Tax: Exit Tax for Individuals and Companies

M&A: Pricing in M&A Transactions: Locked Box vs. Completion Accounts

IP/Media: Art in the Digital Age: what about copyright?

Energy:Reinstatement of the National Energy Commission "CNE"

TAX

Exit Tax for Individuals and Companies

ALEJANDRO PUYO
Partner

Law 26/2014, of 27 November, introduced the ‘exit tax’ or Exit Tax into Personal Income Tax and Corporate Income Tax, designed to prevent tax evasion and ensure tax income in Spain. This tax is applied to unrealised capital gains generated by the ownership of shares or participations when an individual or companies changes its tax residence to another country. The capital gain is calculated as the positive difference between the market value of the shares and their acquisition value, even if this gain has not materialised, i.e. even if the transfer of the shares has not taken place.

The scope of application of the Exit Tax has both subjective and objective requirements. As regards the subjective requirements, the tax applies when the taxpayer loses his tax resident status in Spain, as long as he has been resident in Spain for at least ten of the fifteen tax years prior to the change of residence, both in the case of individuals and companies.

IMPORTANT: If an individual has been a beneficiary of the special tax regime for inpatriates (Beckham’s Regime), the ten-year period starts to run from the first tax year in which the regime ceases to apply. It is essential that the taxpayer complies with the requirements of the scheme and remains under the specific tax conditions that allow its continuity, thus avoiding the activation of this tax.

As far as the objective requirements are concerned, the tax applies if the market value of the holdings exceeds EUR 4,000,000. If this threshold is not reached, the regime also applies if, at the time of the change of residence, the taxpayer holds a shareholding of more than 25% in a company whose market value of the shareholdings exceeds EUR 1,000,000. In the latter case, the tax only affects the gains related to the holdings that meet this condition.

As for the temporary imputation and declaration, capital gains must be included in the tax base of the last tax year prior to the change of residence. The taxpayer must file a complementary tax form within the period corresponding to the first year in which he ceases to be a tax resident, without penalties, interest or surcharges being applied.

On the other hand, if the taxpayer recovers his residence status without having sold the shares, he can request the rectification of the tax form in order to obtain a refund of the amounts paid.

Finally, it is important to note that the tax establishes several special rules:

1. Deferral of payment of the tax debt for temporary relocations, provided that the destination country is not considered a tax haven or has an agreement with Spain to avoid double taxation with an information exchange clause. In addition, if the taxpayer becomes a Spanish tax resident again within the deferral period, the debt will be extinguished together with the accrued interest.

IMPORTANT: Sufficient guarantees must be provided, and if the request is granted, the deferral will be for five years, with the possibility of extension for a further five years.

2. If the change of residence is to another Member State of the European Union or of the European Economic Area (EEA) with an effective exchange of tax information, the capital gain will only be subject to tax if, within the ten years following the last year declared in the Personal Income Tax, any of the following circumstances occur:

• The shares are transferred inter-vivos.

• That the taxpayer loses their status as resident in the EU or EEA.

• The obligation to notify the tax authorities of the choice of this speciality is not complied with.

3. If the taxpayer relocates his residence to a country outside the EU/EEA, the Exit Tax applies immediately, without the possibility of deferral or additional exemptions, unless the unrealised gains on the assets could have been realised or disposed of beforehand.

4. Finally, if the taxpayer moves to a non-cooperative country, capital gains will be attributed to the last period in which the taxpayer was habitually resident in Spain, using as a basis the market value of the shares or holdings on the accrual date of that period. If the shares or holdings are transferred while the taxpayer is still resident in Spain, the acquisition value for the calculation of the capital gain will be the market value used to determine the capital gain in that period.

January 2025

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M&A

Pricing in M&A Transactions: Locked Box vs. Completion Accounts

MANUEL ARMADA
Associate

One of the most relevant aspects in the sale and purchase of shares is the determination of the price. There are two mechanisms used in practice: the fixed price mechanism not subject to adjustment after closing, or commonly known as Locked Box (this mechanism has gained special popularity during the last few years in Europe); and the price adjustment mechanism after closing, or commonly known as Completion Accounts.

