Liability for Continuing Another company's Activity

Written by Alessandro Scherini

Tax and accounting adviser

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Under employment law, a change in ownership of a company, a workplace or an autonomous productive unit does not in itself terminate the employment relationship. The new employer steps into the shoes of the previous one, assuming all employment and Social Security rights and obligations (Article 44 of the Workers' Statute).

A business succession is deemed to have taken place where the transfer affects an economic entity that retains its identity, understood as an organised set of resources brought together to carry out an economic activity, whether principal or ancillary.

Scope of liability for employment debts in a business succession:

The transferor and the transferee, in transfers taking place by inter vivos acts, shall be jointly and severally liable for three years for any employment obligations arising prior to the transfer that remain unsatisfied.

The transferor and the transferee shall also be jointly and severally liable for obligations arising after the transfer where the transfer has been declared a criminal offence.

All of the above is without prejudice to the provisions of Social Security legislation.

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What tax liability arises from continuing another company's business activities?

Liability for debts owed to the Spanish Tax Authority in the context of company succession when acquiring, purchasing, or merging with another company.

Under tax law, those who succeed by any means to the ownership or operation of business undertakings or economic activities shall be jointly and severally liable for the tax obligations incurred by the previous owner in the course of that activity. (Article 42(c) of the General Tax Act)

The successor entity shall also be liable for obligations arising from the failure to make withholding payments or payments on account that were made or ought to have been made, for example, withholdings that should have been applied to employees' wages.

As is evident from the legislation, the law does not provide a detailed definition of what constitutes company succession. It has therefore fallen to case law and administrative doctrine to identify the indicators that may point to its existence. These are the indicators that the tax authorities will assess, either individually or collectively, to determine whether joint and several liability for company succession applies:

1. The same business activity is being carried on,
2. It is carried on by the former employees or under the management of the same individual,
3. It is carried on at the same premises,
4. The same clients or suppliers, the same brand, and other elements of a similar nature are retained.

Scope of liability for tax debts in company succession:

The tax liability described above does not apply to those who acquire isolated assets, unless such acquisitions, carried out by one or more individuals or entities,  allow the continuation of the business or activity.

This liability also does not apply in cases of succession upon death, which are governed by Article 39 of the General Tax Act.

Nor does it apply to acquirers of businesses or economic activities belonging to an insolvent debtor where the acquisition takes place within insolvency proceedings.

How to limit tax liability for tax debts:

The acquirer's liability extends to both past and future debts of the acquired entity.

Article 175.2 of the General Tax Act nevertheless allows anyone intending to acquire ownership of a business or economic activity, with a view to limiting joint and several liability, to request from the Tax Authority, with the current owner's consent, a detailed certificate of the tax debts, penalties and liabilities arising from its operations. In that case, the acquirer's liability will be limited to the debts, penalties and liabilities listed in that certificate.

If the certificate is issued without referencing any debts, penalties or liabilities, or if it is not provided within 3 months of the request, the applicant will be exempt from liability.

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