Sale of a branch of activity of a company
Among the vicissitudes of a businessman running his company may find himself interested in selling part of his company or, conversely, buying part of the activity of another and incorporate it into yours.
That part of the company that is interesting to buy or sell is what is known as a “branch of activity” . The Corporate Tax Law (art. 76.4) defines it as:
“set of heritage elements that are capable of constituting an autonomous economic unit, that is, capable of functioning by its own means”.
Thus, we can understand that a branch of activity separated from a company does not prevent it from continuing to function and, furthermore, does not lead to paralysis or bankruptcy in the future. the operation of the company to which it originally belongs. We would not be facing a company belonging to a group of companies or holding company.
The branch of activity does not have its own share capital and its own legal personality. It is a part of the company but whose activity makes it differentiable from the rest, thus being able to operate autonomously, with its own means and thus susceptible to being bought or sold without affecting the operation of the original company. This sale would not be a mere transfer of assets or stocks but the transfer of all the necessary elements for the development of a business. The examples on the market are countless.
Advice to the entrepreneur to buy or sell
Now, when offering advice to a businessman interested in the sale or purchase of a branch of activity, it is important to give him the monetary key to value the interest or not in the operation. This key is taxation.
As a starting point to obtain the best tax situation, the existence of the branch of activity, as such, in the contributing company is necessary. This is the current criterion of the Supreme Court as indicated in its Judgment of March 17, 2016:
The application of the deferral regime must be linked to the existence of a succession effect. The deferral regime is not a tax benefit, it is not intended to encourage restructuring operations. Try not to hinder them. He wants operations that companies carry out or can carry out for strictly economic reasons not be impeded exclusively by their fiscal cost. That is why it is a neutrality regime and that is why, for its application, the concurrence of a valid economic reason is required. And for the proper functioning of neutrality in this case, the aforementioned succession effect is essential. And for that it is necessary that the branch of activity or the economic unit existed beforehand”.
Starting, then, from this base, we can affirm that the sale of a branch of activity is fiscally neutral, that is, it does not pay taxes by VAT or by ITP/AJD and, in special cases, they will have a special regime within the Corporation Tax.
Branch of activity and VAT
Art. 7 of Law 37/1992 regulating VAT establishes that transfers of a branch of activity are not subject to this tax. To do this, it is necessary to demonstrate that it is not a simple purchase and sale of assets between companies, but rather that this set of acquired goods constitutes a branch of activity. It is irrelevant in this regard that the acquiring company is going to continue operating that branch of activity as long as the acquired assets remain used for the development of an economic activity (that is, they are not subsequently sold).
Patrimonial Transfer Tax and Documented Legal Acts
For its part, art. 7.5 of Royal Legislative Decree 1/ 1993, which regulates the Patrimonial Transfer and Documented Legal Acts Tax, establishes as a general rule that the transfer of a branch of activity is not subject to this tax. Only the deliveries of those properties that are included in the business or branch of activity that is transferred would be subject.
So far we have seen the cases of buying or selling a branch of activity, but there is another option that does not entail the payment or receipt of money when a branch of activity is transferred. This is the contribution of a branch of activity in exchange for a shareholding package in the receiving company.
Chapter VII of Title VII of Law 27/2014 that regulates Corporate Tax establishes a special tax regime (more advantageous) for operations merger, spin-off, contribution of assets and exchange of securities. The art. 76.3 of the LIS considers as a non-monetary contribution of the branch of activity:
“the operation by which an entity contributes, without being dissolved, to another newly created or already existing entity all or one or more branches of activity, receiving in exchange values representing the capital stock of the acquiring entity”.
The basis of this special regime resides in the fact that taxation should not be a brake on the decision-making of companies regarding reorganization operations, when the cause that promotes its realization is based on valid economic reasons. On the contrary, when the cause that motivates the performance of these operations is merely fiscal, that is, their purpose is to obtain a tax advantage regardless of any different economic reason, the special regime does not apply.
Conclusions on the Sale of a branch of activity of a company
In conclusion, in the monetary transmissions of a branch of activity there are no immovable assets, the operation is fiscally neutral from the point of view of VAT and the ITP/AJD. In non-monetary transfers, both the receipt of assets consisting of a branch of activity and the shares received from the receiving company, would have a very beneficial tax regime in Corporate Tax. All this makes these operations extremely attractive for study and assessment by entrepreneurs who want to redirect their business or expand their activity.