Asset-Holding companies and cash surpluses deriving from business activities

Ruling V3440/15 dated 11th of November 2015.

It seems that, buried in a ruling with a less than attractive description of the facts and issues at hand, an interesting statement from the Spanish Tax Directorate (“Dirección General de Tributos” “DGT“) has gone unnoticed. As is customary, the DGT, at least in the publicised version of its rulings, seems often averse to issuing completely clear guidance on the issues raised by taxpayers. Still, Ruling V3440/15 is interesting in that it clarifies, although with a very brief and cursory statement, that the surplus cash from undistributed profits, which in turn derive from the company’s business activities, does not result in such company qualifying as an Asset-Holding Company for Spanish corporate income tax purposes.

In the facts analysed, the company filing for the ruling is the parent of a fully operative company. The parent’s assets are simply the holding in its subsidiary and real estate, which it leases to such subsidiary. The ruling focuses on the requirements needed to qualify for small company incentives and participation exemption.

It is true that the issue over the possible consideration of a company as an Asset-Holding Company, should surplus cash accumulate, is raised only in respect of the subsidiary company. Thus, the DGT states not only that surplus cash deriving from business activities does not turn a company into an Asset-Holding Company, but also that such surplus cash should be deemed to be a business asset. Such a conclusion may appear to be an obvious corollary to the previous statement. However, it is far from being so in light of rulings relating to Spanish Wealth Tax, where the DGT divides assets into three categories: business-related, non-business related and “neutral”, i.e. assets which should not be included in either of the other two categories.

The present ruling, therefore, clearly limits the consideration of surplus cash deriving from excess business profit as a business asset for corporate income tax purposes. However, this ruling does provide a valid argument in favour of applying the same criterion for wealth tax purposes, although the Wealth Tax Act provides for its own definitions and measurements, with no express reference to the Corporate Income Tax Act (where such reference was indeed included in previous versions of the corresponding provisions).

As a final comment, the facts of the ruling, especially with regard to the parent company, provided an opportunity for a more “adventurous” statement from the DGT. Indeed, since with a minimum structure, rental activities can be considered as a business activity for corporate income tax purposes, a company with only real estate and cash deriving from the rental of such real estate would not qualify as an Asset-Holding Company, provided it complies with such minimum structure requirements.