The economic substance and business purpose in mergers

Abstract

This work tries to analyze the possibility to transfer, in the Ecuadorian legislation, the loss in a merger, to be reduced from the tax income by the absorbed companies, exclusively, for those cases where the merger was made with the only motivation to move this fiscal attribute. Ecuadorian regulations do not have any laws to confront this problem. Despite this, in practice, we can observe that there is not a unique and identical criterion to take a reasoned decision, but the public official from the Internal Revenue Service will decide depending on the situation. The legal problem consists in determining what should the tax administration decide when merged companies decide to reduce their tax burden, without considering the economic reason behind it. The answer to this question will try to be given by the study of certain legal institutions, by an analysis of mergers and the loss amortization system in the Ecuadorian legislation. In the same way, we will try to understand some essential tax concepts as the valid economic reason that has to approve the business purpose test to establish if the valid economic reason limits the loss transfer, and in the same course, if the criterion of the economic reality allows for these juridical interpretations. This reasoning will let us conclude that all fiscal attributes can be moved in all mergers, without any limitation, and mainly, without the demonstration of a valid economic reason.