Spanish Holding Company Regime by Gabriel Pretus
Although the Spanish holding regime is a fairly recent entrant into the now crowded holding company field, it has been now become firmly established, especially with regard to the channelling of investments into South America. In this article I would like to draw my colleagues? attention to one distinct advantage of the Spanish holding regime which has attracted much recent attention in connection with acquisitions by Spanish companies: namely the tax deductible depreciation of stock goodwill. I will aso deal in some detail with some new Double Taxation Treaty developments which might make Spain a very attractive holding company base for certain investors.
2. THE SPANISH HOLDING COMPANY: A SUMMARY
To be precise we should refer to 2 distinct sets of provisions:
The ordinary Participation Exemption provisions (art 21st of the Corporation Tax Act, RD Legislativo 4/2004, of 5th March)
The special Holding company provisions (for the ?Entidades de Tesorería de Valores Extranjeros? art 116th o 119th of the Corpotation Tax Act, RD Legislativo 4/2004 of 5th March)
2.1 Participation Exemption Regime
Every Spanish resident company (including those resident in Spain under the ?effective management rule) are entitled to the application of the Participation Exemption regime, which fully exempts capital gain on dividends received from foreign companies, provided all the following conditions are met:
a) The Spanish parent company must hold, directly or indirectly, a minimum 5% stake in the participated company. b) That stake must be held for a minimum period of one (1) year, although that term may be completed ?a posteriori? in the case of the payment of a dividend . Holding periods of other Group Companies are taken into account for the purposes of the 1 year period. c) The participated company must derive at least 85% of its income (as opposed to its gross receipts) from ?economic activities? undertaken abroad, an expression which is synonymous with income items that are not considered as ?passive? under Spanish CFC regulations. Apart from the obvious ?active? income activities such as trading, industrial, tourism, agricultural, insurance or mining ones, and with specific reference to multi-tired structures, the following income items received by the foreign participated company would be deemed as arising from ?economic activities? and therefore qualify for the participation exception regime when distributed to its ETVE parent:
i. Income arising from shares held to comply with legal or regulatory requirements arising from business activities ii. Income from credit rights (e.g. interest from the deferred payment of goods) iii. Income arising from market intermediation activities (e.g. fees and commissions accrued to Brokerage firms) iv. Income arising to insurance and banking firms when discharging their ordinary activities v. Interest accrued from loans granted to Group entities resident outside Spain, when at leas 85% of the debtor?s income derives from business activities vi. Financial income arising from export-import activities vii. Dividend and capital gains from foreign subsidiaries engaged in business activities in which the 1st tier subsidiary holds a direct or indirect stake of at least 5%
d) The participated company (and all the subsidiaries where the income arises in case of multi-tiered structures) must have been subject to a direct tax ?analogous? to the Spanish one. Any country which has entered into a Double Taxation Agreement with Spain is deemed to have an ?analogous? tax system. In the case of non Treaty partners it has also been confirmed that the effective tax rate is not a relevant aspect, as long as the company?s income is taxed, even by reference to turnover (companies granted ?Tax Holding or blanket exemptions are not acceptable for this purposes).
Companies taking advantage to the regime are entitled to deduct the financing cost of the participation subject to the transfer pricing rules when transaction takes place with related parties. It should be borne in mind that since January 1st, 2004 and as reaction to the Lankhorst-Hohorst ECJ case thin capitalisation rules do not apply to loans granted by the EU resident lenders (with the exception of Gibraltar and Cyprus companies) and therefore in those cases the amount of debt (as opposed to the other loan conditions should not pose a problem). The situation is very similar with regard to the CFC rules, they do not longer apply to EU subsidiaries of Spanish companies (save for Gibraltar and Cyprus) therefore ?passive income? will not be attributed to the Spanish parent on an accrual basis, although on the other hand any dividend distributed by such a company will be fully taxable in Spain, with credit being taxed for foreign taxes and, in some cases, for foreign underlying taxes.
2.2 Taxation of non resident shareholders in a Spanish holding company
- Capital gains on the sale of shares or quotas in a Spanish companies will be taxable as follows:
- If the transferor is an EU resident (save for Gibraltar and Cyprus) the gain will be exempted provided that:
i. The transferred quota does not represent more than 25% of the Spanish company?s issued capital or belong to a stake that had met that criteria during the previous year ii. The company whose shares or quotas are transferred does not have a balance sheet more than 50% made up of Spanish situs property (under Spanish accounting rules)
- If the transferor is neither an EU resident nor entitled to Treaty Protection they will be taxed at the 18% rate – If the transferor is resident in a Treaty partner the Treaty provisions shall obviously apply.