EU Probes Spanish Tax Loophole For Foreign Takeovers

by Philip Morton, Investors Offshore.com

15 October 2007

The European Commission has opened a formal investigation under state aid rules into a provision of Spanish corporate tax law that allows Spanish companies tax deductions deriving from acquiring a stake in non-Spanish companies.

The scheme appears to establish an exception to the general Spanish tax system. The Commission is concerned that the scheme provides an advantage for Spanish companies acquiring foreign ones with respect to acquisitions of other Spanish companies. The opening of an investigation allows interested parties to comment on the measures under scrutiny, but does not prejudge the Commission’s final decision.

Competition Commissioner, Neelie Kroes explained that: “Many believe this scheme gives an advantage to Spanish companies buying foreign companies. Opening this investigation will let us find out whether these concerns are justified.”

The Commission has received several questions from Members of the European Parliament, as well as formal complaints alleging that the Spanish scheme is unlawful. These questions have primarily been in connection with the acquisitions of foreign targets by Spanish companies: O2 by Telefónica (Telephone operator), Scottish Power by Iberdrola (Energy), and bids by Sacyr, Abertis and Cintra for the concession of highways in France.

The Commission's preliminary assessment gave rise to concerns that the scheme provides selective advantages to Spanish companies engaged in acquiring foreign companies and is therefore susceptible to distorting competition. Moreover, the Commission has concerns that the scheme could attract the location of international holding activities in Spain, while the creation of domestic groups seems to be excluded from its scope.

Spain did not notify the scheme to the Commission before its implementation. Should the investigation find that the scheme constitutes incompatible state aid, Spain may have to recover the aid illegally granted. With the opening of its in-depth investigation, the Commission also invites comments as to the scope of a potential recovery order.

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