This blog provides an in-depth legal and economic analysis of three alternatives for restructuring an intra-group debt between a Spanish company and its creditor, a Dutch company. We will consider that the Dutch company is related to the Spanish company, assuming that the sole shareholder of the Spanish company is also a shareholder of the BV.
This report will assess, from a corporate, registry, and tax perspective in Spain, the following alternatives:
- a) Share capital increase by offsetting receivables in Spain
- b) Participating loan in Spain
- c) Ordinary loan between the Dutch company and the Spanish company.
At Welex, lawyers and accountants in Spain, we will place particular emphasis on:
- certainty of registration and correct notarial implementation in Spain
- impact on Corporate Income Tax in Spain
- recurring or one-off tax costs
- transfer pricing and related-party transaction risks.
For information purposes, we will also include a comparative subsection analysing the potential tax implications if the transaction were structured as a capital increase through a cash contribution, rather than a share capital increase by offsetting receivables, due to the implications regarding pre-emption rights and the potential gratuitous acquisition arising from waivers of such rights.
Alternative 1: Share capital increase by offsetting receivables in Spain
1. Key corporate and registry framework
The offsetting of receivables in the context of a share capital increase of a Spanish company is specifically regulated by Article 301 of the Consolidated Text of the Spanish Companies Act (TRLSC), which establishes requirements regarding the identification and substantiation of the receivable and, where applicable, its verification by an auditor.
This is not a cash contribution. The transaction cancels an outstanding liability and converts it into equity of the Spanish company.
The wording of Article 304 TRLSC limits the pre-emption/preferential subscription right “solely and exclusively” to capital increases made through cash contributions.
In other words, when a capital increase by offsetting receivables is carried out in Spain, the existing shareholders of the company do not acquire a right to subscribe to and participate in that capital increase.
It should be taken into account that, in tax audit proceedings conducted by the Spanish Tax Authorities, the existence of such a pre-emption right may lead to tax reassessments, as the Tax Authorities may consider that a “waiver” of that right constitutes a donation of its value in favour of the new shareholder of the company. We will explain this in greater detail in the section dealing with capital increases through cash contributions.
The above principle, namely that no preferential right arises in capital increases by offsetting receivables or loans, was confirmed by the Resolution of the DGRN/DGSJFP (Directorate-General for Registries and Notaries) dated 7 February 2020, which settled the previous registry-related debate by confirming that the offsetting transaction does not constitute a cash contribution and that no waiver is required for registration purposes, since the preferential subscription right only arises in capital increases made through cash contributions.
In view of the above, it is therefore important to include the following clause in the public deed documenting the share capital increase by offsetting receivables in Spain:
“The share capital increase is implemented exclusively by way of offsetting receivables in accordance with Article 301 TRLSC. No cash contribution is involved. The preferential subscription/assumption right provided for in Article 304 TRLSC does not apply, in accordance with the Resolution of the DGRN/DGSJFP of 7 February 2020 (BOE-A-2020-6793). The file contains the identification, substantiation and tax valuation of the receivable being capitalised.”
Operational corporate conclusion. The public deed documenting a share capital increase by offsetting loans or receivables in Spain should expressly state the nature of the transaction pursuant to Article 301 TRLSC and, by express reference to Article 304 TRLSC and the DGRN Resolution of 7 February 2020, confirm that no preferential right applies and that, consequently, no waiver of preferential subscription rights is required.
2. Could any tax implications arise in Spain when a share capital increase by offsetting receivables or loans is proposed?
In our view, the taxation of the offsetting transaction depends essentially on the valuation attributed to the receivable that will be used for the capital increase. Since no preferential subscription right exists, the Spanish Tax Authorities should not be able to assign an economic value to a right that has not arisen and does not exist under corporate law.
Article 17.2 of the Spanish Corporate Income Tax Act (LIS) requires these transactions to be valued for tax purposes at the amount of the capital increase established for corporate purposes, irrespective of their accounting measurement.
Where the tax value of the capitalised receivable differs from that amount, Article 17.5 LIS requires the difference to be included as taxable income. In other words, if the receivable has a lower tax value than the amount of the capital increase, the Spanish S.L. must make a positive off-book tax adjustment for the difference and pay Corporate Income Tax accordingly.
Expanded numerical example. Capital increase by offsetting receivables: €3,000,000. Tax value of the receivable in the S.L.: €2,500,000. Tax value of the receivable in the BV: €3,000,000. Taxable income to be recognised: €500,000 (Form 200, codes 01818/01819), which would be subject to Corporate Income Tax at 25%.
