B Law & Tax
20 October 2023

Tax advisor: Challenges of the taxation in corporate spin-offs: TSJ of Castilla y León Case

The Court fails to understand why a requirement that is originally of a commercial nature and optional, such as qualitative proportionality, can become an insurmountable obstacle for certain total divisions, particularly in the case of companies with a single economic activity that cannot be divided into more than one business area, preventing them from benefiting from the tax advantages. This contradicts the purpose of the EU Directive to promote this type of corporate restructuring operation.


The Superior Court of Justice (TSJ) of Castile and León (Valladolid), in its judgment of June 13, 2023, examines the applicability of the special tax regime for mergers, divisions, asset contributions, and share exchange to the appellant. It focuses on a total division and assesses the requirements related to the branch of activity and valid economic reasons.

In this case, there is no dispute that the company, whose sole activity was the lease of real estate of the same nature, is fully divided into two entities now owned by two different family groups. This results in a non-proportional total division due to the lack of “qualitative proportionality.” Although the appellant admits that the requirements for different business branches are not met, she argues that this does not apply to the case, claiming that only “quantitative proportionality” is required, which is fulfilled here, but not “qualitative proportionality.”

The TSJ believes that circumstances have arisen that, under the direct vertical effect of European Union law in relation to European Directives, allow for a favorable interpretation of non-proportional total divisions, as argued by the appellant.



The Court mentions a dissenting opinion in the Supreme Court’s judgment of July 20, 2014, and an infringement procedure initiated by the European Commission against Spain related to the transposition of Directive 90/434/EEC. The Commission considered that the requirement for business branches established by Spanish law to access the special regime for non-proportional total divisions was contrary to the Directive. The Commission urged Spain to remove this requirement and warned that it could refer the matter to the Court of Justice if Spain did not act within two months.

The Court believes that the literal text of the Directive only requires a proportional allocation to the partners in the beneficiary companies in relation to the divided company, without necessarily implying that this allocation must apply to each and every new company.

“Qualitative proportionality” is considered a provision aimed at guaranteeing the individual rights of the affected partners and, as such, it is fully available to them.

The Court does not understand why a requirement for “qualitative proportionality” can become an absolute impediment for total divisions, especially when it concerns companies with a single economic activity that cannot be divided into multiple business branches. This contradicts the purpose of the European Directive to promote this type of corporate restructuring operation.

In summary, the Court considers that, in accordance with the Directive, the special tax regime cannot be rejected solely because the lack of “qualitative proportionality” is not accompanied by the transfer of “business branches,” and therefore, this ground for challenge is accepted.



The TSJ examines the existence of valid economic reasons for the operation, an argument introduced for the first time by the Tax Administration in the settlement agreement.

The Court argues that the concept of the “rectification of the proposal contained in the record” is not limited to quantitative corrections only, and it believes that the interpretation of a “valid economic reason” as derived from the Directive does not correspond with the one adopted in the settlement agreement.

The Court reminds that valid economic reasons or restructuring are not requirements for the application of the special tax regime but circumstances whose absence may lead to the presumption of tax evasion or fraud. Tax advantages alone do not imply tax evasion or fraud.

The TSJ concludes that in this case, the primary objective is not to obtain a tax advantage, and the division’s reasons are based on disagreements between the two family groups. Therefore, the lack of valid economic reasons is irrelevant, and the ground for contest is accepted.


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