The Supreme Court upholds the partial non-application of the Mergers, divisions, transfers of assets and exchanges of shares (its Spanish acronym, FEAC) regime to contributions made to holding companies

The Supreme Court, in its judgment No. 949/2026 of 20 July 2026, has ruled on the scope of the adjustment to be applied when the tax authorities reject the special tax neutrality regime (“FEAC regime”) in transactions involving the contribution of shareholdings to family holding companies, on the grounds that there are no valid economic reasons.

The issue of appeal focused on determining whether, once the lack of valid economic grounds has been established, the anti-abuse clause in Article 96(2) of the consolidated text of the former Corporation Tax Act (its Spanish acronym, TRLIS) permits the application of the principle of proportionality—limiting the adjustment to the tax benefits that might have been obtained—or whether, on the contrary, it requires the special regime to be disapplied in its entirety, with the consequent full taxation of the unrealised capital gains arising from the contribution.

The main purpose of the judgment lies precisely in clarifying this issue in the light of the very wording of Article 96(2) TRLIS, the text of which —unlike the current Article 89(2) of Law 27/2014 on Corporation Tax (its Spanish acronym, LIS)—did not expressly provide for the possibility of just a partial non-application of the regime, but merely stipulated that ‘the regime shall not apply’ where the transaction had tax fraud or evasion as its principal objective.

The Supreme Court concludes that a principle of proportionality is implicit in the anti-abuse clause of Article 96(2) of the TRLIS, which allows for the partial non-application of the FEAC regime even whilst that provision remains in force. It thus establishes that the absence of valid economic grounds does not, in itself, lead to the total rejection of the tax neutrality regime, but only to the removal of the tax advantages sought abusively by the taxpayer. Such abusive tax advantages must be clearly identified in the settlement agreement issued by the Tax Inspectorate.

Consequently, the total deferral of unrealised capital gains may only be eliminated if the tax authorities demonstrate, by means of a substantiated justification, that such deferral constituted the principal objective sought through the transaction, identifying the evidence supporting that purpose; and moreover, the burden of proof lies with the tax authorities.

The judgment does not assess the specific mechanisms for correcting abuse set out by the Central Economic-Administrative Court (TEAC) in its most recent rulings (progressive adjustment as the holding company distributes the deferred dividends), as it considers this to be outside the scope of the appeal before the Court of Cassation. Nor does it rule on whether the exemption to avoid double taxation of dividends under Article 21 of the TRLIS may, in itself, constitute an abusive tax advantage, as this issue was not the subject of debate at the lower court. Therefore, many doubts remain that have yet to be resolved.

Nevertheless, one hopes that, in light of this doctrine, the Tax Inspectorate will strengthen the reasoning behind its assessment notices when seeking to extend the adjustment to tax deferral, and that it will continue to adhere to the TEAC’s criteria regarding the mechanics of adjusting this type of transaction, given their binding nature in accordance with Article 239.8 of General Tax Law 58/2003.