Locked Box

In the Locked Box mechanism, the parties agree on a fixed price that cannot be adjusted after the closing of the sale and purchase, except for certain exceptions described below. In this case, the parties calculate the price of the target company using financial statements closed at a date prior to the closing of the sale and purchase. In other words, if the sale were to close on April 1, the financial statements to be used to determine the price would be those corresponding to an earlier date, such as, for example, the financial statements closed on December 31.

For the protection of the buyer, the sale and purchase agreement normally prohibits any cash outflows in favor of the seller or related parties (such as payment of dividends, management fees, etc.) from the date of the reference financial statements until the closing date. Such unauthorized outflows are known as leakage. Should leakage occur, the seller is obliged to compensate the buyer for the full amount euro for euro. Only outflows expressly agreed between the parties, known as permitted leakage, are permitted.

Exceptionally, the only possible adjustments in the Locked Box mechanism are those related to inaccuracies or misrepresentations in the reference financial statements, which are covered under the representations and warranties regime of the sale and purchase agreement. In other words, if the buyer discovers that the financial statements do not reflect the reality of the target company, it may demand a compensation or adjustment to the price.

Completion Accounts

In the Completion Accounts mechanism, once the target company has been sold, one of the parties, usually the buyer with the assistance of its auditors, prepares the financial statements of the company as of the closing date. Based on these financial statements, the buyer calculates the parameters used by the parties to value the target company at that date, all in accordance with the calculation methods and principles agreed by the parties in the sale and purchase agreement.

The initially agreed price will be adjusted because of the differences between the financial statements prepared at the closing date and those used to determine the provisional price.

Differences between Locked Box and Completion Accounts

The main differences between these two mechanisms are set out below:

1. Transfer of economic risk:

• In the Locked Box mechanism, the economic risk is transferred to the buyer from the date of the reference financial statements, i.e. any economic changes in the company (profit or loss) will be borne by the buyer from that point onwards.

• In the Completion Accounts mechanism, the economic risk is transferred to the buyer on the closing date. This means that the buyer only assumes the company's risk from the moment the transaction is officially formalized.

2. Price certainty:

• The Locked Box mechanism provides greater price certainty, as the price is agreed in advance and is not subject to adjustments after closing, except for the exceptions mentioned above.

• On the other hand, the Completion Accounts mechanism introduces greater uncertainty for the seller, as the price is subject to adjustment once the financial statements are reviewed at the closing date, which may lead to the final price being different from that initially agreed.

3. Simplicity vs. Complexity:

• The Locked Box mechanism is operationally simpler, as the parties do not have to agree on complex parameters to adjust the price after closing. All the effort is concentrated on the initial negotiation and the review of the reference financial statements.

• The Completion Accounts system, on the other hand, is more complex, as it requires the parties to agree on specific methods for calculating price adjustments and to make detailed comparisons between the pre-closing and closing financial statements. This involves more time and post-closing work, as well as potential valuation disputes.

Pros and Cons of each mechanism

The Locked Box mechanism is generally preferred by sellers, as it provides more control over the process. As the seller prepares the financial statements used to determine the price, the seller has more scope to influence the initial valuation of the target company. Also, by avoiding post-closing adjustments, the risk of disputes is reduced, and the closing process is simplified.

However, the buyer may perceive the Locked Box mechanism as a riskier option, as it assumes economic risk from a date prior to closing without having direct control over the company's operations in the interim period. To mitigate this risk, the buyer will need to conduct comprehensive due diligence.

In contrast, the Completion Accounts mechanism is generally more favourable to the buyer, as it ensures that it will pay a price based on the actual financial situation of the target company at the closing date, minimising the risk of paying for overstatements or situations not discovered during due diligence. However, this mechanism introduces greater uncertainty for the seller and may delay the completion of the closing process.

Conclusion

Both Locked Box and Completion Accounts mechanisms have their advantages and disadvantages, and the choice between them will depend on the context of the transaction, the preferences of the parties and the jurisdiction in which the transaction takes place. While the Locked Box mechanism provides certainty and simplicity in determining the price, the Completion Accounts mechanism provides greater certainty to the buyer by reflecting the financial reality of the company at the exact time of closing. The decision on which to use will depend on the balance the parties wish to strike between simplicity, certainty and risk control.

