Corporate Tax Breaks in Spain Revived by Court

(CN) - Spain can let corporations deduct shareholdings in foreign companies from their taxes, the EU General Court ruled Friday, annulling two regulatory orders.

The Spanish law at the heart of the dispute says that, when a taxable company in Spain holds a shareholding of at least 5 percent in a foreign firm for at least a year, the resulting goodwill may be deducted through amortization.

"Foreign companies" are subject to a tax similar to that of Spain-based firms, reaping income mainly from business activities conducted abroad.

Spanish law says that, when a company taxable in Spain acquires a shareholding in a company based in Spain, the resulting goodwill cannot be entered separately in the accounts for tax purposes. Goodwill may, however, be amortized where undertakings are grouped together.

European Parliament members asked its regulatory authority in 2005 and 2006 whether the Spanish provision permitting the "foreign company" deduction should be considered state aid.

The European Commission responded that the Spanish regime did not constitute state aid, but opened a formal investigation in October 2007 upon the filing of a complaint by a private operator.

After the intra- and extra-European shareholdings acquisition procedures were closed on Oct. 28, 2009, and Jan. 12, 2011, respectively, the commission declared Spain's regime incompatible with the internal market, directing the country to recover the aid granted.

Three Spain-based companies - Autogrill Espana SA, Banco Santander SA and Santusa Holding SL - each sought reversal by the General Court.

The court granted those requests in Luxembourg today, finding that "the commission failed to establish that the Spanish regime was selective, selectivity being one of the cumulative criteria for classifying a measure as state aid."

Though the opinions are not available in English, the court explained its holding in a statement.

The regime does not by itself show that a measure favors "certain undertakings or the production of certain goods" under EU law, the court found.

"The General Court notes that the Spanish regime does not exclude, a priori, any category of undertaking from taking advantage of it, since its application is independent of the nature of an undertaking's activity," according to the press release. "In addition, the Spanish government does not set any minimum amount in respect of the minimum 5 percent shareholding threshold. The regime, therefore, does not, in fact, restrict the undertakings which can take advantage of it to those which possess sufficient financial resources to do so."

Claims that the Spanish regime benefits only select companies that make certain investments abroad did not impress the court.

Such an approach could lead to every tax measure whose benefit is subject to certain conditions to be "selective, even though the beneficiary undertakings would not share any specific characteristic distinguishing them from other undertakings," the court ruled.

A measure's selectivity must be based "on a difference of treatment between categories of undertakings under the legislation of the same member state, not a difference in treatment between companies of a member state and those of other member states," the court added..

The commission has two months two appeal, and an annulment action may be brought if the ruling is found contrary to European law.

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