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SPANISH HOLDING COMPANIES

 

TAX ADVANTAGES

 

The Spanish regime for international holding companies compares favourably with traditional European centres such as Luxembourg, Netherlands and Belgium. It can provide effective solutions to the reorganisation problems required for companies operating internationally.

Spain is now one of the 8 main European jurisdictions in which it is fiscally attractive to locate a holding company. A Spanish holding company is known as an "ETVE" (Entidad de Tenencia de Valores Extranjeros).

Spanish holding companies (ETVE) were created by Law 43/95 which came into force on 1 January 1996.

Spain's extensive and growing double taxation treaty network means that it exercises substantial leverage in reducing withholding taxes on dividends remitted to a Spanish holding company by a foreign subsidiary located in a double taxation treaty country.

The regime has gained the approval of the European Commission.

An ETVE is a regular Spanish company subject to a 35% tax on its income, but exempt from taxation on qualified foreign-source dividends and capital gains. As such, the ETVE is protected by EU Directives such as the Parent-Subsidiary Directive and the Merger Directive and is regarded as a Spanish resident for tax purposes pursuant to Spain's 50 tax treaties. The broad tax treaty network with Latin America and the European character of the ETVE make it an interesting vehicle for channelling capital investments towards Latin America, as well as a tax-efficient exit route for EU capital investments by non-EU companies.

In June 2000, the regime was amended in order to introduce significant new improvements, including a capital gains tax exemption on the transfer of shares in the Spanish holding company, which will enhance the possibilities of the ETVE as a holding vehicle. Also, the EU's Code of Conduct Committee has determined that the ETVE does not represent potentially harmful tax competition.

For a country to be an attractive location in which to set up a holding company 4 criteria must be satisfied:

INCOMING DIVIDENDS
Incoming dividends remitted by the subsidiary to the holding company must either be exempted from or subject to low withholding tax rates in the subsidiary's jurisdiction.

DIVIDEND INCOME RECEIVED
Dividend income received by the holding company from the subsidiary must either be exempted from or subject to low corporate income tax rates in the holding company's jurisdiction.

CAPITAL GAINS TAX ON SALE OF SHARES
Profits realized by the holding company on the sale of shares in the subsidiary must either be exempt from or subject to a low rate of capital gains tax in the holding company's jurisdiction.

OUTGOING DIVIDENDS
Outgoing dividends paid by the holding company to the ultimate parent corporation must either be exempt from or subject to low withholding tax rates in the holding company's jurisdiction.

By these criteria Spain is a moderately attractive jurisdiction in which to locate a holding company but without the advantages of Denmark.

 

TAX BENEFITS

WITH HOLDING TAXES ON INCOMING DIVIDENDS

As a member of the EU Spain is governed by the provisions of the EU's parent/subsidiary directive, whose effect is that where a Spanish holding company controls at least 25% of the shares of an EU subsidiary for a minimum period of 12 months any dividends remitted by the EU subsidiary to the Spanish holding company are free of withholding taxes.

Spanish holding company rules include a participation exemption at the 5% level for non-resident shareholdings, which can be direct or indirect. Shares must have been held for a minimum of 12 months.

A subsidiary must be a non-resident corporate entity with no business activities in Spain.

Where the provisions of the parent/subsidiary directive do not apply (or where anti-avoidance provisions are in place) Spanish holding companies can rely on a reasonably extensive network of double taxation treaties the effect of which is to obtain a reduction in withholding tax rates on dividends remitted to Spain from the subsidiary jurisdiction.

Spain has 50 double taxation treaties in place. (Denmark has 78 and the UK has 110). The greater a country's network of double taxation treaties the greater its leverage to reduce withholding taxes on incoming dividends. An elaborate network of double taxation treaties is thus a key factor in the ability of a territory to develop as an attractive holding company jurisdiction.

The dividend income remitted by the foreign subsidiary to the ETVE holding company must have been taxed abroad at a rate that is analogous to the corporate income tax rates applicable in Spain - obviously this rules out many offshore jurisdictions, although those with 'designer' corporate forms may manage to wriggle through.

The income remitted to the "ETVE" must relate to profits earned from core corporate activities and must not include "passive income".