January 2025

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IP/MEDIA

Art in the Digital Age: what about copyright?

FLORENCIA ARRÉBOLA
Senior Associate

A recent judgment of the 9th Commercial Court of Barcelona (the “Court”), handed down in 2024, addresses a complex controversy about the limits of the right to public exhibition of works of art in the digital context.

The case raises the alleged infringement of moral and economic rights invoked by the Plaintiff, the collecting society VEGAP (Visual Entidad de Gestión de Artistas Plásticos) (the “Plaintiff”), representing the Authors Joan Miró, Antoni Tàpies and Miquel Barceló (the “Authors”), as owners of the works and, consequently, of the economic and moral rights derived from them, against the Defendant, Grupo Mango (the “Defendant”), which holds ownership of the physical supports of the works, i.e., the works themselves.

The works were modified by the Defendant and converted into digital pieces for the purpose of being used in the context of the opening of a Mango shop on Fifth Avenue in New York. The exhibition of the works took place during the aforementioned inauguration, unfolding simultaneously in three spheres: the physical space (in the Fifth Avenue shop), the digital space (on the Opensea platform) and the virtual space (in the Decentraland metaverse).

The core of the controversy lies in determining whether the right of public exhibition (inherent to the ownership of the physical support) held by the owner of a plastic work can legitimise the disputed use, allowing the creation of new digital works that incorporate and transform the original work, without the need to seek the consent of the owner of the pre-existing work. To this end, the Court's analysis is therefore based on assessing whether such actions constitute an infringement of the moral and economic rights of the Authors, having transformed and exploited their original works without the authorisation of the Plaintiff, or whether, on the contrary, such uses are covered by the exercise of the right of public exhibition.

We should mention that these works, although they are exposed in the virtual and digital world, the Court understands that they are covered by the current legal regime, as has been done with infringements committed in other classic digital environments, and proceeds to analyse one by one the arguments put forward by the Plaintiff, which we summarise below:

1. Moral right to disclosure of the work

This right protects Authors by allowing them to decide when and in what form their work should be disclosed. However, the Court considers that the infringement of this right is unfounded, since, after the first public performance, the moral right of disclosure is extinguished. In this case, the works were originally disclosed between 1970 and 1991.

2. Economic right to public communication

The owner of the physical support of the work has the right to the exhibition and public communication of the work unless the transfer document excludes this right or affects the honour and reputation of the author. Ultimately, the Court ruled in favour of the Defendant since this use was not excluded in the transfer agreement and understood that the Defendant acted with sufficient diligence and respect for the prestige of the Authors, as well as to their integrity.

3. Economic right to the transformation of the work and the doctrine of "fair use"

Although the Defendant was obliged to obtain the Authors’ authorisation to transform the works, it argued that the use made was harmless, invoking the doctrine of fair use, a concept originating in the U.S. legal system. This doctrine, recognised in our legal system by the Spanish Supreme Court in a 2012 judgment, was again applied by the Court in this case. The Court's analysis of the fair use doctrine focused on the different factors that make up the fair use doctrine:

• Transformative nature of the use: The Defendant argued that the transformation of the original works into digital files was not a mere reproduction, but a meaningful reinterpretation that endowed the pieces with a different purpose than the initial one. These transformations were aimed at creating unique and specific works for a high-impact cultural and commercial event, such as the opening of a flagship shop in the Fifth Avenue on New York. This use differed substantially from the original artistic purpose of the works, placing them in an innovative context that combined physical, digital and virtual environments.

• Quantity and substantiality of the work used: the Court emphasised that the use did not imply a total reproduction or a direct copy of the original works but provided a new interpretative and transformative dimension. This significant change clearly differentiated them from their original versions, this being a key element to legitimise the use under fair use principles.

• Economic impact on the market for the original works: the Court concluded that the exploitation of the transformed works was limited to the specific and temporary context of the shop's opening events, which reduced any risk of market substitution or economic harm to the rightsholders. Furthermore, it was noted that the marketing of the original works, both in physical and virtual format, was not affected, as the transformative use did not interfere with their economic exploitation in traditional markets.

