Regularization of FEAC transactions lacking valid economic reasons: the temporal and material scope of the adjustments according to the TEAC

The special tax regime applicable to certain business restructuring transactions (the special tax-neutrality regime for mergers, divisions, contributions of assets and exchanges of shares, or FEAC regime) allows the taxation of the income generated in those transactions to be deferred when there are valid economic reasons. However, when the tax authorities find that the main purpose of the transaction is to obtain a tax advantage, they may regularize the tax effects arising from the improper application of the regime.

Recent administrative doctrine of the Central Economic-Administrative Court (TEAC) has clarified how and when that regularization must be carried out, clearly delimiting its material and temporal scope.

Guiding principle of the regularization: “all abusive effects, but only those”

This approach rules out any global or automatic regularization of the transaction and requires a specific analysis of what tax advantage has actually been obtained and when it has materialized (TEAC decisions of April 22, 2024, RG 6448/2022 and 6452/2022).

The necessary temporal delimitation of the adjustments

Identifying the abuse has not only a material dimension but also a temporal one. The TEAC insists that the regularization must be made in the tax year in which the prohibited tax advantage is actually consummated, which may or may not coincide with the tax year in which the FEAC transaction was formalized.

The adjustments may therefore be made:

• In the tax year of the transaction itself, or
• In any of the subsequent tax years in which the actual materialization of the abusive tax advantage can be identified.
• This clarification is particularly relevant in cases involving the non-monetary contribution of shares (participaciones) to a holding company.

The abusive tax advantage in non-monetary contributions to family holding companies

In the case analyzed by the TEAC (TEAC decisions of June 24, 2025, RG 5240/2022PDF and RG 5242/2022)PDF, the operating company had reserves and undistributed profits at the time of the non-monetary contribution of the shares to the holding company.

As a result of that contribution, the individual shareholders could indirectly access those profits while avoiding the Personal Income Tax (IRPF) that would have been payable had the dividends been distributed directly, since the holding company was interposed and benefited from the exemption under Article 21 of the Corporate Income Tax Law (LIS).

The TEAC considers that the abusive tax advantage arises with the non-monetary contribution, although it stresses that this does not entail an immediate regularization; rather, the regularization must take place when the advantage becomes effective.

The FIFO criterion and the timing of the regularization (TEAC decisions of December 12, 2024, RG 5937/2024PDF and 6543/2024)PDF

The Court specifies that the maximum capital gain that may be regularized is equal to the distributable reserves and profits generated prior to the contribution, determined in accordance with the FIFO (first in, first out) criterion.

This criterion, already established in the decisions of December 12, 2024, means that the profit distributed is deemed to correspond first to those pre-existing reserves, and only thereafter to the profit generated subsequently.

The regularization must therefore be carried out in the tax year in which those profits are distributed, since that is when the tax fraud achieved through the contribution of the shares is consummated.

In the case analyzed, the pre-existing reserves were distributed in subsequent tax years in the form of dividends, benefiting from the exemption under Article 21 of the LIS, whereas, had they been distributed before the contribution, they would have been taxed in the savings tax base of the individual shareholders.

The absence of distributions as an indication of abuse

The TEAC adds a particularly relevant element: the fact that the dividends were not distributed directly to the shareholders confirms that the transaction was carried out without valid economic reasons, with the predominant purpose of obtaining a tax advantage.

The review body emphasizes that the shareholders had full control of the holding company and could enjoy the economic benefit of the profits without the need for a formal distribution, through investment decisions or expenses borne by the company (purchase of a home, payment of insurance premiums, personal expenses, etc.).

These circumstances show that the economic reasons put forward lack sufficient weight compared with the magnitude of the tax advantage obtained, which reinforces the abusive nature of the transaction (TEAC decisions of June 24, 2025, RG 5240/2022 and RG 5242/2022).

The FEAC regime does not disappear: only its effects are corrected

An essential aspect of the TEAC’s doctrine is that the FEAC regime does not cease to apply in its entirety.

What is corrected is solely its abusive effects, to the extent that and at the time when they materialize.

This nuance is key to understanding the actual scope of the regularization and to preventing overly expansive interpretations by the tax authorities.

Change of criterion on the acquisition value at the level of the holding company

Finally, the TEAC introduces a significant correction to its previous doctrine regarding the tax acquisition value of the shares at the level of the holding company.

In earlier decisions, the TEAC had held that, as the deferral was corrected at the level of the shareholders, the tax value of the shares held by the holding company had to be increased correspondingly.

However, the current criterion is different. The Court considers that:

• The consummation of the abuse derives from the distribution of dividends by the operating company.
• That distribution reduces the value of the net assets and, with it, the fair value of the shares held by the holding company.
• This decrease in value already prevents any future double taxation of the income initially deferred.

Consequently, it is not necessary to increase the tax acquisition value of the shares held by the holding company, since doing so could give rise to improper future non-taxation if those shares were transferred.

Conclusion

The TEAC’s recent doctrine provides a precise and coherent view of the scope of the regularization of FEAC transactions carried out without valid economic reasons. In particular:

1. The regularization must be strictly limited to the abusive tax effects.
2. The time at which the tax advantage materializes must be precisely identified.
3. The FIFO criterion is decisive for quantifying the gain subject to regularization.
4. The FEAC regime is not eliminated but is corrected in a proportionate manner.
5. Future non-taxation at the level of the holding company is avoided.

This approach reinforces the need for rigorous and well-documented planning of business restructuring transactions, especially in family holding structures. At OC | Tax & Legal, we advise both at the design stage of these transactions and in verification and audit procedures, with a technical approach focused on legal certainty.