CORPORATE INCOME TAX ON DIVIDEND INCOME RECEIVED
The mainstream Spanish corporate income tax rate is 35%. Income accruing to an ETVE holding company which falls under the previous paragraph is free of corporate tax in Spain. The ETVE must have an effective presence in Spain and must be an organization with substance and personnel (i.e. not be merely a brass plate company).

CAPITAL GAINS TAX ON THE SALE OF SHARES
Any capital gains made by the ETVE on the sale of shares in qualifying non-resident subsidiaries are free of capital gains tax in Spain in most circumstances, although there are some conditions. Capital gains tax in Spain currently stands at 35%.

WITHHOLDING TAXES ON OUTGOING DIVIDENDS
Under the EU's parent/subsidiary directive dividends paid by Spanish subsidiaries to EU parent corporations are exempt from Spanish withholding taxes provided the EU parent corporation has held 25% of the shares in the Spanish subsidiary for at least 12 months.

Outgoing dividends paid by an ETVE intermediate Spanish holding company to its non-resident parent corporation are free of withholding taxes in Spain (irrespective of the existence or non-existence of a double taxation treaty) unless the parent corporation is in a jurisdiction where it will not pay corporate taxes equivalent to those ruling in Spain. Evidently this rules out many offshore jurisdictions, although those with 'designer' corporate forms may qualify.

If the parent corporation is not an EU entity or if these conditions are not otherwise satisfied then a standard withholding tax rate of 25% applies on outgoing dividends unless that rate has been reduced (usually to between 5% and 15%) by the provisions of a double taxation treaty. Spain has 50 double taxation treaties in place (Belgium has 66, Denmark has 78 and the UK has 110).

WITHHOLDING TAXES ON INCOMING DIVIDENDS
As a member of the EU, Spain is governed by the provisions of the EU's parent/subsidiary directive, whose effect is that where a Spanish holding company controls at least 25% of the shares of an EU subsidiary for a minimum period of 12 months any dividends remitted by the EU subsidiary to the Spanish holding company are free of withholding taxes.

Where the provisions of the parent/subsidiary directive do not apply (or where anti-avoidance provisions are in place) Spanish holding companies can rely on a reasonably extensive network of double taxation treaties the effect of which is to obtain a reduction in withholding tax rates on dividends remitted to Spain from the subsidiary jurisdiction

MAIN TAX BENEFITS OF SPANISH HOLDING COMPANY
(a) Total participation exemption for dividends and capital gains realized on
the disposal of shares;
(b) Absence of a withholding tax on distribution of non-Spanish source dividends;
(c) Full deductibility of interest payments;
(d) No capital duty on the issue of share capital for entities established in certain provinces, and on share-for-share contributions;
(e) Exemption of overseas branch income; and
(f) Availability of pre-transaction rulings.

These tax benefits, along with the added flexibility provided by the recently issued final "check-the-box" regulations in the United States, make a Spanish Holding Company an ideal vehicle for investments in Europe and Latin America.

In fact, more and more companies use Spain as a launching step to Latin
America.

Spain's extensive and growing double taxation treaty network means that it exercises substantial leverage in reducing withholding taxes on dividends remitted to a Spanish holding company by a foreign subsidiary located in a double taxation treaty country.

SETTING UP A HOLDING COMPANY IN SPAIN - ETVE
To set up an ETVE it is not necessary to get an administrative authorization, only to notify the Tax Authorities.

REQUIREMENTS:
In order to qualify for the regime the following conditions must be satisfied:

(1) For the purposes of applying to the exemptions, the ETVE should have a minimum participation of 5 per cent in the capital of the foreign company or the participation should be higher than Euro 6 millions.
(2) The non-resident company is subject to, and not exempt from, a tax system that is similar to Spain’s corporate tax system, independent of the rate of taxation imposed on the income;
(3) The non-resident entity must not reside in a country or territory identified by the Spanish tax authorities as a tax haven (certain jurisdictions such as Uruguay or Costa Rica are not included in the list);
(4) In the case of capital gains, the seller and the purchaser must be unrelated parties if the purchaser is a Spanish entity;
(5) Income earned by the non-resident entity, from which dividends and capital gains are paid, is derived from business activities conducted outside Spain.
(6) Material and personal means. One of the requirements to be met is the fact that the Spanish holding has an organization of own material and personal means to develop the activity of administrating the referred funds. According to Spanish Courts, it is enough to hire a Director through a private contract.
(7) Once the company opts for the ETVE regime, this regime will be applicable for tax years ending after the option.