• Purpose of use: The use made by the Defendant not only complied with the parameters of proportionality, but also respected the requirements of good faith. It was concluded that this use did not infringe the moral and economic rights of the Authors. On the contrary, the Court considered that it provided an indirect benefit by giving greater visibility and relevance to the works in a contemporary and innovative environment.

In conclusion, after analysing the factors that make up the doctrine of fair use, the Court considered that the transformative use carried out by the Defendant was legitimate and fair as being covered by this doctrine.

This decision acknowledged that the public display right of the owner of the physical support of the works confers certain rights, provided that it acts in accordance with the principles of good faith and without infringing fundamental intellectual property rights. The Court ruled in favour of the Defendant, underlining that the use not only did not harm the Authors, but even contributed to highlighting the cultural and artistic value of their works in a new global context.

January 2025

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ENERGY

Reinstatement of the National Energy Commission "CNE"

SONSOLES GARCÍA
Senior Associate

The Bill on the reinstatement of the National Energy Commission (CNE) approved by the Government was published on the website of the Congress of Deputies for its parliamentary processing last October 11th.

The Bill reinstates the CNE as an independent institution, separate from the National Markets and Competition Commission (CNMC), capable of ensuring both the proper operation of energy markets and the correct application of decarbonisation policies.

The National Energy Commission existed from 1995 until 2013 , date of the creation of the macro-regulator, the Comisión Nacional de los Mercados y la Competencia [National Commission for Markets and Competition] "CNMC", which brings together and integrates the supervisory functions of the previous independent regulatory bodies: the National Competition Commission (CNC), the National Energy Commission "CNE", the Comisión del Mercado de las Telecomunicaciones [Telecommunications Market Commission] "CMT", the Comité de Regulación Ferroviaria [Railway Regulation Committee] "CRF", the Comisión Nacional del Sector Postal [National Commission for the Postal Sector] "CNSP" .

Objective of the reinstatement of the CNE

At the current time of the fight against climate change, the aim of reinstating the CNE is to strengthen the regulator's institutional capacity at a key moment for energy transition. In particular, the objective of decarbonisation adds new areas of action for the Commission, such as the hydrogen sector and other renewable gases. The new CNE will focus on the following objectives:

• The decarbonisation of the economy, incorporating in its regulations and decisions the energy transition objectives assumed by Spain in the context of the European Union and internationally.

• Consumer protection.

• Transparency and proper operation of energy markets and sectors.

In the face of these new challenges, the existence of a multisectoral regulatory body is proving insufficient to deal with an expanded scope of functions with guarantees. According to the Explanatory Memorandum of the Bill, the reinstatement of the CNE will guarantee a higher level of specialisation in energy matters, insofar as a body exclusively dedicated to the regulation and supervision of the sector, which is increasingly complex and has a high regulatory density, is created. This is a sector which due to its characteristics and particularities requires a high level of training and knowledge of the subject on the part of the governing bodies and management staff, and the decision to create a single-sector regulator is an effective response to this.

This configuration of a specialised energy regulatory body is echoed in the regulations in force in our closest European neighbours, such as: Austria, Belgium, Croatia, Cyprus, Czech Republic, Finland, France, Lithuania, Poland, Portugal, Romania, Slovenia and Sweden.

It returns to the recovery of a regulatory body as an independent Administrative Authority (AAI), as provided for in article 109 of Law 40/2015, of 1 October, on the Legal Regime of the Public Sector.

The Independent Administrative Authorities are public law entities that are linked to the General State Administration, with their own legal identity, which are entrusted with regulatory or supervisory functions of an external nature over specific economic sectors or activities. When it comes to conducting their functions, they have special autonomy from the General State Administration and are independent of any business or commercial interest.

In order to preserve this independence, the Bill foresees that the CNE will have its own assets, independent of the assets of the General State Administration. These assets will be managed and administered in accordance with the provisions established for public bodies in Law 33/2003, of 3 November, on the Assets of Public Administrations. To this end, the Bill provides for the establishment of certain fees for the exercise of its activity, which will be managed and collected by the CNE as its own revenue. Finally, the CNE will be subject to parliamentary and judicial control.

