Are contributions to holding companies still possible in family businesses?

Recently, a couple of rulings by the Central Economic Administrative Court (TEAC) have caused quite a stir, denying the application of the tax neutrality regime (“merger regime”) to contributions made by group companies to a holding company. The seriousness of this criterion lies in the fact that, without the application of the aforementioned regime, most of these operations would have a tax cost that would make them unfeasible.

Following the publication of these rulings, and thanks to the comments they have generated in the press, many family business owners are wondering whether contributions to a holding company under the merger regime are still possible or whether this door has been closed, to the point of seriously considering abandoning reorganization transactions that had already been planned and scheduled.

The answer is that it is still perfectly possible.

Let us see how the existence of this doctrine should be interpreted, how solid it is, and what future it may have.

The business usefulness of holding companies

The rulings we are referring to are dated November 19 and December 12, 2024, and have their origins in another ruling dated April 22 of the same year, which already pointed in the direction confirmed by the latest rulings. One issue, however obvious it may seem, that should not be overlooked is that when the TEAC has had to rule on this controversy, it is because the AEAT Inspectorate has issued inspection reports denying taxpayers the possibility of applying the merger regime. Therefore, we must emphasize the importance of the entrepreneur being prepared to face an inspection process with confidence, which is where the discussion will originate, if necessary, and where it would be ideal to settle the dispute with the tax authorities.

In order to be prepared for this eventuality, it should be borne in mind that the existence of a holding company that owns the companies that make up the family business usually offers a structure that allows for the rationalization and increased efficiency of the group's management, facilitating the achievement of various objectives, such as:

• Prevent the risks of one activity from jeopardizing the assets used in other activities;
• Centralize support services (HR, accounting, legal, IT, marketing, etc.) to avoid unnecessary duplication, which reduces costs and prevents miscommunication and inconsistencies in management; 
• consolidate the group's companies for accounting purposes, which will project an image of greater solvency in the market, whether for obtaining external financing or for accessing certain businesses;
• take advantage of the corporate tax consolidation regime, which can reduce the tax burden for this tax;
• manage the group's resources while minimizing tax costs, as they can be transferred from one company to another by distributing a dividend to the holding company and the latter contributing it to the entity that needs the funds, assuming a tax burden of 1.25%, compared to that borne by individual partners, which would range from 19% to 30%. In other words, it allows the taxation of income distribution to be minimized as long as the income remains within the business circuit. This will prevent the family business from being forced to make decisions of dubious business efficiency (for example, the existence of shareholdings between “sister” companies) in order to avoid distributing dividends to individuals, which would reduce resources “along the way” by an amount that may be unaffordable for the family business;
• divest, also at an affordable cost, provided that the proceeds from the divestment are reinvested in new businesses or in the expansion of existing ones. As in the previous case, it does not seem reasonable for the Spanish Tax Agency (AEAT) to seek to tax these profits while the entrepreneur intends to keep them invested in the family business;
• simplify compliance with the requirements so that the partners of the family business can access the exemption from Wealth Tax and the corresponding reductions in Inheritance and Gift Tax, by limiting compliance to the only company in which they have a direct stake, i.e., the holding company.

As can be seen, the reasons that, from a business point of view, make it advisable to move from a structure in which all partners participate in all companies to one in which all investments are channeled through a holding company are not only unquestionable but also truly powerful.

So why is the Inspectorate attacking him?

Well, it can be anticipated that the reason is that some family businesses have not wanted, known how, or been able to prove that the purpose of the company's contribution to the holding company was to achieve some or all of the above objectives, or others of an eminently business nature, not fiscal. It is already clear that the emphasis should be placed on the business reasons we have referred to, making an effort to prove that it is these reasons, and not tax savings, that inspire and justify the contribution.

In fact, the merger regime includes an anti-abuse clause that provides that it may not be applied when the main objective of the transaction is tax fraud or evasion, specifying that, in particular, the regime shall not apply when the transaction is not carried out for valid economic reasons, such as the restructuring or rationalization of the activities of the entities participating in the transaction, but for the sole purpose of obtaining a tax advantage.

