In a recent binding ruling, the Spanish Directorate General for Taxes (Dirección General de Tributos, DGT) concluded that the mere coincidence between the activity carried out by a newly incorporated entity and that previously performed by its shareholders or other entities related to those shareholders is not, in itself, sufficient to deny the application of the reduced rate, provided that there has been no legal transfer of the activity.
The application of the reduced 15% corporate income tax rate to newly incorporated entities remains a matter of particular practical relevance, both because of its economic impact and because the Spanish tax authorities continue to scrutinize in detail the requirements for accessing this incentive. Of particular interest are cases in which newly incorporated entities carry out the same economic activity as their shareholders or as another pre-existing company in which those shareholders participate, without any legal transfer of the business having taken place.
Binding ruling V1627-25, dated 15 September, issued by the Directorate General for Taxes (DGT), provides new and relevant clarifications in relation to these scenarios.
The case analyzed by the DGT is based on a structure that is relatively common in practice. A company and/or its shareholders have been carrying out an economic activity and, subsequently, several of those shareholders (in the case examined, together with a third, unrelated shareholder) incorporate a new entity to carry out the same activity, without any transfer—under any legal title—of the business from the pre-existing company or its shareholders, and without any single shareholder holding, on an individual basis, a majority of the share capital of the new entity. The question submitted to the DGT was whether, under these circumstances, the newly incorporated company could apply the reduced 15% tax rate.
The DGT begins by recalling the applicable legal framework. Article 29.1 of the Spanish Corporate Income Tax Law provides for a reduced 15% tax rate for newly incorporated entities that carry out economic activities, applicable in the first tax period in which the taxable base is positive and in the following tax period. The same provision expressly excludes the application of this reduced rate, inter alia, in the following cases: (i) where the economic activity was previously carried out by related individuals or entities and transferred, under any legal title, to the newly incorporated entity; (ii) where the activity was carried out during the preceding year by an individual who holds a participation exceeding 50% in the new entity; (iii) where the entity forms part of a corporate group within the meaning of Article 42 of the Spanish Commercial Code; or (iv) where the newly incorporated company qualifies as a holding (patrimonial) entity, i.e. where its assets consist mainly of assets and rights not allocated to an economic activity.
On the basis of this legal framework, the DGT analyses whether any of these exclusion grounds apply to the case at hand:
- Continuity of activity from a related entity. The DGT concludes that this exclusion does not apply merely because the activity was previously carried out by related individuals or entities; it also requires that the activity has been transferred to the newly incorporated entity under some legal title. In the case analyzed, although there is a relationship between the individual shareholders of the pre-existing entity and the new entity (or between both entities), the DGT notes that there has been no formal transfer of the business or of the assets associated with the activity. Accordingly, it concludes that this exclusion ground does not apply. This reasoning reinforces a strict interpretation of the concept of “transfer” of the activity to the new entity, such that the mere coincidence of activities carried out by the shareholders or by different entities is not sufficient to deny the application of the reduced rate, provided there has been no legal transfer of the previously carried out activity.
- Participation of individuals who carried out the activity in the previous year. The DGT again adopts a literal interpretation and concludes that this exclusion only applies where an individual, considered on an individual basis, exceeds the relevant participation threshold and carries out the same activity. In the case examined, as none of the individual shareholders holds, on an individual basis, participation exceeding 50%, this exclusion does not apply, irrespective of the fact that, taken together, the majority shareholders hold most of the share capital.
- Membership of a corporate group. The ruling also addresses whether the company forms part of a corporate group. In this respect, the DGT recalls that the relevant concept of a group for the purposes of excluding the reduced rate is that defined in Article 42 of the Spanish Commercial Code, which requires the existence of a corporate control relationship. The mere coincidence of individual shareholders does not, in itself, give rise to the existence of a corporate group. In the absence of a control relationship between companies, the new entity cannot be considered part of a group, and this exclusion ground does not apply.
- Pure holding (patrimonial) entities. Finally, the DGT recalls that the reduced 15% rate does not apply to pure holding entities. However, it clarifies that the qualification of a newly incorporated entity as a holding entity is a factual matter to be determined by reference to the actual composition of its assets, and that it is for the taxpayer to evidence to the tax authorities that the entity effectively carries out an economic activity and that its assets are allocated to that activity.
The doctrine established in this ruling is particularly relevant in sectors where it is common to structure activities through independent companies with the same investor base, typically made up of the same individuals, without any formal transfer of bus15iness between them, even where they carry out identical activities. In addition to the real estate and property development sector (where such structures are frequently used to ring-fence risks between different projects) this issue also arises in renewable energy and infrastructure projects (where special purpose vehicles are incorporated on a per-project or per-installation basis), in retail and distribution (through separate entities by territory, channel or product line), in family businesses (which separate activities for organizational or risk management reasons), in start-ups and technology projects promoted by the same entrepreneurs, and in certain business and professional services where new lines of activity are structured through separate entities.
Across all these sectors, the proper legal delineation of activities (which must be supported by valid economic reasons), the effective performance of a genuine economic activity, the shareholding structure and the absence of any formal transfer of the business are key elements (which must be adequately evidenced) to support the application of the reduced 15% tax rate.