3. Accounting, solvency and corporate governance effects
A share capital increase by offsetting a loan strengthens the S.L.’s equity and may help restore its financial balance.
The elimination of future financial expenses improves coverage ratios and DSCR and aligns the capital structure with the company’s actual cash-generating capacity.
From a corporate governance perspective, it is advisable to reinforce the shareholders’ resolution with an economic and financial rationale and to refer to the expert valuation report regarding the receivable, facilitating both registry scrutiny and any future tax inspections.
4. What if the share capital increase in Spain were carried out through a cash contribution?
At Welex, your efficient English-speaking accountant in Marbella, we consider it necessary to include this section because, in our experience, many advisers assume that in all capital increases, whenever a shareholder does not wish to or cannot participate, a preferential subscription right automatically arises in favour of that shareholder. This is not always the case under the provisions of the Spanish Companies Act.
A.Creation of the preferential subscription right and its economic nature in Spain
In capital increases involving an immediate cash contribution, the preferential subscription/assumption right under Article 304 TRLSC arises in order to protect the shareholders’ percentage ownership.
This right has an economic value and may be transferred or valued at market value.
B. Risk of a “gratuitous acquisition” where rights are waived
In a Spanish capital increase Title Deed through cash contributions — i.e. where money is deposited in the bank, and the share capital is simultaneously increased — if a shareholder waives its preferential right free of charge and another shareholder increases its subscription accordingly, the courts have classified the resulting benefit as a gratuitous acquisition for the beneficiary and as a potential capital gain for the holder of the subscription right.
For example, the Spanish National High Court (Audiencia Nacional, 28 March 2019, appeal 23/2016) held that the gratuitous waiver of a subscription right, where there is animus donandi, in a capital increase through cash contributions produces a taxable increase in wealth that must be valued at market value, with the tax burden falling on the beneficiary of the advantage. This case law requires particular caution when choosing the cash contribution route, given the Spanish Tax Authorities’ broad powers to value these types of transactions.
In our view, and assuming in this specific case that, instead of a Spanish capital increase by offsetting receivables or loans, a share capital increase through cash contributions were carried out, the consequences could be as follows:
- The Spanish Tax Authorities could value the preferential subscription right. Assume that the assets of the Spanish company are worth €4,000,000, while the capital increase amounts to €3,000,000 and the new shareholder would hold 99.90% of the share capital. In those circumstances, the Spanish Tax Authorities could consider that the subscription rights have a value of €1,000,000.
- The Spanish Tax Authorities could consider that, by waiving its preferential subscription right, the current shareholder has effectively made a “donation” of that right to the new shareholder.
- The Spanish Tax Authorities could attribute a capital gain of €1,000,000 to the new shareholder by way of donation. However, in this particular case, since the party subscribing to the capital increase is a BV resident in the Netherlands, the Double Taxation Convention between Spain and the Netherlands would apply. Pursuant to Article 14 of the Convention, the transaction would not be taxable in Spain and, therefore, the Spanish Tax Authorities would not be entitled to tax it in Spain.
- The former shareholder, as an individual, could likewise be attributed a capital gain of €1,000,000, as though the subscription rights had been sold. If that individual is resident in Spain, the gain could be taxed at up to 30%. If the individual resides in the Netherlands, the Double Taxation Convention between Spain and the Netherlands would apply and the transaction would most likely not be taxable in Spain either.
Comparative conclusion between a share capital increase in Spain by offsetting receivables and a share capital increase through cash contributions
- Offsetting receivables: no preferential right or waiver arises; the tax focus is limited to Article 17 LIS (valuation differences) and Article 18 LIS (related-party transactions).
- Cash contribution: preferential subscription rights do arise; gratuitous waivers or undervalued issue prices may trigger a gratuitous acquisition and potential tax litigation.
Alternative 2: Participating loan in Spain (hybrid instrument)
1) Legal nature and corporate effects
Participating loans in Spain are governed by Article 20 of Royal Decree-Law 7/1996. Their main characteristics are:
- Variable interest linked to the borrower’s performance, potentially combined with a fixed component
- Subordination to ordinary creditors
- Treatment as equity for capital reduction and liquidation. In situations involving financial imbalance, they may therefore help prevent a statutory ground for dissolution.
2) Tax implications for the Spanish S.L. when using a participating loan in Spain
In an intra-group context, the remuneration of a participating loan is treated as a return on equity in the hands of the borrower and is therefore non-deductible under Article 15. a LIS.
