In light of the recent economic events that have shaken the global economic system, the corporate world is seeking ways to cut costs and avoid insolvency with many companies inevitably looking to restructure.
The lack of cash-flow and credit that led to the current situation will affect every level of a corporate group: from operational companies to ultimate holding companies, they may all need to take measures to ascertain the damage caused by the credit crunch and enhance both the group’s and relevant subsidiaries’ viability during the recession.
Across Europe, and within a group of companies, taxpayers can usually resort to forgiveness or waiver of intragroup debt in order to maintain the viability of their affiliated companies.
This inevitably has direct tax consequences, with general consequences across most European countries being:
(A) that the debtor company realises an exceptional profit, which may not lead to effective taxation because of the offsetting of tax losses carried forward, or
(B) that the creditor company realises an exceptional loss, which is often tax deductible.
However, many different provisions exist across jurisdictions which may impact the taxation or deductibility treatment respectively. Here we look at how debt forgiveness or waivers are treated for tax purposes in Spain, specifically in the context of a debtor which is or threatens to be insolvent. Tax treatment in the hands of the creditor
The waiver of an outstanding debt by a creditor shall be treated as an extraordinary loss for accounting purposes. As taxable income for corporate income tax purposes is calculated from the company’s accounting results assessed upon accounting regulations, such loss is normally deductible unless income tax law provides for an adjustment.
An adjustment would occur if the forgiveness would qualify as a “donation” or “gratuity”, which are generally not tax deductible. However, under the doctrine of the Spanish General Directorate of Taxation, a waiver of debt by the creditor is not always considered a donation or gratuity as this requires the subjective factor animus donandi (intention to give).
However, if the creditor has done the utmost to get paid proceeding ultimately to waive the debt as a business decision, the General Directorate has stated that the amount waived shall be treated as a tax deductible expense. Losses derived from a cancellation of debt under the scope of an insolvency proceeding will also be tax deductible provided that certain requirements are met.
Different rules apply in the event that the creditor participates in the capital of its debtor. There is no stated minimum stake required, although rules may apply in the event that the creditor and debtor are considered related parties – where there is a direct participation of at least 10% (non-listed companies) or 5% (listed companies).
Where the creditor participates in the debtor’s capital, from an accounting perspective the waiver of debt is deemed to be a contribution in kind to the equity of the debtor and not an extraordinary loss. As a consequence, the tax basis of the creditor’s participation in the debtor will increase with the amount of the debt so waived.
The same treatment will apply in the event that both creditor and debtor form part of a tax consolidated group under the scope of the Corporate Income Tax Law.
Tax treatment in the hands of the debtor
The waiver of a debt represents extraordinary income for the debtor in the amount of debt and interest cancelled. From a tax perspective, the foregoing income recognition leads to inclusion in the tax base of the debtor, becoming subject to tax at the corporate income tax rate of 30%.
However, in the event that the creditor holds a participation in the debtor’s capital (under the rules stated above) or both entities form part of a tax group, no income recognition shall arise for the debtor and the amount of debt waived shall increase the debtor’s equity without triggering any corporate income tax burden.