Statute of limitations and the FEAC regime: how long can the AEAT challenge the contribution of shares to a holding company when there are undistributed profits?

The growing volume of litigation surrounding transactions covered by the special tax-neutrality regime for mergers, divisions, contributions of assets and exchanges of shares (FEAC regime) keeps raising new questions. In our previous article we analyzed the scope of the adjustment when the Spanish Tax Agency (AEAT) considers that there are no valid economic reasons for the contribution of shares to a holding company. In this new installment we address an issue that, in our view, is the most relevant and controversial of all those arising from the administrative doctrine of the Central Economic-Administrative Court (TEAC): the length of time during which the tax authorities may challenge the regime when there are undistributed profits in the operating companies whose shares were contributed.

The “modulated” adjustment and its effect on time limits

As we explained, the doctrine initiated by the TEAC decisions of April 22, 2024 (RG 6452/2022) and of May 27, 2024 (RG 6550/2022)PDF, subsequently consolidated by those of November 19, 2024 (RG 8869/2021)PDF, December 12, 2024 (RG 6543/2024 and 5937/2024)PDF, and the more recent ones of June 24, 2025 (RG 5240/2022 and 5242/2022)PDF, establishes an adjustment system that the TEAC itself describes as “modulated.” Under this approach, the capital gain deferred under the FEAC regime should not be adjusted in full in the tax year of the contribution, but progressively, as the operating company distributes dividends to the holding company out of the reserves accumulated before the contribution.

In addition, the TEAC applies a FIFO criterion: the first dividends distributed after the contribution are deemed to come from the pre-existing reserves, and only once these have been exhausted are subsequent distributions allocated to profits generated after the transaction. The adjustment must therefore be made in each tax year in which the tax advantage materializes, not in the tax year in which the contribution was made.

This approach, which at first sight might appear more favorable to the taxpayer because it avoids an “en bloc” adjustment of the entire capital gain, has a temporal consequence of enormous significance: it extends the taxpayer’s tax-risk horizon over time.

The two statutory pillars supporting the AEAT’s position

Article 115 of the General Tax Law (LGT) and the absence of time-barring for the power of verification

Following the reform introduced by Law 34/2015, of September 21PDF, Article 66 bis.1 of the LGTPDF enshrines as a general rule that the statute of limitations (time-barring) on the right to assess does not affect the right of the tax authorities to carry out verifications and investigations under Article 115 of the same Law. This means that the AEAT may verify facts, acts, transactions, and business dealings entered into in time-barred periods, provided that they produce effects in periods that are not time-barred.

The Supreme Court confirmed this interpretation in its Judgment of March 11, 2024 (appeal 8243/2022), stating that, following the reform introduced by Law 34/2015, the tax authorities are empowered to exercise their power of verification retroactively, whatever the date on which the characterized transaction was entered into, since the powers to verify and to assess have been legally separated.

Applied to the FEAC regime, the TEAC considers that the power of verification over the contribution transaction—including the determination of whether or not valid economic reasons exist—remains open for as long as the effects of that transaction extend to tax years that are not time-barred. In practice, this means that, if in 2030 the operating company distributes dividends out of reserves predating a contribution made in 2016, the AEAT could initiate verification proceedings in respect of the original contribution.

Related tax obligations under Article 68.9 of the LGT

The second instrument invoked by the TEAC is Article 68.9 of the LGT, concerning the interruption of the statute of limitations for related tax obligations. According to the TEAC, the acts that interrupted the limitation period for the tax year in which the FEAC transaction was carried out also interrupt the limitation period for the tax years in which the abuse is consummated, since these are related tax obligations: the determination of the capital gain in the year of consummation derives directly from the adjustment of the tax year in which the contribution was made.

The result: a “sword of Damocles” hanging over the taxpayer

The combination of both mechanisms leads to a scenario in which, according to current administrative doctrine, the AEAT can challenge a FEAC transaction virtually without any time limit, provided that undistributed profits predating the contribution remain in the operating company. Each time the operating company distributes dividends to the holding company—with the FIFO criterion being applied against the pre-existing reserves—a new four-year limitation window on the right to assess opens in respect of that specific tax year of distribution. And the power of verification over the original transaction remains open for as long as there are effects extending to periods that are not time-barred.