In other words, the interest paid by the Spanish company to the Dutch BV is not deductible for Spanish Corporate Income Tax purposes, creating an annual tax cost compared with the alternative of capitalising the debt.
Alternative 3: Ordinary intra-group loan
1) Nature, deductibility and limitations of an ordinary loan between the Dutch company and the Spanish company
Financial expenses are deductible in principle, although they are subject to the limit of 30% of EBITDA, with a minimum guaranteed deduction of €1,000,000 under Article 16 LIS.
In addition, the arm’s-length principle under Article 18 LIS must be complied with: the interest rate, term, guarantees, repayment schedule and contractual provisions must be consistent with market conditions and supported by appropriate transfer pricing documentation.
In other words, where the lender and borrower are related parties, as in the present case, the interest rate agreed between them must be in line with the market interest rate. If it is not, the Spanish Tax Authorities may make tax adjustments to the transaction.
Accordingly, provided that the interest rate is determined at market value, the transaction may be viable.
2) Risk of recharacterization and evidence of repayment capacity
As explained above, provided that the interest rate complies with the arm’s-length principle, the transaction may in principle be feasible.
However, it should be considered that the Spanish Tax Authorities have additional mechanisms to review loan transactions between related parties.
If the S.L. cannot demonstrate its repayment capacity or if the terms are not consistent with market conditions, the Spanish Tax Authorities may recharacterize the loan as a disguised participating loan or an equity contribution, denying the deductibility of the interest under Article 15. a LIS or making transfer pricing adjustments under Article 18 LIS. The interest on the ordinary loan could consequently be regarded as non-deductible for Spanish Corporate Income Tax purposes.
For these reasons, whenever possible, we generally advise our clients to regularise the existence of these types of loans in the balance sheets of commercial companies through a share capital increase, thereby reducing this type of risk.
Strategic comparison (expanded executive summary) between share capital increases, participating loans and ordinary loans
| Alternative | Impact | Tax cost | Risks | Documentation |
| Offsetting receivables | Debt → equity; improves solvency | One-off adjustment if tax value of receivable < amount of capital increase (Art. 17 LIS) | Valuation; related-party rules (Art. 18 LIS) | Public deed under Articles 301/304 TRLSC + DGRN 2020 Resolution |
| Participating loan | Equity treatment; subordinated | Intra-group interest non-deductible (Art. 15.a LIS) | Metrics; transfer pricing | Agreement pursuant to Art. 20 RDL 7/1996; business rationale memorandum |
| Ordinary loan | Enforceable liability | Interest deductible subject to 30% EBITDA limit (Art. 16 LIS) | Arm’s length; repayment capacity; recharacterisation (Arts. 15.a/18 LIS) | Agreement; comparables; cash-flow projections; transfer pricing documentation |
Conclusion
In the circumstances described, a share capital increase by offsetting receivables is the preferred option due to its registry certainty and tax efficiency.
Under this structure, no preferential subscription right arises, and no waiver is required (Article 304 LSC and RDGSJFP 7 February 2020).
The tax impact is limited to the possible recognition of valuation differences where the tax value of the receivable in the S.L. is lower than the corporate amount of the capital increase (Articles 17.2 and 17.5 LIS, Form 200, codes 01818/01819). Where both values coincide, the transaction is tax neutral.
By contrast, a participating loan generates non-deductible interest (Article 15.a LIS, Article 20 RDL 7/1996), increasing its cost without providing any clear advantages in this particular case.
An ordinary loan is viable provided that the interest rate complies with market conditions. However, where it cannot be sufficiently demonstrated that the company generates enough funds to service the debt, there is a risk that the Tax Authorities may recharacterize it as a participating loan or as equity due to the indirect corporate relationship between the parties.
For all the above reasons, our recommendation would be to carry out the share capital increase by offsetting the exact amount of the receivable verified in both the BV and the S.L., supported by a valuation report on the receivable, minutes setting out the economic and financial rationale and a notarial clause expressly referring to Article 301 LSC, Article 304 LSC and RDGSJFP 7 February 2020.
Please do not hesitate to contact our law firm, specialised in corporate matters in Spain, if you require further information regarding the structuring of financing between a Spanish company and its Dutch corporate shareholder. Our offices will be pleased to assist you with any queries relating to capital increases by offsetting receivables, ordinary loans and participating loans in Spain.
This blog has been written by Wim Lamers, economist and director of Welex law firm. Welex is your tax adviser in Spain, specialising in corporate law.
