New rules in the Spanish Corporate Income Tax Act (CIT) allow groups of companies controlled by the same ultimate parent to consolidate, but do not specify which group should remain in existence and which should be extinguished. It is now clear that the parent company can decide.

When a non-Spanish resident entity (not resident in a tax haven), with legal personality and subject to an identical or similar corporate income tax to that of Spain has two or more individual subsidiaries, the group consists of all the Spanish subsidiary entities that meet the legal requirements.

The previous law did not allow a non-Spanish resident entity to be the ultimate parent company of a Spanish tax group. In this respect, the new regime could imply that more than one tax group having the same non-Spanish resident parent company should be considered as one single group.

With respect to which of these pre-existing tax groups should be integrated, the Spanish General Directorate of Taxes has considered that there is no preference as to which tax group should prevail and which tax group should be extinguished.

A specific case before the Spanish General Directorate of Taxes concerned an entity tax resident in the Basque Country that is the owner, directly and indirectly, of 100 percent of two subsidiaries (A and B) subject to the common tax standard as described above. Under the old regime, both companies A and B were considered the parent company of their respective groups, in each case subject to the tax consolidation regime.

For the purposes of the tax consolidation regime, the parent entity is resident in the Basque Country, and the tax treatment is equivalent to the tax regime in Spain where companies A and B are resident. Under the new CIT Act, the Basque resident company would be considered as the parent entity. As a result,  the tax group will be comprised of the two companies (A and B) under the parent entity and all of their other subsidiaries resident in Spain meeting the common tax standard.

The new CIT Act regulates the effects of the tax consolidation regime where two tax groups exist in the tax period 2014 and they have a common non-resident parent company, or as in the case at hand, resident in the Basque Country. In this case, both groups must integrate into a single group without requiring the creation of a new tax group. In this specific case, therefore, this could mean the extinction of one of the two tax groups and its integration into the other, without any indication as to  as to which tax group this should be, (so the parent company can choose which group prevails).