The European Commission has reported that a new interpretation of a Spanish tax scheme benefiting companies acquiring foreign shareholdings is incompatible with European state aid rules. Spanish current scheme allows companies to deduct the “financial goodwill” arising from the acquisition of indirect shareholdings in foreign companies from their corporate tax base.

In a statement on October 15, 2014, the Commission concluded that the measure provided the beneficiaries with a selective economic advantage which cannot be justified under EU state aid rules, and which must now be repaid to the Spanish state. In October 2009 and in January 2011, the Commission ordered Spain to abolish the provision. Furthermore, the Commission ordered the recovery of aid granted with the exception of certain cases, taking into account the existence of legitimate expectations for some beneficiaries.

Spain committed not to grant the exemption to any new beneficiaries but did not abolish the provision, arguing that the financial goodwill can still be deducted in certain cases where the Commission recognized legitimate expectations or authorized a transitory period.

In March 2012 the Spanish authorities adopted a new administrative interpretation which allowed the deduction of financial goodwill deriving from indirect shareholding acquisitions through the acquisition of foreign holding companies, thereby extending the initial scope of application of the measure.  The Spanish authorities did not notify the Commission of this new interpretation in advance of application but only informed the Commission in April 2012. In July 2013, the Commission opened an in-depth investigation to verify whether this new interpretation, allowing tax deductions in connection with the acquisition of indirect shareholdings in foreign companies, was in line with EU state aid rules.

The Commission’s investigation showed that the amended application constitutes new state aid, since Spain is unduly enlarging the scope of an aid scheme, and that the new interpretation is incompatible with EU state aid rules.

As well as ruling against Spain’s decision, the Commission concluded that beneficiaries of this new interpretation have no legitimate expectations as regards their situation because the receipt of tax benefits derived from the indirect acquisition of shareholdings was not covered by the scope of the original measure at the time of adoption of the Commission’s 2009 and 2011 decisions