Tax consolidation: when to adopt a holding structure
Tax consolidation is a special regime for corporate tax and VAT purposes which consists in the creation of a legal structure gathering several commercial entities that are treated as a single entity for tax purposes. In other words, this results in the joint taxation of several individual entities belonging to the same corporate group, considered as a single tax group. Entities belonging to the holding structure do not face their tax obligations separately; the group will be taxed for the sum of the individual tax bases instead.
Tax consolidation is a completely voluntary legal instrument regulated by Article 55 and following of Law 27/2014, of 27 November, of the Corporate Tax Act. This procedure is not exempt of complexities, but it can be a compelling option for many businesses.
There is a series of prerequisites for integrating a holding group and benefitting from a consolidated tax regime:
• The entities comprising the group must be resident in Spain.
• The majority entity can be based in a foreign country, but that country must not be a tax haven.
• The scheme must be approved by the management board or equivalent body of the newly constituted taxable entity. An agreement between each business comprising the group is also necessary.
• The holding company must own 75% of the aggregate shares and be liable for corporate tax.
• The tax consolidation process must be carried out in the financial year prior to the one in which it is deemed to take effect.
Requirements for VAT consolidation
• The holding company is required to own a lower stake in the group, 50% only.
• The majority entity cannot be based in a foreign country.
• Greater flexibility to join or leave the group.
Main advantages
Tax consolidation regimes are based on a joint and several liability principle, whereby any profits made by some entities are automatically set off against any losses from other entities belonging to the same holding group.
Transactions between affiliated entities are not subject to withholding tax.
Deductible net financial expenses are calculated within the boundaries of the consolidation scheme, which often results in a larger volume of deductible expenses.
Entities comprising the tax consolidation group maintain their own separate commercial risk. Sanctions imposed on one of them do not apply to the others.
Minority entities benefit from the greater fiscal commitments undertaken by the largest ones and can build on their resources, methodology, and knowledge.
There are no minimum permanence requirements.
The maximum compensation of negative tax bases incurred in previous years is also calculated at the consolidated level – and so are the determination of capitalisation reserves, the various deductions, etc. A business can generate a certain deduction and another entity from the same group can benefit from it.
With regards to VAT, there are two different models of tax consolidation:
• Basic, which consists in the compensation of the recoverable and receivable VAT amounts of the different entities.
• Advanced, which allows for the tax base of intra-group transactions to be determined with a special procedure, offering substantial savings in those sectors that are subject to a pro-rata basis.
The importance of preliminary analysis
Despite the various advantages of tax consolidation, we always recommend analysing the different variables beforehand – to avoid scenarios in which this procedure could be counterproductive. Several factors must be taken into account, including the joint and several liability of the entities comprising the group and the complexity of determining the amount of tax. For these reasons, we recommend that such a preliminary study be carried out by a law firm specialised in tax consolidation, such as Confianz.