By Abigail Blanco Vázquez & Álvaro de la Cueva, J&A Garrigues, S.L.P., Spain
Spain published on July 9 a law to prevent and combat tax fraud (Law 11/2021), triggering changes to various tax concepts and to the general taxation law itself.
Provisions in the anti-fraud law affecting corporate income tax and non-resident income tax include changes to international tax transparency rules, a new “non-cooperative jurisdiction” classification, enhanced exit taxation rules, and a special tax regime for real estate investment trusts.
Changes to international tax transparency rules
The Spanish rules on international tax transparency have been brought into line with articles 7 and 8 of Council Directive (EU) 2016/1164 of 12 July 2016, laying down rules against tax avoidance practices that directly affect the functioning of the internal market (known as the ATAD directive).
To understand these changes, it is helpful to first look at the Spanish rules on international tax transparency up to this point.
Firstly, the applicable legislation stipulates that corporate income taxpayers must include as taxable income any income obtained by non-resident entities when, either alone or in conjunction with related persons or entities, they hold at least 50% of the capital, shareholders’ equity or voting rights of the non-resident entity, if that non-resident entity pays an amount of tax (on the income in question) that is less than 75% of the tax that would have been payable in Spain.
This means that only certain types of income are included as taxable income (partial pass-through). This income is specifically stipulated in the law and, as a general rule, is classified as passive or non-business income, such as gains from real estate assets, from ownership interests in legal entities, from the transfer of owner’s capital to third parties, from insurance and capitalization operations, and from industrial and intellectual property.
Secondly, all income of the non-resident entity (the aforementioned non-business income and any other type of income) is included in taxable income when that entity lacks an organized structure made up of the human and material resources required to pursue a business activity (full pass-through). The material and human resources of another entity forming part of the same group are deemed valid for these purposes.
In situations of both partial and full pass-through, up until now, dividends and gains deriving from the transfer of holdings obtained by the non-resident entity were not included in taxable income of the Spanish holding entity when they derived from holdings of at least 5% owned for at least one year, which were managed and administered by the non-resident entity using adequate human and material resources (those of the non-resident entity itself or those of another entity in its group). In other words, non-resident holding companies that were investees of Spanish resident entities were not, as a general rule, required to apply international tax transparency rules.
The anti-fraud law has done away with this important exception. This means that ever since the law came into force, any dividends and gains from the transfer of holdings obtained by non-resident investees must be included in the taxable income of corporate income taxpayers if the aforementioned requirements related to the participation in the non-resident entity are met, i.e., ownership of at least 50% and tax paid by the non-resident entity which is less than 75% of the Spanish tax.
This new rule could potentially have adverse implications, following the recent modification of the participation exemption regime set out in the 2021 general state budget law (Law 11/2020 of December 30, 2020), which has reduced the effective corporate income tax exemption for dividends and gains from the transfer of holdings from 100% to 95%.
Until this change was introduced, the Spanish participation exemption regime implied a full exemption. In other words, Spanish companies could treat dividends and gains from the transfer of holdings as exempt provided certain requirements were met. Basically, the holding needed to be at least 5% and owned for at least one year, and if the investee was non-resident, it had to be subject to a tax identical or similar to Spanish corporate income tax (which was presumed to be the case where the investee was resident in a country which had signed a tax treaty with Spain).
Therefore, because this income was not taxed in Spain, the same type of income obtained by non-resident investees was not subject to transparency rules, since the taxation of the non-resident entities could in no case be less than 75% of the tax levied on the same kind of income in Spain (which was zero).
The situation now is that such income will be effectively taxed at 1.25% in Spain (25%, which is the standard tax rate, applied to 5% of the income, since 95% is exempt). This means that the tax paid by many non-resident holding companies will be less than 75% of that 1.25%, and their income will be subject to transparency rules (making it taxable) in Spain.
It is not absolutely certain, however, that this is what will happen. This is because although the exemption in Spain, in practice, is 95%, the wording of the Spanish participation exemption rules continues to stipulate that dividends and gains from transfers “shall be exempt”, although the exemption shall be reduced, for these purposes, “to 5% in respect of the management costs associated with such holdings”. The view taken by some, based on this wording, is that the exemption regime in Spain continues to be fully applicable (although reducing the amount exempted by the referred 5% for management costs), meaning that the income typically obtained by foreign holding companies (dividends and gains from the transfer of holdings) is not affected by Spanish international tax transparency rules. The position adopted by the tax authorities and the courts with respect to this issue remains to be seen.
Apart from the modification referred to above, the anti-fraud law makes some minor changes to the list of non-business income types.
Firstly, it reduces the threshold for recognizing income from lending, financial, insurance, and service provision activities performed directly or indirectly with resident related persons or entities. Up until now, the rule had been to include this income where the amount exceeded 50% of the investee’s revenues; under the new rule, this threshold has been reduced to two-thirds.
Secondly, new types of non-business income are included: non-business income from insurance and lending activities, finance lease transactions and other financial activities conducted by non-related parties, and income derived from controlled transactions with non-residents or permanent establishments in which the latter add little or no value.
Finally, for the sake of alignment with the 95% exemption referred to above for dividends, the rule stipulates that where previously attributed non-business income is subsequently distributed in the form of dividends, it must be included as taxable income, but for only 5% of its amount.
All these changes are applicable now, for tax periods commencing on or after January 1, 2021.