OTHER TAX ISSUES
Any financing costs are fully deductible (notwithstanding a 3-to-1 debt-to-equity ratio) and, in contrast to holding companies established in other jurisdictions, these entities are not limited by the fact that the income received by the Spanish Holding Company is tax exempt.

Also, the one percent capital duty payable on the issue of share capital and which is normally imposed on entities established in Spain, is not imposed if the entity is domiciled in certain provinces or in cases where the stock contributed to the entity is part of a share-for-share transaction.

The enactment of legislation in Spain allowing for the establishment of a Spanish Holding Company, along with the recently issued final "check-the-box" regulations, provide taxpayers a unique opportunity to carefully examine their organizational structure. Spanish domestic tax law contains a very favourable holding company regime that may provide significant tax savings both in Spain and elsewhere.

If this entity holds shares in other entities resident in Spain, in any percentage, it would never affect the applicability of this special regime, as long as it takes in account the 15% limit of patrimonial goods located in Spanish territory when selling the shares.

LIMITATIONS:
1 - If the participation by the ETVE in the non-resident entity was valued according to the rules applicable to the special tax regime for mergers, spin-offs, exchanges of shares and in kind contributions and payment of direct taxes in Spain was deferred, the exemption only applies to the difference between the transmission value and the market value when the participation was acquired by the ETVE.

2 If foreign source dividends are exempt from tax in Spain, the ETVE cannot include in the taxable base the depreciation of the participation corresponding to those dividends.

3 If the ETVE has losses in the transmission of a participation in a foreign company, such losses will be reduced by the amount of exempt gains obtained by an entity forming part of the same group of companies of the ETVE that transmitted the participation to the ETVE.

COMPARISON WITH DANISH HOLDING COMPANIES
Since Denmark is currently considered the benchmark holding company jurisdiction which other contenders seek to emulate, a particularly useful purpose can be served by drawing a comparison between the Spanish "ETVE" and the Danish Holding company regime.

i) Fiscal Benefits: Provided the appropriate conditions can be met both Spanish and Danish holding companies are not assessed to corporate income tax on incoming dividends, to capital gains tax on the profitable disposal of shares in a foreign subsidiary and to withholding taxes on outgoing dividends. However, in the case of Spain , both the remitting subsidiary and the receiving parent must be in jurisdictions which charge corporate taxes equivalent to those ruling in Spain . Evidently this excludes most offshore jurisdictions, severely limiting the usefulness of the Spanish holding company. Denmark has no such rule.

ii) Incoming Dividends & Double Taxation Treaties: A double taxation treaty is the usual means by which the holding company is able to obtain a reduction in the rate of withholding taxes levied on outgoing dividends by the subsidiary jurisdiction from the (usual) standard rate of 25% to a rate which can be as low as 0%. Denmark has 78 double taxation treaties in place whereas Spain has approximately 50.

iii) Parent–Subsidiary Directive: Since both Spain and Denmark are members of the EU neither enjoys any particular advantage in respect of the withholding tax provisions of the Parent-Subsidiary directive save that Spain (unlike Denmark) is among one of many EU territories that has applied anti-avoidance provisions to their interpretation of the directive aimed specifically at holding companies owned by non EU third parties. Moreover because Denmark has signed double tax treaties with most EU countries, where the provisions of the directive are frustrated by anti-avoidance legislation the provisions of double taxation treaties can still be relied on to circumvent any problems thereby created.

iv) Participation Exemption Criteria: It is considerably harder to meet the Danish "participation exemption criterion" of 25% than it is to meet the Spanish level of 5%. Denmark excludes from the participation exemption rules income and capital gains derived from "financial" companies (defined as an entity of which more than 33% of its income is passive). Spain excludes all "passive income". Denmark is marginally more attractive in this respect.

v) Zero Withholding Tax Routes: The combination of Denmark double tax treaty network and its holding company regime means that there are currently 35 major countries who with proper structuring can route their dividends through Denmark and not incur any withholding taxes at any stage. In about another 40 other countries withholding taxes are further substantially reduced by reason of the treaty network. Spanish holding companies cannot compete in this respect.

vi) Capital Taxes: Denmark has no taxes on the issue of shares whereas Spain has a 1% tax.

 

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