Taxation of Collective Investment Institutions merger

How does the fund merger work?

Introduction

The taxation of the merger of Collective Investment Institutions is a complex issue and with confusing regulations. However, mergers of CIIs are very common in the operations of investment services companies. These operations are of particular relevance for Collective Investment Institution Management Companies (CIIMC).

In order to analyze this problem, we must first clarify that collective investment institutions can be funds or SICAVs. (SICAV: Sociedad de Inversión de Capital Variable – Variable Capital Investment Company).

The first ones do not have legal personality, so they necessarily have to have a Management Company to represent them.

The second have their own legal personality, although in most cases they operate through an CIIMC.

The funds have participants and the SICAVs have shareholders. Although it can also occur in SICAVs, the most common are mergers of funds. We will therefore focus on the latter.

Differences in taxation

For the analysis of the taxation of the fund merger, we must differentiate between reimbursement and reinvestment.

In a merger transaction, the participant can decide whether to approve the continuation of his or her participation in the resulting fund. This is called reinvestment of their participation. If you decide against continuing in the resulting fund, and therefore to recover your investment, you will be opting for a refund.

This differentiation is key for tax purposes. Sometimes the refund is taxed and sometimes not, depending on whether the participant is an individual or a legal entity.

When the obligated participant is an individual, he will pay income tax.

When it is a legal entity, it will pay for Corporate Tax.

Si te ha interesado este artículo no dudes en leer:

Brief note on Asset Management Companies in Spain

But let’s analyze this difference a little more deeply:

1.- Participants who are legal entities.

Article 52 of the Corporate Tax Law (LIS – Ley de Impuesto de Sociedades), establishes certain requirements for this regime to be applicable. These are:

• The funds must be regulated by Directive 2009/65/EC of the European Parliament and the Council. This Directive coordinates the legal, regulatory and administrative provisions on certain undertakings for collective investment in transferable securities.
• They must be incorporated and domiciled in an EU Member State.
• They must be registered in the special register of the CNMV, to be marketed by entities resident in Spain

If these requirements are met, the participant legal entity will have to pay taxes.

In addition, the LIS does not differentiate between reimbursement and reinvestment. Therefore, legal entities will have to pay tax in both cases.

2.- Individual participants.

The Income Tax Law, unlike the LIS, does establish a difference between refund and reinvestment at tax level.

Thus, Article 94 of the Personal Income Tax Law includes the so-called deferral regime for reinvestment of fund shares. This regime allows not to pay tax on the capital gain or loss when the amount obtained is reinvested in another fund. In this case, the new units will retain the value and date of acquisition of the old ones.

For this regime to be applicable, the following requirements must be met:

• The subscription, transfer and redemption of fund units will be carried out in marketing entities registered with the CNMV.
• The number of members of the fund must be over 500.
• No participation of the contributor in more than 5% of the fund’s capital. This limitation applies only within the twelve months prior to the transfer.

On the other hand, the redemption of units will always involve an obligation to pay tax when the unit-holder is an individual.

Conclusion

In this way, the complexity of the taxation of this type of operation becomes clear. As mentioned above, it does not have the same tax consequences a if the participant is an individual or a legal entity. Nor is it the same if the shareholder decides to reinvest or reimburse his holding after the merger.

All these issues must be taken into account when advising on a fund merger transaction. Not only on a tax level, it is necessary to know them in order to provide a complete legal service to our client.

If this article has been of interest, we also suggest you to read the following article published on our website: Keys to the tax on financial transactions (Tobin Tax)