Sabadell shareholders will pay more personal income tax than the cash they receive if they join the BBVA takeover bid.

BarcelonaOnce the Spanish government has established its conditions for a possible merger of BBVA and Sabadell, which it freezes for a minimum of three years, it's now the turn of the Catalan financial institution's shareholders. This will happen once the Basque-based bank decides whether to maintain the offer or withdraw it. The fact is that, due to its nature—a combination of share exchange and cash payment—many of those who decide to opt in, especially small shareholders, could end up paying more income tax (IRPF) when they file their tax return next year than the cash portion they receive.

This is the conclusion drawn from inquiries made to the Directorate General of Taxes of the Ministry of Finance by the association of small shareholders of Banc Sabadell and also by the financial institution, which is completely opposed to the transaction. The general recommendation is to consult a tax advisor before making a decision if BBVA ultimately goes ahead with the transaction and the National Securities Market Commission (CNMV) approves the takeover bid prospectus. Sabadell estimates that this situation would affect 88% of small shareholders who hold shares in the bank, which is around 80% of the total.

When a transaction of this type is based on a share exchange, the tax effect is neutral, but not when the cash portion exceeds the par value of the shares of the entity that retains the majority of the capital by more than 10%, as is the case with BBVA. In this case, it is considered a sale of shares, which generates capital gains, and then a purchase, with taxation between 19% and 30%. For legal entities (companies and other entities), it is 25%. Furthermore, capital gains are calculated based on the market price, which does not necessarily have to match the offer price; that is, it may be higher and, therefore, taxable on a price that has not actually been received, according to the sources consulted.

In the case of BBVA, the tax-neutral regime cannot be applied because the cash payment for each BBVA share exceeds 10% of the nominal value of the shares. Therefore, it is considered a sale and is taxed as savings income. BBVA's offer establishes that for every 5.3456 ordinary shares of Banc Sabadell, the investor will receive one new BBVA share plus €0.70 in cash.

An example better illustrates the tax impact. Sabadell is doing several to ensure its shareholders have information. An individual shareholder who had purchased 10,000 shares of the Valle del Cauca bank last April would have invested €16,375. This share would now have an approximate market value of €26,900. BBVA will offer approximately €25,573 (1,870 shares of the Basque bank valued at €24,254 and €1,319 in cash). To calculate the tax capital gains according to regulations, the market value of Sabadell shares (€26,900) must be used as a reference. Thus, the tax capital gains—the difference between the purchase and sale price—would amount to approximately €10,525. In conclusion, the tax cost would be between €2,090 and €3,158 depending on the applicable tax rate for the savings tax base, which ranges between 19% and 30%.

The other problem with the offer is that it has been below the market price for many months, specifically since January 20th. This means that shareholders would be better off selling the shares on the stock exchange today than participating in the takeover bid, as they are currently around 4% below the market price. Therefore, many analysts expected BBVA to improve its offer, but the conditions imposed by the Spanish government for the merger and transactions such as the possible sale of Sabadell's British subsidiary, TSB, significantly alter the context of the transaction.

Sabadell is demanding that BBVA rewrite the takeover bid prospectus to adapt the transaction's synergies to the new circumstances. Carlos Torres has stated that he would be able to achieve savings even without an initial merger.