Spanish Holding Company
Spanish Law 43/1995 introduced a special tax regime applicable to Spanish holding companies creating one of the most competitive holding regimes in the world. The stability that this special regime has experimented over these last years makes it a very reliable vehicle of investment. This fact is even enforced by the wide range of treaties that Spain has undersigned in the last years. There are several interesting features about the Spanish holding company (called in Spanish "Entidad de Tenencia de Valores Extranjeros" – ETVE – ) which may be summarised as follows.
Taxation of inbound dividends and capital gains
Dividends and capital gains will be tax exempt in the Spanish ETVE, if the following conditions are met:
a) Residence and taxation of the subsidiaries.
The subsidiaries must not be resident in a tax haven jurisdiction (black list at the end of this note). In addition, the foreign subsidiary must have been subject to tax of identical or analogous nature than the Spanish Corporate Income Tax. If the subsidiary is resident of a country which has signed a Double Tax Treaty with Spain which includes an exchange of information provision, this requirement will be deemed to be fulfilled.
It should be noted, that in the last years the Tax Authorities have been more flexible when considering this requirement, since it is understood that companies resident in jurisdictions with a territorial tax system (as Uruguay, Costa Rica, etc.) comply with this condition.
b) Activity of the subsidiaries.
Dividends obtained from the foreign subsidiary must derive from active business activities. This requirement will be deemed to be fulfilled if at least 85% of the income derives from business activities abroad or from participations that also accomplish the requirements for the participation exemption. In this sense, income derived from the exploitation of certain intangible assets, such as patents, copyrights, trademarks, as well as management of commercial or scientific experiences, technical assistance, will qualify for the participation exemption.
c) Shareholding and holding period.
A participation of at least a 5% in the foreign subsidiary is required, or alternatively, an acquisition value higher than 6 million euros. A non-interrupted holding period of at least 12 months is also required, or alternatively, commitment of accomplishing the holding period after the distribution of dividends.
Taxation of outbound dividends and transfer of the ETVE shares
Dividends and capital gains derived from the ETVE shares with regard to the exempt income described above shall not be subject to tax in Spain provided the recipient is a non-resident individual or entity who is not resident in a tax haven jurisdiction. The same tax treatment applies when the ETVE company is liquidated.
Payments of interests and thin capitalisation rules
Interests paid by the ETVE company will not be subject to withholding tax in Spain provided that the individual or entity receiving the interest is an EU resident that does not have a permanent establishment in Spain. Interests paid will be fully tax deductible in the ETVE company.
Regarding thin capitalisation rules, it applies a ratio financing/equity of 3:1. However, from 1st January 2003, this provision is not applicable on loans granted by companies resident in an EU member State.
Provisions for a decline in value of the shares are deductible against other taxable profits of the ETVE or other group companies (if the ETVE is a member of a Spanish tax group). The relief may be clawed back on disposal if sale proceeds exceed the tax basis. Additionally, a 5% allowance for goodwill for an investment in non-Spanish subsidiaries is also available under certain conditions. This would be subject to claw back on the disposal of the shares in the foreign subsidiary.
List of Tax Havens
Antigua and Barbuda
British Channel Islands
Isle of Man
British Virgin Islands
Saint Vincent and Grenadines
Trinidad and Tobago
Turks and Caicos Islands
United States Virgin Islands
* From their incorporation to the EU, they should not be deemed as tax havens since there is the possibility to exchange information with the tax authorities of both countries
** For the income obtained by holding companies defined in the special Luxembourg legislation, contained in law 1929.
Double Tax Treaties signed by Spain
United Arab Emirates
United States of America