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Corporate restructuring operations: what is a securities exchange?
Corporate restructuring refers to strategic processes undertaken by companies to reorganise their organisational, financial, or legal structure with the aim of enhancing efficiency, adapting to market changes, or complying with new regulations.
In an increasingly dynamic and competitive business environment, corporate restructuring has become an essential tool for ensuring the long-term viability of organisations.
However, business restructuring is not merely an internal adjustment; it also entails significant tax, labour, and legal implications which must be managed with due care and strategic foresight.
In this article, we will focus specifically on securities exchange operations, briefly outlining both the particular features of this type of restructuring and the special tax regime available to such transactions—provided that certain conditions are met—without which, in many cases, these operations would be unviable from a tax perspective.
What is a securities exchange?
A securities exchange is not defined as such under commercial law. To find its definition, one must refer to tax legislation.
Specifically, Article 76.5 of the Corporate Income Tax Act (LIS) defines this operation as one whereby an entity acquires an equity interest in another company that grants it a majority of the voting rights therein. This acquisition is made by offering the shareholders of the latter company, in exchange for their securities, securities representing the share capital of the acquiring entity and, where applicable, a cash payment not exceeding 10% of the nominal value.
In other words, this operation allows a company to become the parent or controlling entity of another by acquiring the majority of its voting rights.
Additionally, the legislation also extends this classification to cases in which the acquiring entity already holds a majority of voting rights and proceeds to increase its equity interest in the target entity.
An example of this kind of corporate reorganisation would be the shareholders of Company “X” exchanging their shares or stakes in Company “Y” by contributing them to the share capital of the latter.
In fact, one of the most common securities exchange transactions involves the formation of a holding company, to which shareholders contribute the shares they hold in other companies.
What are the main features of a securities exchange?
In summary, two distinguishing characteristics set this type of operation apart from other forms of corporate restructuring:
Firstly, through this operation, one entity obtains or reinforces a majority of voting rights in another company.
Secondly, the shareholders of the target entity become shareholders of the acquiring (or parent) entity through the exchange.
Does a special tax regime apply to securities exchange transactions?
Chapter VII of Title VII of the LIS regulates the special tax deferral regime applicable to securities exchanges. The main features of this regime are neutrality, simplified administrative procedures, and the deferral of tax payments that would otherwise be triggered.
Under this regime, any capital gains or income arising from the securities exchange are not included in the taxable base of Corporate Income Tax (IS), Personal Income Tax (IRPF), or Non-Resident Income Tax (IRNR). Instead, the taxation of these gains is deferred until a future transfer of the relevant shares or interests takes place.
It is important to highlight, however, that this regime includes a specific anti-abuse rule aimed at preventing the use of such transactions for tax avoidance purposes.
In this regard, Article 89.2 of the LIS stipulates that in order for these transactions to benefit from the deferral regime, they must be carried out for valid economic reasons and not merely for tax motives.
The notion of “valid economic reasons” is a legally indeterminate concept that has caused interpretative difficulties in practice and continues to be the subject of significant legal debate.
What are the requirements for applying the special tax regime to securities exchanges?
In addition to the requirement of valid economic reasons mentioned above, the main conditions for applying the special regime to securities exchanges are set out in Article 80 of the LIS:
The shareholders undertaking the exchange must be resident in Spain or in another EU Member State.
The entity acquiring the securities must either be resident in Spain or fall within the scope of Directive 90/434/EEC.
Does the special tax deferral regime apply to other types of corporate restructuring?
Yes, in addition to securities exchanges, the deferral regime also applies to the following operations:
Mergers, including both mergers by absorption and mergers resulting in the creation of a new entity. It also covers various forms of special mergers (e.g. reverse mergers, cross-border mergers, etc.).
Demerger operations, including both total and partial demergers. The regime also covers financial demergers, which occur when a company holds majority stakes in other entities.
Non-cash contributions of business branches.
Special non-cash contributions, as defined in the relevant legislation.
In conclusion, corporate restructuring operations such as securities exchanges can play a key role in the strategic planning of businesses and in establishing optimal corporate structures aligned with economic realities. Moreover, they benefit from a favourable special tax regime that ensures neutrality and deferral, provided the required conditions are satisfied and the transactions are backed by valid economic grounds.
While the benefits are substantial, due to the potential for legal interpretation disputes, it is essential to carry out a thorough prior analysis of each specific case before undertaking such a restructuring.
Do you need advice? Access our areas related to the exchange of securities: