The Spanish tax regime relating to “Entities Holding Foreign Securities” (ETVEs in Spanish) is not new (it first entered force back into the ‘ 90s) but its use was somewhat impaired by the reluctance of the tax administration to freely admit it, simply because the ETVEs were regarded as vehicles for tax evasion. In this sense, we should take into account that the full implementation of the scheme would limit the benefits of the tax administration to little more than just certain advantages that may arise from the investments that these companies generate.
Law 27/2014, of November 27, re-launched in Spain the ETVE special tax regime causing Spain to become a fiscally attractive territory for the establishment of “operational” holding companies (see an analysis of the concept in paragraph 3, d) below).
Such enactment coincides in time with the execution of several Double Taxation Agreements (CDIs in Spanish) with attractive foreign tax jurisdictions, all of which generates new opportunities for this is legal instrument.
The most significant aspects of the ETVE regime in Spain are as follows:
- It implements a system of tax exemption for those Spanish companies that maintain significant holdings in other foreign companies, through various mechanisms designed to avoid international double taxation on income derived from holdings in resident and non-resident companies alike.
- It sets forth a regime based on objective factors, thus making “fiscal engineering” totally unnecessary.
Article 21 of the referred Law describes a number of requirements, which – if met – relieve the company from the obligation to pay the Corporate Tax.
Under the ETVE system, group companies are exempt from withholdings on dividends distributed by the operational Spanish Company as well as on the capital gains generated by the transfer of shares and/or participation in companies that comply with the requirements laid down in the law; among others, and with essential character, the Spanish ETVE Company must be a company with “substance”, that is, a legal entity having operational and managing capacity and not only be devoted to asset management.
- The essential fiscal and legal elements of the system are as follows:
(a) The dividends distributed and capital gains obtained shall be exempt from corporate tax when the percentage of participation of the foreign partner in the capital or in the own funds of the Spanish entity is of (i) a minimum of 5% of its own funds or, (ii) the acquisition value of the participation exceeded 20 million Euros.
(b) The referred participation should be maintained continuously throughout the year preceding the day when the profit that is distributed or the gain obtained are payable. Failing that minimum time requirement, the holding in the Spanish entity must be maintained, after that day, for all the additional time necessary to complete such minimum one year period.
(c) In the period in which the benefits are distributed or the gains are realized, the foreign affiliate must have been subject to a foreign tax identical or analogous to the Spanish Corporate Tax, at a nominal rate of not less than 10 per cent.
It should be noted as an extremely favorable aspect that the new legislation has removed, from the year 2015, the previous requirement that also the intervening foreign companies should have “economic activity” outside the Spanish territory and replaced it by the more objective requirement that the foreign entity must be subject to a minimum similar tax of 10%.
This requirement is deemed to be met when the non-Spanish companies that are a part of the group are based in countries that have signed with Spain a Double Taxation Agreement (DTA – CDI in Spanish) containing an “exchange of information clause”; that is, almost all of them.
(d) Any company can apply for the ETVE regime irrespective of its sector of activity, but its corporate purpose must be worded to include “the management and administration of the own funds of entities that are not resident in the Spanish territory, by means of the corresponding organization of material (substantial) and personal resources”.
The extent of this definition has been discussed both by the Treasury Office and by our Courts, although a detailed analysis of their contents would exceed the limits of this necessarily sketchy report. We will simply note that the resolutions of the Treasury Office as well as court rulings establish the need that the “organization of means and resources” must be “substantial”, that is, it must exceed the limited scope of asset management. The Spanish entity must have activities, employees, physical means, management resources and be active in controlling and causing actions of the foreign affiliates geared at securing profits.
- e) with regard to the formal aspects of the system, the Spanish entity must adapt its social purposes to include the above referred activities and report to the tax authorities its intention to abide by the ETVE regime, while identifying in the application (i) the foreign affiliates that participate in the scheme; and (ii) the activity that such affiliates will develop, enclosing their By-Laws, their last balance sheet available and their organizational charts.
The applications are normally approved by administrative silence.
- It modifies the scope of the rules on taxation of Non Residents.
The Law governing the tax on the income of non-residents provides that dividends/profits paid or distributed by Spanish companies to non-residents, and the possible gains that the latter may obtain from the sale of shares of Spanish entities, are taxed at a rate of 20% for the year 2015.
These rates may be further reduced or even cancelled, by the application of Double Taxation Agreements or European Directives. In fact, there are currently numerous DTAs in force with very favorable tax jurisdictions, such as Uruguay, Cyprus, Malta, Singapore, Panama, Barbados, and Hong Kong, which guarantee almost no taxation under the regime applicable to Nonresidents.
Entities incorporated in or residents of countries that Spanish law regards as Tax Heavens do not qualify for the regime.
Therefore, the main advantage of the ETVE system is that income received from foreign partners may be distributed without being subject to the Spanish Tax on Income of Non Residents, provided that neither the partners nor shareholders receiving the foreign income reside in any of such Tax Heaven jurisdictions
Legal entities that do not qualify for the ETVE regime include
* Entities having as main activity the management of real estate or movable assets; in other words, portfolio or asset management.
* Spanish or European Economic Interest Groupings or Temporary Unions of Companies.
* A peculiar exception to the regime refer to foreign affiliates that were originally incorporated or had previously been residents in Spain and became “relocated” to a foreign country for economic reasons. The Treasury Office would entertain allegations to the contrary.
Based on all of the above and given that a holding company will normally be taxed according to the rules of the territory where it is domiciled, we can conclude that the tax advantages are sufficient for us to advise foreign groups to relocate their economic activities to Spain and organize and control the international investments of the group from Spain; thus also benefitting from the privileged business and diplomatic relationships that the country has all over Latin America.