Tax reliefs give Spanish a head start on M&A activity

Record levels of European merger and acquisition activity posted this year
may have benefited corporate financiers in the EU, but those operating out of
Spain have been particularly well positioned because of the country’s tax

With European companies looking to expand through acquisition and the high
level of liquidity in European credit markets, M&A activity in 2006 has
already reached $271.9bn (£155.7bn) according to research by Dealogic.

Since the beginning of 2002, any Spanish group purchasing a foreign company
has been allowed to set goodwill amortisation from these transactions against
tax, which has provided Spanish business with additional firepower when bidding
for international targets.

Such is the extent of the benefits that, according to Big Four firm Ernst
& Young, every £100 of goodwill created in these deals could save up to £20
of a Spanish company’s tax bill over the next 20 years.

Research by investment bank Morgan Stanley shows that Spanish group Ferrovial
could make a potential tax saving of £850m if it successfully buys FTSE100 group
BAA (valued at £10bn by analysts).

Mark Schofield, international tax partner at PwC, said a similar relief for
UK companies would benefit the economy.

‘These would encourage UK companies to expand overseas, and anything that
encourages inflows and makes the UK more competitive is helpful,’ he said.

But although Spanish companies have benefited from the foreign acquisition
tax relief, analysis by E&Y showed there were trade offs that came with the

‘Spain has high taxation with a current corporate tax rate of 35%, one of the
highest in Europe,’ the Big Four firm said in a briefing note.

E&Y cautioned that the introduction of IFRS could affect the level of
relief available to Spanish companies on the acquisition trail. ‘The gradual
adoption of international accounting standards in Spain would offset a
percentage of these tax benefits,’ said E&Y.

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