The economic-financial management of the CNE will be subject to the control of the General State Administration Comptroller, through the Delegate Comptroller, under the terms established in Law 47/2003, of 26 November. Permanent financial control will be carried out by the CNE’s Delegate Comptroller, with the rank of Deputy Director General, under the functional dependence of the General State Administration Comptroller. Furthermore, the CNE will be subject to the ongoing supervision system in accordance with the provisions of Law 40/2015, of 1 October.

Functions and scope of action

The new CNE will exercise its functions throughout Spain and in relation to the following economic sectors:

a) Electricity sector.
b) Liquid hydrocarbons sector.
c) Natural gas sector.
d) Hydrogen and other renewable gases sector.

In particular, it shall conduct the following functions:

• General functions: control, supervision and arbitration and technical collaboration with the ministerial departments that require it.

One of these functions is to manage the payments of the Electricity and Gas Sectors, corresponding to the income obtained from tolls and fees relating to the use of transmission network facilities. Initially, the draft bill established the creation of the Fund for the Management of Electricity and Gas Sector Payments (FGLSEG) to carry out this function. The text of the bill that has finally been submitted for processing has eliminated the creation of this specific payment fund.

• Sectoral functions: regulation, through circulars, of the different aspects related to transport, distribution, access in the natural gas and electricity sectors; implementation and supervision of compliance with regulations and protocols in the aforementioned sectors; and consumer protection.

• Functions related to the acquisition of shareholdings in the energy sector: it will hear operations for the acquisition of shareholdings in companies that are considered to be regulated or companies with strategic assets.

• Functions linked to the resolution of conflicts between economic operators linked to the sectors subject to regulation and supervision.

• The CNE is vested with sanctioning powers, in accordance with the legislation in force in the electricity and hydrocarbons sectors. In compliance with one of the traditional principles of administrative sanctioning law, due functional separation between the investigation phase and the resolution phase will be guaranteed.

Organisation and operation

From the institutional point of view, the Bill basically replicates the structure that the CNE acquired in its day. The CNE will exercise its functions through the following governing bodies:

a) The Council of the CNE: composed of nine members: the Presidency with the rank of Secretary of State, the Vice-Presidency, and seven Councillors. The Council will be assisted by the person holding the Secretariat.

b) The Presidency of the CNE, which will also be the Presidency of its Council.

All members of the Board are considered senior officials and are subject to a specific regime of incompatibilities established by law.

Integration of CNMC staff into the CNE

Tthe CNMC will transfer to the CNE the Energy Directorate, including its management staff, as well as the staff and resources of the rest of the CNMC management bodies that have been carrying out and/or supporting the functions entrusted to the CNE by the Project, including in any case the main headquarters, which will be the CNE headquarters, and the remaining real estate that was transferred to the CNMC from the former National Energy Commission by virtue of Law 3/2013 of 4 June.

To this end, within one month of the entry into force of this law, the CNMC shall submit a reasoned proposal for the transfer of resources to the Ministries for Digital Transformation and the Civil Service, Economy, Trade and Enterprise, and Ecological Transition and the Demographic Challenge, for approval by joint ministerial order, taking into account the past and future workload and the normal functioning of the institutions.

Proceedings initiated prior to the entry into force of theis law.

The proceedings initiated by the CNMC related to the functions assumed by the CNE will continue to be processed by the previously existing bodies of the CNMC until the effective start-up of the new CNE, which will assume their management.

For these purposes, the Draft foresees that the constitution and start-up of the CNE may be considered an extraordinary circumstance which, in accordance with the specific applicable legislation, will allow for the extension of the maximum period to resolve the proceedings for a period that may not exceed the period established for the processing of the proceedings, in accordance with article 23 of Law 39/2015, of 1 October.

Organic Statute of the CNE

The Bill provides for the approval, within three months of the entry into force of the law, of the Organic Statute of the CNE, which will determine the functions and internal structure of the Secretariat of the Board, of the Directorates that are established, as well as of the General Secretariat and the Legal Department attached to the Secretariat of the Board. This is without prejudice to the powers of the Government to develop, by Royal Decree, the content of this law within the scope of its competences.

For its part, the Council of the CNE will approve the body’s internal operating regulations and code of conduct.

January 2024