Put more directly: if an operating company keeps the profits accumulated as of the date of the contribution undistributed for fifteen or twenty years, the AEAT would, in theory, retain the power to challenge the FEAC transaction throughout that entire period.

Technical objections to this position

Although the TEAC’s position rests on statutory provisions currently in force, there are sound technical objections that deserve consideration.

First, Article 115 of the LGT was conceived to allow the tax authorities to verify facts or circumstances that determine tax obligations—such as valuations, characterizations, or the existence of transactions—not to keep open indefinitely the possibility of recharacterizing a special tax regime duly notified to the tax authorities. Extending this power to a full review of the economic reasons for a business restructuring carried out more than a decade ago raises doubts as to its compatibility with the principle of legal certainty enshrined in Article 9.3 of the Constitution.

Second, Article 68.9 of the LGT governs the interruption of the statute of limitations between obligations of the same taxpayer (obligado tributario) and for the same tax, having been designed essentially with temporary shifts of tax base items between tax years in mind. Its application to a scenario involving different taxes—the shareholder’s Personal Income Tax (IRPF), the holding company’s Corporate Income Tax (IS), and the operating company’s IS—and different taxpayers is forced and does not serve the purpose for which it was introduced.

Third, assessing whether the objective of a transaction was to obtain an abusive tax advantage when that advantage materializes many years later entails an evidentiary difficulty that should require the tax authorities to make a heightened effort to prove their case. The time elapsed between the contribution and the distribution of dividends should not weaken the standard of proof, but rather raise it.

The pending appeal before the Supreme Court

By means of an Order of March 12, 2025 (appeal 6518/2023), the Supreme Court has admitted for consideration a cassation appeal (recurso de casación) that addresses issues directly connected with the current debate, even though it concerns Article 96.2 of the Revised Corporate Income Tax Law (TRLIS), i.e., the previous legislation. The Supreme Court will have to rule on whether a principle of proportionality that allows the adjustment to be modulated is implicit in the anti-abuse clause, and on whether the exemption to avoid double taxation of dividends under Article 21 of the Corporate Income Tax Law (LIS) constitutes in itself a tax advantage for the purposes of denying the regime.

Although the judgment to be handed down will not be directly transposable to Article 89.2 of the LIS currently in force—the wording of which already expressly provides for partial non-application—the criteria laid down by the Supreme Court on proportionality, the scope of the tax advantage, and the time limits of the adjustment will inevitably shape the treatment of these transactions.

Practical recommendations

Given this uncertain landscape, family businesses and individual shareholders that have carried out contributions to holding companies under the FEAC regime should bear in mind the following considerations.

The first and most obvious is the need to rigorously document the valid economic reasons for the restructuring, not only at the time of the contribution but on an ongoing basis, demonstrating that the holding structure performs genuine functions of direction, management, planning, or centralization of resources.

The second involves carefully analyzing the operating company’s dividend distribution policy, bearing in mind that, under the TEAC’s FIFO criterion, the first distributions after the contribution are always allocated to the pre-existing reserves, regardless of what the general meeting may formally resolve.

The third, defensive in nature, consists of being prepared to challenge before the courts the unlimited temporal extension of the power of verification in FEAC matters, invoking both the principle of legal certainty and the technical limits of Articles 115 and 68.9 of the LGT. The Supreme Court’s judgment in appeal 6518/2023 will be a key milestone in this regard.

Conclusion

The TEAC’s doctrine has shaped a system for adjusting FEAC transactions that, in its temporal dimension, creates an unprecedented situation in our tax system: the possibility that the tax authorities may challenge a business restructuring for as long as undistributed profits predating the contribution remain, with no defined time horizon. This is an interpretation that, while supported by the literal wording of Articles 115 and 66 bis of the LGT, creates serious tension with legal certainty and that will foreseeably be subject to judicial review in the coming years.

At OC | Tax & Legal we advise both on the planning of restructuring transactions and on the defense against verification procedures and tax audits (inspection procedures), with a technical approach aimed at minimizing risks and protecting our clients’ interests.