Spain to end takeover tax breaks

By Douglas Fraser
BBC Scotland Business editor

Scottish Power was bought by Spanish company Iberdrola

The Spanish government has been told to end a tax break that gives its companies an advantage in buying companies in other European countries.

The taxation law change was seen as vital to the 2006 takeover of 02 by Telefonica, making it one of the biggest players in UK telecoms.

It also aided the purchase of Scottish Power by Iberdrola in 2007.

The European Commission has said it will require the Spanish government to remove the tax break.

Indications from Madrid are that it is willing to make those changes.

The Spanish government has been told to end a tax break that gives its companies an advantage in buying other companies in other European countries Neelie Kroes Competition commissioner

The list of Spanish companies buying British companies also includes Ferrovial which bought BAA, which owns most of Britain's large airports.

And Santander has been buying assets from British banks, including parts of Bradford and Bingley.

In 2007 and under political pressure, the European Commission opened an investigation into allegations that the Madrid government was putting its companies at an advantage that distorted the open market.

Nearly two years on, the EC has decided to end the measures.

The tax regime allowed Spanish companies to write off the goodwill element of a deal - that is, the excess valuation over the value of the actual assets being bought.

This was allowed for 20 years after the acquisition, and could apply even where there was not a full merger. But it does not apply to Spanish companies buying other Spanish companies.

The European Commission is able to require repayment of those tax subsidies, but has chosen not to do so in the case of sales that preceded the start of its inquiry.

That leaves uncertainty over possible repayments of tax for more recent deals, such as the purchase of part of Bradford and Bingley by Santander.

Competition commissioner Neelie Kroes said: "This tax provision gives a discriminatory advantage to Spanish companies when acquiring shares in other European companies.

"To preserve a level playing field in the single market, Spain must put an end to this measure and recover unlawful aid given since December 2007".