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Spain: Related Information

Holding Companies (ETVE)

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). 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.

An ETVE is a regular Spanish company subject to a 30% 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 70 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 enhance the possibilities of the ETVE as a holding vehicle. Also, the EU's Code of Conuct 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.


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 10% 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 over 80 double taxation treaties in place. 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 30%. 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 30%.


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 10% 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 21% (18% prior to Janaury 1, 2010) applies on outgoing dividends unless that rate has been reduced (usually to between 5% and 15%) by the provisions of a double taxation treaty.


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.

  1. 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.
  2. 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 19% (18% prior to January 1, 2010) to a rate which can be as low as 0%.
  3. 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.
  4. Participation Exemption Criteria: The Danish "participation exemption criterion" is 10%; the Spanish level is 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.
  5. Zero Withholding Tax Routes: The combination of Denmark double tax treaty network and its holding company regime means that there are currently more than 35 major countries who with proper structuring can route their dividends through Denmark and not incur any withholding taxes at any stage. In about 40-plus other countries withholding taxes are further substantially reduced by reason of the treaty network. Spanish holding companies cannot compete in this respect.
  6. Capital Taxes: Denmark has no taxes on the issue of shares whereas Spain has a 1% tax.



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