Specifically, the ruling refers to a complex operation conducted in several phases, executed as a single act, in which the acquiring entity (X) obtained financing (tranche A) from a financial institution to acquire a stake in four entities (ABCD), as well as financing from third parties outside its tax group. In addition, the acquired companies, ABCD, refinanced various debts they had with entities of the seller’s group, replacing them with new loans with the same financial institution (tranche B). The ABCD entities used part of this tranche B to distribute dividends to X (i.e., to the entity purchasing its shareholding) and, with those dividends, X paid part of the purchase price of ABCD.
The DGT analyses the set of transactions, considering the concatenated nature of all of them and their agreement or execution as a single act as part of an integrated whole, and concludes that, for the purposes of calculating the ratio of the additional limit, the total debt incurred with third parties to finance the purchase price of the shares in ABCD must be taken into account as acquisition debt, without taking into account its split, i.e. (i) both the debt assumed by the acquiring entity X itself (tranche A and the remaining debt with third parties outside its tax group) and (ii) the debt assumed for that purpose by the acquired entities, ABCD, i.e. the part of tranche B that finances the dividend paid by ABCD to X with which that entity satisfies part of the purchase price.
For consistency, for the purposes of calculating the ratio, the total amount paid will be computed as the acquisition price of the shares in the capital or own funds of the ABCD entities, without this amount being reduced by the amount of the dividends distributed to X. Therefore, in this case, the dividend distributed (even if it reduces the cost for accounting purposes) does not reduce the acquisition price for the purpose of calculating the ratio.
This approach continues the line of interpretation of previous rulings (V1664-15, V3503-15, V3462-16 or V4448-16). In particular, the analysis is consistent with that conducted in consultation V4487-16, although in this case the conclusion was different. In the case analyzed in this ruling, the acquired entity paid a dividend (not financed with third-party debt, but with its own resources) immediately after the purchase, with which the acquiring entity, the beneficiary of the dividend, reduced the acquisition debt. The joint and integrated analysis of this operation determined a reduction in the “real” amount of the transaction, precisely because of the amount of the acquiree’s resources immediately delivered to the financing entity, which determined a reduction in both the price and, we understand, also in the acquisition debt itself, in order to balance the magnitudes (the sources & uses) used in the calculation of the ratio of the additional limit.
In short, the DGT once again reminds us of the need to carry out a global analysis taking into account the economic substance of the operations and the existence of concatenated operations that respond to a single purpose, beyond the form and order of execution of these, in order to determine the tax implications, whether (as in the resolution analyzed) to determine which financial expenses are not deductible, or for other reasons.
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