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Leading Spanish companies will have to pay back €1 billion in tax breaks

EU tells Madrid policies to encourage firms’ international expansion break competition rules

Spain’s Finance Ministry is set to begin proceedings to retrieve just under €1 billion in tax breaks given to around 100 leading Spanish companies that have acquired or bought stakes in overseas firms since 2002, ministry sources have told EL PAÍS.

Spanish Finance Minister Cristobal Montoro.
Spanish Finance Minister Cristobal Montoro. EL PAÍS

The decision, outlined in the Finance Ministry’s 2017-2020 Stability Plan, is based on a European Court of Justice ruling from December backing the European Commission’s view that the tax breaks given to Spanish companies buying more than a 5% stake in foreign businesses were illegal under European Union (EU) competition rules.

The estimated €1 billion the government expects to recover is well short of the €8 billion Brussels had cited.

The estimated €1 billion the government expects to recover is well short of the €8 billion Brussels had cited

The tax breaks, known as the Spanish Goodwill III, were established under the government of former Popular Party Prime Minister José María Aznar to encourage Spanish firms to expand internationally. Among the beneficiaries were telecommunications giant Telefónica when it bought the UK’s O2; Santander bank, which acquired British mortgage lender Abbey; electricity utility Iberdrola, now the owner of Scottish Power; and Ferrovial, with its buyout of airports operator BAA. Other companies that benefited were construction player Sacyr, toll-road firm Abertis, technology outfit Cintra, and highway eateries chain Autogrill.

In December 2016, the European Commission explained its view in the following statement: “In 2002, Spain introduced a special tax scheme, derogating from the normal tax regime, granting corporate tax deductions to companies resident in Spain that would buy shares and bonds of foreign companies. In particular, the measure allowed these companies to deduct from their corporate tax base the so-called financial goodwill, i.e. the difference between the costs of acquisition of the shareholding of the target company and the market value of the underlying assets of that company. The deduction was allowed for a period of up to 20 years following the acquisition. In contrast Spanish companies making domestic acquisitions were subject to the normal tax rules and could not benefit from the measure.”

Telefónica benefited from the tax breaks.
Telefónica benefited from the tax breaks. EFE

The Spanish Finance Ministry’s response, outlined in its 2017-2020 Stability Plan, which was sent to the European Commission last month, reads: “Spain will set about recovering the subsidies through a new procedure approved under the General Tax Law in 2015.” It adds: “The entities that will be the object of action have been identified.”

The Finance Ministry also said that firms affected by the move would be required to reduce their tax loss carry forward to €5 billion.

English version by Nick Lyne.

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