The FEAC Regime and the Anti-Abuse Clause

The FEAC Regime and the Anti-Abuse Clause

The FEAC regime (mergers, divisions, asset transfers and exchanges of shares) stems from the transposition of Directive 90/434/EEC on the common tax regime applicable to mergers, divisions, partial divisions, transfers of assets and exchanges of shares.

The regime seeks to ensure tax neutrality for business restructuring. Its fundamental aim is to prevent the tax consequences that could arise under the general tax rules from hindering business decisions to restructure, reorganise or rationalise activities. This tax neutrality is achieved essentially by deferring tax on income generated when assets involved in these transactions are transferred.

However, Article 11(1)(a) of Directive 90/434/EEC contains an anti-abuse clause intended to prevent the special regime from applying to transactions whose sole or main purpose is tax fraud or evasion:

“A Member State may refuse to apply all or any part of the provisions of Titles II, III and IV, or withdraw all or any part of the benefit of those provisions, where a merger, division, transfer of assets or exchange of shares:

(a) has as its principal objective, or as one of its principal objectives, tax fraud or tax evasion. The fact that one of the transactions referred to in Article 1 is not carried out for valid commercial reasons, such as the restructuring or rationalisation of the activities of the companies participating in the transaction, may constitute a presumption that the transaction has tax fraud or tax evasion as its principal objective or as one of its principal objectives; (…)”

This anti-abuse clause reflects the general principle of EU law prohibiting abuse of rights. It was incorporated into Spanish law through Article 96(2) of the former Corporate Income Tax Law (TRLIS), which provides:

“2. The regime set out in this Chapter shall not apply where the transaction carried out has tax fraud or tax evasion as its principal objective. In particular, the regime shall not apply where the transaction is not carried out for valid commercial reasons, such as the restructuring or rationalisation of the activities of the entities participating in it, but solely to obtain a tax advantage.”

By directly applying the anti-abuse clause in Article 96(2) TRLIS, the Tax Administration may deny the special regime during a tax inspection without relying on the general anti-abuse provisions in Articles 13, 15 and 16 of the General Tax Law (legal characterisation, conflict in the application of tax rules and simulation). The Supreme Court has repeatedly endorsed this approach, including in its judgments of 16 February 2015 (appeal 647/2013) and 31 March 2021 (cassation appeal 5886/2019). The latter held:

“A reasoned finding that the legal transaction lacks a valid commercial reason, thereby excluding it from the special regime for mergers, divisions, etc. governed by Chapter VIII of Title VII of the consolidated text applicable at the relevant time, and subject to judicial review, makes it unnecessary to initiate proceedings concerning conflict in the application of the law. The specific anti-abuse clause operates as lex specialis and derives directly from EU law.

This does not prevent proceedings under Article 15 of the General Tax Law from being initiated and decided where the facts and circumstances warrant it.”

The Court of Justice of the European Union (CJEU) has held in several judgments that, to determine whether a transaction has tax fraud or evasion as its main or one of its main objectives, the competent national authorities may not rely solely on general, predetermined criteria. They must examine the transaction as a whole on a case-by-case basis. In particular, in its judgment of 17 July 1997 (Case C-28/95), it stated:

“39. Article 11(1)(a) provides that, under this reservation of powers, a Member State may establish a presumption of tax fraud or evasion where ‘one of the transactions referred to […] is not carried out for valid commercial reasons, such as the restructuring or rationalisation of the activities of the companies participating in the transaction’.

40. It follows from Article 2(d) and (h) and Article 11(1)(a) that Member States must grant the tax benefits provided for by the Directive to the share-exchange transactions referred to in Article 2(d), unless those transactions have tax fraud or tax evasion as their main or one of their main objectives. Member States may provide that the absence of valid commercial reasons gives rise to a presumption of tax fraud or evasion.

41. […] To determine whether the transaction in question pursues such an objective, the competent national authorities may not rely solely on general, predetermined criteria; they must examine it as a whole on a case-by-case basis. It is settled case-law that such an examination must be open to judicial review (see, to that effect, the judgment of 31 March 1993, Kraus, C-19/92, paragraph 40).”

The CJEU took the same approach in its judgment of 8 March 2017 (C-14/16, Euro Park Service), concluding:

“56. […] Where the national legislation at issue systematically and unconditionally requires a taxpayer to prove that a transaction is justified by a commercial reason and does not have tax fraud or evasion as its principal or one of its principal objectives in order to obtain the benefit of deferral of capital gains under Directive 90/434, without requiring the tax authorities to provide at least prima facie evidence that there are no valid commercial reasons or indications of fraud or tax evasion, that legislation establishes a general presumption of fraud or tax evasion.”

Spanish case-law has relied on the CJEU’s criteria when examining this issue.

In its judgment of 16 March 2016 (cassation appeal 1815/2014), the Supreme Court held that the Administration may use presumptive evidence to justify denying the special regime. Where there are no commercial reasons for a transaction, it may be established that it was carried out “primarily for purposes of tax fraud or evasion.” In that case, the company seeking to use the special regime must rebut the presumed conclusion:

“The burden of proof must be understood as shared between the company seeking to benefit from the special merger regime, which must prove the facts giving rise to the right it asserts (Article 105(1) of the General Tax Law), and the Administration, which must prove a circumstance it invokes as an obstacle to applying the regime, such as the absence of a ‘valid commercial reason’. This allocation must also take into account the evidentiary difficulties inherent in proving the absence of a fact.

Accordingly, unsubstantiated assertions are not enough. At the same time, as this Court has repeatedly held, the Administration may rely on presumptions to justify denying the tax-neutrality regime. In light of the absence of commercial reasons, it may establish that the transaction was carried out ‘primarily for purposes of tax fraud or evasion’. In that case, the company seeking the special merger regime must rebut the presumed conclusion, either by showing that the requirements for relying on that presumption are not met or by disproving it through other evidence (see Supreme Court judgments of 28 June 2013, cassation appeal 1186/2011, and 4 July 2014, cassation appeal 725/2012).”

Finally, in its judgment of 16 November 2022 (appeal 89/2018), the Supreme Court concluded:

“In short, the fact that a transaction is not carried out for valid commercial reasons, such as restructuring or rationalising the activities of the participating companies, may give rise to a presumption that its principal objective is tax fraud or evasion—that is, obtaining an undue tax advantage. What matters, however, is the purpose of avoiding or evading tax, not whether there is a valid commercial reason in itself, since the latter is the underlying fact from which the prohibited fraudulent purpose may be presumed. […] Under the terms of the Directive, there is a rebuttable presumption of tax fraud or evasion based on the absence of valid commercial reasons, such as restructuring or rationalising companies’ activities. Valid commercial reasons help establish that tax evasion or fraud is not being pursued. This is the approach in the case-law, including the judgments of 16 March 2016, cassation appeal 1815/2014, and 4 July 2014, cassation appeal 725/2012.

(…)

Further conclusions may be drawn from the CJEU judgment of 10 November 2011, Case C-126/10, Foggia-SGPS. The anti-abuse clause applies only where the transaction pursues tax fraud or evasion. That purpose may be presumed where the transaction lacks valid commercial reasons, and where it is established that its sole objective is to obtain a tax advantage. The judgment reiterates that each case must be examined individually: denying the deferral regime cannot be based on mere presumptions or on the taxpayer’s failure to prove valid commercial reasons. The transaction must be assessed as a whole and not by reference to isolated factors.”