This clause has generated controversy, debate, and a wealth of literature, and its regulation has evolved to mitigate its effects, since, in its early drafts, the non-application of the regime had disproportionate effects in relation to the alleged tax benefit obtained by the taxpayer, meaning the complete elimination of tax deferral for all taxes affected by it.

On the other hand, as we have pointed out in previous posts on this blog, in recent times the Tax Inspectorate has frequently been making very aggressive regularization proposals based on extremely rigorous interpretations of the regulations that obey eminently revenue-raising criteria.

Combining the two factors above, it is easy to guess that the Tax Inspectorate's interpretation of the anti-abuse clause is as broad as possible, so that they often use any evidence at their disposal to activate it and deny the taxpayer the application of the regime.

Is it possible to defend against these attacks?

In the TEAC rulings we have referred to, it can be seen that what the TEAC is trying to do is to mitigate the disproportionate effects that the Inspectorate sought to link to the non-application of the regime.

And it is in this attempt that the TEAC, in order to deny the application of the merger regime, while avoiding the disproportion inherent in the regularization proposed by the Inspectorate, makes an interpretation that is highly questionable in terms of current legislation, which, taken to its logical conclusion (something that the TEAC does not do), could easily lead to cases of double taxation that are impossible to correct. In its analysis, the TEAC forces the legal classification of the facts to the point of considering that the resources of a subsidiary company that are distributed to the holding company are available to the taxpayer as if the holding company did not exist, or to understand that, as long as those dividends are not distributed to the holding company, we are faced with a “prepared and pending abuse,” a concept that seems difficult to reconcile with the presumption of innocence, as it presumes the taxpayer's fraudulent intent, moreover, without any time limit. In other words, if a company contributed to the holding company distributes a dividend to the latter ten years after the contribution, that distribution would be the execution of the fraud that until then was “in the preparation phase.” It is difficult to assume that a contribution to a holding company is made for the purpose of saving taxes on dividends that will be distributed, perhaps, in eight, ten, or twelve years...

For all the above reasons, it is to be assumed that the taxpayers affected by the resolutions we are discussing will have filed the corresponding administrative appeals before the National Court, which we hope will reject both the TEAC's and the Inspectorate's criteria.

Furthermore, in our opinion, the tax authorities themselves are aware that this interpretation is getting out of hand, as the latest of the aforementioned rulings introduces significant nuances with respect to the previous ones, making a much less extensive interpretation of when abuse by taxpayers occurs, i.e., restricting the possibilities for regularization, which in the previous rulings seemed almost unlimited.

Moreover, according to a recent article published in the newspaper Expansión (February 19, 2025), the Directorate General of Taxes has halted all consultations related to securities exchange transactions or non-monetary contributions of shares made by individuals (which is typically the case of family businesses that contribute operating companies to a holding company), because the TEAC's criteria on this type of transaction is not completely defined.

That said, it should be noted that the factual circumstances analyzed in the repeated TEAC rulings, while not necessarily abusive or fraudulent, could be considered “unattractive” in the sense that the taxpayer appears to have been unable to consistently demonstrate that the objectives pursued were business-related, which makes them susceptible to arousing suspicion on the part of the tax authorities, even if unfounded, which, given the disposition with which it approaches its investigations, may lead it to uphold the most restrictive criteria possible regarding the application of the merger regime by the family businesses concerned.

In conclusion, as we have seen, the business reasons for a family business to contribute its shares in group companies to a holding company can be numerous and powerful, but if these did not exist or were less relevant than obtaining some tax advantage, the application of the merger regime could be at risk.

Therefore, before carrying out the transaction, it is necessary to consider whether there are sufficient business reasons in each specific case. If not, it may be advisable to abandon the contribution or seek alternative solutions. If the aforementioned reasons exist, in principle the transaction can be carried out, although it is highly advisable to make an effort to demonstrate the existence of these reasons, since, if this effort is not made adequately, the family business may be faced with an unexpected and unnecessary tax burden due to the contribution to the holding company.

At CECA MAGÁN, we are experts in advising family businesses and helping them restructure their businesses by organizing their companies in the most efficient and rational way possible, so we are in a position to respond to any needs that may arise in this field.

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 Javier Lucas – Family Business Group

Tax partner