The Commission has opened a formal investigation under EC Treaty state aid rules into a provision of the Spanish Corporate Tax Law that allows Spanish companies tax deductions deriving from acquiring a stake in non-Spanish companies. The scheme appears to establish an exception to the general Spanish tax system. The Commission is concerned that the scheme provides an advantage for Spanish companies acquiring foreign ones with respect to acquisitions of other Spanish companies. The opening of an investigation allows interested parties to comment on the measures under scrutiny. It does not prejudge the Commission's final decision.

Competition Commissioner Neelie Kroes said: "Many believe this scheme gives an advantage to Spanish companies buying foreign companies. Opening this investigation will let us find out whether these concerns are justified."

The Commission has received several questions from Members of the European Parliament, as well as formal complaints alleging that the Spanish scheme is unlawful. These questions have primarily been in connection with the acquisitions of foreign targets by Spanish companies: O2 by Telefónica (Telephone operator), Scottish Power by Iberdrola (Energy), and bids by Sacyr, Abertis and Cintra for the concession of highways in France.

The Commission's preliminary assessment gave rise to doubts whether the scheme would provide selective advantages to Spanish companies engaged in acquiring foreign companies and would therefore be susceptible to distort competition. Moreover, the Commission has concerns that the scheme could attract the location of international holding activities in Spain, while the creation of domestic groups seems to be excluded from its scope.

Spain did not notify the scheme to the Commission before its implementation. Should the investigation find that the scheme constitutes incompatible state aid, Spain may have to recover the aid illegally granted. With the opening of its in-depth investigation, the Commission also invites comments as to the scope of a potential recovery order.

Article 12(5) of the Spanish income tax code provides that as of 1 January 2002 a Spanish company may amortize the financial goodwill resulting from the acquisition of a significant shareholding in a foreign company during the 20 years following the acquisition. The amortization of financial goodwill is the possibility to deduct from the tax base of the acquiring company the difference between the acquisition cost of the shares and the market value of the underlying assets of the target.

The scheme appears to provide an exception from the general Spanish tax system in permitting amortization of goodwill even where the acquiring and the acquired companies are not combined into a single business. The scheme only applies if the acquired shareholding is that of a foreign company, and is also conditional upon the acquisition of more than 5% of the target company. Gaining control of the target is not necessary. [10 October 07]