Spain: Co-Ordination Centres

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In order to attract the headquarters of foreign multinational companies the Government accords favorable treatment to entities known as "co-ordination centers" located in the Basque and Navarre regions of the country. Co-ordination centers are entities whose activities consist of the management, direction, supervision and centralization of transactions and services within an international group of companies.

NB: Spanish Co-ordination Centres were included on the list of 'Harmful Tax Practices' issued by the EU's Code of Conduct Committee; as of 2004 the outcome is not clear, but it seems likely that the Spanish government will abolish the scheme, at least for new entrants.

Qualifying Preconditions

To obtain co-ordination center status a company must satisfy the following five criteria:

It must be part of a multinational group. At least 25% of the multinational group consolidated equity must relate to non-resident group members and at least 25% of the multinational group consolidated turnover must relate to the business operations of foreign group members.
The consolidated equity of the multinational group must exceed 1250m ESP (US$8.1m) and the consolidated turnover must exceed 8,000m ESP (US$52m).
The equity of the co-ordination center must exceed 600m ESP (US$4m) and its turnover must exceed 1,000m ESP (US$6.5m).
To obtain co-ordination center status prior approval is required from the local tax administrator. The status is normally granted for a period of 5 years if the co-ordination center is to be located in the Basque area or 3 years if it is to be located in the Navarre area. The time period can be extended if necessary.
The co-ordination center must employ a minimum of 8 employees.

Fiscal Advantages of Co-ordination Centres

Co-ordination centers enjoy the following fiscal advantages:

The corporate income tax assessment of co-ordination centers located in the Navarre and Basque regions is a flat levy of 25% of all the "operating expenses" incurred by the company from which formula and for the purposes of establishing the taxable base are excluded "financial expenses". Given that in Spain corporate income tax rate is 35% of accounting profit (32.5% in the Navarre & Basque regions) this arrangement is a substantial concession and means that a company with co-ordination center status which has high business profits, high financial expenses but low business expenses (other than "financial expenses") will pay considerably less corporation tax than other Spanish corporate entities. (N.B. The co-ordination center has the option to be taxed according to normal fiscal rules applying to other corporate entities in Spain).

Comparison with Belgian Co-ordination Centers

Like Spain, Belgium too has a special tax regime for co-ordination centers. Since Belgium is internationally considered to be a particularly favorable jurisdiction in which to set up a co-ordination center, it is worth drawing a comparison between the co-ordination center regimes which exist in both countries.

It is considerably easier to set up a co-ordination center in Spain than it is to set one up in Belgium. The minimum consolidated group equity requirements are US$22.5m in Belgium and US$8.1m in Spain and the minimum consolidated group turnover requirements are US$225m in Belgium and US$52m in Spain. (N.B. The non-resident portion of consolidated equity and turnover must be a minimum of 25% in Spain and a minimum of 20% in Belgium meaning that there is no material variation in this pre-condition).
The corporate income tax regime of Belgian co-ordination centers would appear to be considerably more favorable than that applied to Spanish co-ordination centers. Belgian co-ordination centers pay the standard Belgian corporate income tax rate of 39% on a sum total of 4-10% of the co-ordination center's "business expenses" (with salary and financial expenses being excluded from the definition of "business expenses" for the purposes of the assessment). The 4-10% rate is determined in advance with the tax authorities. In the Basque and Navarre regions by contrast the co-ordination centers pay 32.5% corporate income tax on a 25% sum total of all their "operating expenses" with "financial expenses" being excluded from the definition of "operating expenses" for the purposes of this assessment.
Subject to a few exceptions royalties, loan interest and dividends remitted by a Belgian co-ordination center are free of withholding taxes. In Spain by contrast any reduction in withholding taxes will only occur if there is a double taxation treaty in place.
Belgian co-ordination centers have to pay a 400,000 BEF (US$9,000) annual tax per employee on each of their employees up to a maximum of 10 employees. There is no such tax in Spain. (N.B. In Belgium a co-ordination center must employ a minimum of 10 persons whereas in Spain the minimum number of employees is 8 persons).
In Spain co-ordination centers can only be physically set up in the Navarre & Basque regions whereas in Belgium they can be set up anywhere in the country.
Whereas permits for the establishment of co-ordination centers are limited to an initial period of 3-5 years in Spain, in Belgium the initial period is up to 10 years. In both countries an extension can be applied for. A lengthier initial period is to be preferred given that there is no guarantee of a renewal.

BACK TO SPAIN INFORMATION: LOW-TAX AND INCENTIVE REGIMES

SPAIN: CO-ORDINATION CENTRES

Qualifying Preconditions

Fiscal Advantages of Co-ordination Centres

Comparison with Belgian Co-ordination Centers