Replacement of the term “tax haven” with “non-cooperative jurisdiction”
Transactions with tax havens are tightly controlled in Spain. Among other rules, the tax neutrality regime cannot be applied to restructuring operations (mergers, spin-offs, exchanges of assets, among others) when entities domiciled or established in tax havens are involved. Under the international tax transparency rules, when calculating gross tax payable on allocated income, tax credits cannot be generated on taxes paid in tax havens. In addition, among other rules, there is the general rule that services costs corresponding to transactions performed with persons or entities resident in tax havens cannot be deducted, unless there is evidence to demonstrate that the transaction was effectively executed.
This concept of tax haven has now been replaced by the broader concept of non-cooperative jurisdiction. In fact, a territory that has signed a tax treaty with Spain can even be classed as a non-cooperative jurisdiction if the resulting tax treatment in Spain does not run counter to the treaty provisions.
The list of non-cooperative jurisdictions will be approved through a ministerial order and will be updated to reflect the level of tax transparency of each jurisdiction, which shall be determined based on criteria such as the existence of mutual assistance legislation for the exchange of information and effective compliance with information exchange commitments assumed, as well as the findings of peer reviews conducted by the OECD Global Forum on Transparency and Exchange of Information for Tax Purposes, among others. Another factor to be considered when classing a jurisdiction as non-cooperative is, for example, whether the non-resident jurisdiction facilitates the existence of offshore arrangements or entities that bring in profits that were not generated by activities actually performed there, or if there is zero or low taxation in the jurisdiction.
The list may also be updated in light of the work undertaken by the European Union through the working group on the Code of Conduct for business taxation, which publishes its conclusions twice a year, or the work undertaken by the OECD through the Forum on Harmful Tax Practices.
There are various problems that could arise when updating this list.
On the one hand, the updates are optional, and we know from experience that there is no guarantee that the updates required to remove compliant jurisdictions from the list will take place on a regular basis.
On the other hand, the regulations governing the mutual assistance regime in Spain are very basic and Spanish legislation therefore provides few elements from which to judge whether another jurisdiction meets the minimum requirements for an acceptable level of mutual assistance.
In addition, there are important concepts, such as “low taxation,” that refer in vague terms to the existence of an effective level of taxation considerably lower than the level in Spain, although the rule fails to stipulate what “considerably lower” actually means.
It appears, in any event, that the list in question would be mixed, including both countries classed as non-cooperative jurisdictions per se and others that would be non-cooperative only in relation to some of their tax practices.
Hardening of exit tax rules
The corporate income tax law envisages an exit tax applicable when Spanish resident entities change their country of tax residence. The tax charge is calculated based on unrealized gains on the entity’s assets, unless they are allocated to a permanent establishment in Spain.
Up until now, however, it had been possible to defer payment (subject to the provision of security and the accrual of interest) until the assets in question were transferred to third parties, where the destination country was a country in the European Union or the European Economic Area with which there was an effective exchange of information.
The anti-fraud law has replaced the deferral option with the possibility of making split payments over five years, effective for tax periods beginning on or after January 1, 2021.
The entitlement to split payments will cease to be valid, either in whole or in part (as appropriate), when the assets in question are transferred to third parties or are moved to third countries, when the taxpayer relocates its tax residence to a third country or goes into liquidation or begins bankruptcy or similar proceedings, or when the split payments are not made on time.
In any event, in cases of change of residence or transfer to Spain of assets or activities that, pursuant to the provisions of the ATAD directive, have had an exit tax levied on them in an EU member state, the value determined by the member state exited shall be taken as the value for tax purposes in Spain, unless it does not reflect market value.
The same changes have been established in relation to the non-resident income tax exit charge. Under this tax, the exit tax charge applies when assets assigned to a permanent establishment located in Spanish territory are transferred abroad, or when a permanent establishment in Spanish territory ceases its activity, and now, under the new rules, when the activity of a permanent establishment is moved to outside of Spain.
In this case, splitting of the payment can be allowed except where the permanent establishment discontinues its activity.
New special 15% tax within special tax regime for Listed Corporations for Investment in the Real Estate Market, known as SOCIMIs
Listed Corporations for Investment in the Real Estate Market, known as SOCIMIs, or real estate investment trusts, benefit from special corporate income tax rules under which, in general, they are taxed at a zero percent rate (except on certain kinds of income). A 19% special tax rate is just applied on dividends distributed to shareholders whose ownership interest is at least 5%, if dividends are exempt or are taxed at a rate of less than 10% in the shareholders.
This tax is not levied when the shareholder is a non-resident entity whose corporate purpose is the same as that of a SOCIMI and is subject to a regime similar to the SOCIMIs regime insofar as relates to the mandatory distribution of dividends.
For periods beginning on or after January 1, 2021, however, the anti-fraud law introduces a special 15% levy on profits not distributed, insofar as they derive from income that has not been taxed at the standard corporate income tax rate or income not deriving from the transfer of eligible assets, once the three-year holding period has elapsed (assets subject to the three-year reinvestment period envisaged in the law).
This tax charge accrues on the date the shareholders’ meeting or equivalent body passes the resolution on the allocation of profit for the year and must be self-assessed and paid within two months of its accrual.
— Abigail Blanco is a partner with J&A Garrigues, S.L.P., in Madrid
— Álvaro de la Cueva, is a partner with J&A Garrigues, S.L.P., in Madrid
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