The Court rejects the return to Naturgy of 26 million for the preferred ones

Naturgy loses in the National Court the appeal with which it asked the Tax Agency to return 26 million euros due to the way of accounting for preferred shares. The Contentious-Administrative Chamber has rejected the appeal against the resolution of the Central Economic-Administrative Court of November 12, 2019.

In June 2005, Unión Fenosa Preferentes (UFP) – absorbed by Naturgy in 2009 – carried out a total import issue of 750 million, divided into 15,000 shares with a value of 50,000 euros each. For its part, at the end of May 2015 the purchase offer was settled, and the consequent payment was made, which entailed the acquisition of 12,794 shares (85.29% of the issue), for a total effective import of 543.7 million. of euros.

Subsequently, UFP proceeded to amortize and cancel the preferred shares it purchased, leaving 2,206 shares in circulation, worth 110.3 million euros. Given that the aggregate nominal value of the repurchased shares was 639.7 million euros, and the import paid by UFP for them in the repurchase was 543.7 million euros, there was an excess of import in books over the amount paid of 95.95 million euros. In addition, expenses of 105,900 euros were charged in the operation.

Written for the Central Delegation of Large Taxpayers

In the 2015 Corporate Tax declaration, UFP made a positive adjustment to its tax base, increasing it by imports of 95.89 million euros (a figure that coincides with the net difference in expenses indicated above), in such a way that It was incorporated into the individual tax base of UFP, and into the tax base of the consolidation group whose dominant entity is Naturgy. In this sense, on December 13, 2016, a letter was submitted to the Central Delegation of Large Taxpayers of the AEAT requesting the rectification of the following self-assessments, and the corresponding return of undue income.

According to Naturgy, the rectifications requested determine a refund of 26.8 million euros, of which the amount of 9.9 million euros is in the nature of income improperly made through self-assessment.

The ruling of the National Court states that the net difference in expenses resulting from the operation was not considered accounting income for the UFP, but was recorded under the heading of “reserves”, because, in the opinion of the company, they constituted instruments of equity, and changes in equity due to transactions on equity instruments are not considered income or expenses. This was recognized in the report of the annual accounts of the UFP corresponding to 2015.

However, the Central Economic-Administrative Court (TEAC) does not share the classification of preferred shares as an equity instrument, but rather considers that, at a commercial level, they are a “financial hybrid between shares and obligations.” Administration “since the issuance of the PPF does not have an unconditional right to avoid the outflow of cash flows, since it is not avoidable to pay the remuneration to the PPF, the analysis of the economic background of the issuance of the PPF, carried out by UFP, allows us to conclude that, in accounting terms, the reference issue should be classified directly as a financial liability as a compound instrument in which the part that would be attributed to the financial liability would be the entire value of the PPF issued.”

Naturgy can still fight

In fact, the TEAC affirms that only if the payment of the stipulated remuneration is made freely and is not subject to any commitment would one of the most essential characteristics of equity instruments be fulfilled. Otherwise, it points out that when the payment of remuneration to the holders of the securities is mandatory, the instrument in question is “without a doubt” assimilated to a figure of liability (foreign debt).

The Court agrees with TEAC and has failed to dismiss the contentious-administrative appeal, including the imposition of costs on naturgy. This ruling is subject to an appeal in cassation, which must be prepared before the Contentious-Administrative Chamber within a period of 30 days from the day following its notification. Company sources consulted by this means have preferred not to comment.

What about preferred shares?

Preferred securities form part of the company’s share capital but do not give their holders voting rights at general shareholders’ meetings. However, they do have preference when it comes to collecting the dividend over ordinary shareholders if the company does not perform well. The preferred shares can be redeemed by the company, which means that it can buy the preferred shares at the same price at which they were sold.