Spain Jose Ramon Vizcaino Fernandez de Casadevante Diego Carrera Dávila [email protected] [email protected]

166 • dentons.com 1.0 OVERVIEW withholding rate would apply to From a direct taxation viewpoint Spanish can be levied non-residents who obtain Spanish there are other applicable taxes, at a national (state), regional source dividends, interest payments, such as local and (autonomous region) or local (town rents, royalties or management fees business activity tax, and others that hall or municipal authorities) level. (among other kinds of income). The only apply to individuals, such as Additionally, Spanish taxes can be rate of withholding tax depends the inheritance and and the broken down into three groups: on the nature of the income (for . instance, as a general rule, the 19% taxes, duties and special levies. In Regarding indirect taxation, value- any case, and as a general overview, applies to interest and dividends regardless of the residence of added tax (VAT) and are duties and special levies trigger in applicable in . VAT is regulated return of a public service or benefit, the non-resident) and on the of the non-resident (for according to the EU standards such as the parking rate, garbage under the VAT Directive. VAT is not rate or court fee. instance, the 19% applies to residents of the (EU) or the applicable in the Canary Islands, Spain imposes corporate and European Economic Area (EEA), while Ceuta or Melilla, which are not personal on its residents, the 24% withholding rate applies considered Spanish territories from including permanent establishments to other non-residents of the EU or a VAT perspective. Instead, these in Spain of non-resident companies, the EEA). The Spanish payer of such regions apply their specific sales on a worldwide basis for any type amounts is liable for withholding this taxes. Most aspects of transfer tax, of income (e.g., interest, dividends, tax on behalf of the non-resident including rates, deductions and lease income, capital gains, etc.). recipient before the Spanish tax formalities when filing tax returns, Both corporate income tax (CIT) and authorities. However, Spain has are determined by regional tax laws. personal income tax (PIT) are state- one of the most extensive double- Stamp duties and custom duties on level taxes, although Spanish regions taxation treaty networks in the imports are among the other forms can regulate certain aspects of the world, which reduces or eliminates of indirect taxation. PIT, such as rates and deductions. the Spanish withholding on such types of income. Certain Spain has signed the Multilateral Non-residents not acting through a payments within the EU, such as Convention to Implement can also interest, dividends and capital gains, Related Measures to Prevent Base be subject to taxation in Spain under are not subject to taxation if certain Erosion and Profit Shifting (MLI), but the Non-Residents Income Tax (NRIT) requirements are met. the Spanish parliament has not yet Act. In general terms, a 19% / 24% completed the ratification process.

dentons.com • 167 2.0 LEGAL SYSTEM management is in Spain. Special • General partnerships are private rules apply if the company is entities (sociedad colectiva) with In Spain, the autonomous regions established in a but has legal personhood and unlimited and local territories operate under assets and/or rights in Spain. Below joint liability a civil law legal system established are the main aspects of Spanish • Simple limited partnerships by the Spanish Constitution. Taxes business vehicles, alongside with (sociedad comanditaria) have are also governed by international some introductory tax inputs. treaties (including double-taxation legal personhood and comprise treaties signed by Spain or the 4.1 Public limited companies two types of partners: general EU), international regulations, the partners with unlimited liability, In public limited companies (in Spanish General Tax Act and other and limited partners whose Spanish, Sociedad Anónima applicable legislation. liability is limited by their or S.A.), shareholder liability is contributed amount 3.0 TAXATION AUTHORITIES generally limited to the amount • Limited shareholders the shareholder contributed The tax system in Spain is partnerships (sociedad to the company’s equity. This administered by the Agencia Estatal comanditaria por acciones) contribution is represented by the de Administración Tributaria (AEAT), have legal personhood and shares that qualify as negotiable which depends on the Spanish comprise two types of partners: securities, which may be listed on Treasury Ministry. general partners with unlimited the stock exchanges. The minimum liability, and limited partners Spanish regions have been capital to set up a Spanish S.A. whose liability is limited by their entrusted with the administration is €60,000, which must be fully contributed amount of certain taxes, along with the subscribed and at least 25% paid up regulation of certain aspects upon incorporation. 4.4 Foreign entities (with or (principally, rates and deductions). without a Spanish permanent 4.2 Private limited companies Municipal bodies administer certain establishment) local taxes and have the power Private limited companies (in A foreign company that carries to regulate their own municipal Spanish, Sociedad Limitada or on business in Spain, whether taxes, with certain limitations S.L.) are the most common type it acts through a permanent and, normally, within a framework of investment vehicle in Spain. establishment or not, is subject established by state law. Shareholder liability is generally to tax under the Non-Resident limited to the investment in the Income Tax (NRIT) Act in respect of 4.0 BUSINESS VEHICLES company’s equity. The minimum such income. A non-resident may either establish capital required to set up an S.L. is a Spanish business vehicle to €3,000, which must be subscribed If the foreign entity is resident carry on business in Spain or and fully paid upon incorporation. in an EU country or in a country operate directly, with or without a The capital is represented by units, that has a double-taxation treaty Spanish permanent establishment. an instrument that closely resembles pursuant to which the company In general, the incorporation the shares of an S.A, and which may claim treaty benefits, the of Spanish entities is exempt can also have a non-voting nature. entity would generally be subject from taxation. However, units may not be listed on to the rules of EU legislation (for stock exchanges. instance, an EU directive or an EU Additionally, it should be noted regulation) or the relevant treaty. that, according to the Corporate 4.3 Partnerships There are special rules when Income Tax Act, a company is There are three main types of the profits are earned through considered resident in Spain if it has partnerships in Spain, which are not a permanent establishment been incorporated under Spanish very common due to the unlimited situated in Spain. One of the most law, if the corporate address is in liability of the members: important special rules is that a Spain or if the place of effective foreign company would not be

168 • dentons.com allowed to claim double-taxation from Spanish 1% capital and general rule that interest payments treaty benefits if the activity is not subject to VAT or ). to an EU resident are exempt from performed in Spain through a However, when assets other than withholding taxation (whether or not permanent establishment. cash are contributed to a Spanish the lender is a third party). Particular company, it should be considered on attention should be given to anti- In this regard, a company that a case-by-case basis, because tax abuse tax provisions. operates through a Spanish could be triggered when contributing 5.2.2 Thin capitalization and permanent establishment (such as mortgaged assets to an entity. a branch) will be subject to taxation limitation on deductibility of interest expenses in a very similar way as a Spanish 5.1.2 Contributions without taking additional shares resident entity. In a nutshell, the Thin capitalization rules no rules applicable under the CIT Act Shareholders can make an equity longer apply in Spain, although would apply in order to determine contribution to an incorporated there are some restrictions on the NRIT liability of the permanent company without the issuance of the deductibility of interest establishment. However, additional shares. This is known as expenses for Spanish entities. some particularities should be “other shareholder contributions,” Interest deductibility is subject to considered, such as the limitation and can for instance be used to compliance with on certain expenses and valuation offset accounting losses. rules and earning stripping rules (i.e., of certain transactions. the 30% EBITDA limit). In general terms, these contributions For non-resident entities not are not subject to taxation and do Under earning stripping rules, acting through a permanent not have CIT implications, as they net interest expenses (i.e., excess establishment, the NRIT Act are not considered accounting financial expenses accrued over imposes a withholding tax of 19% income (relevant exceptions could interest income) generally are / 24% (although this rate may apply in case of debt contribution). capped at 30% of EBITDA (as vary on certain type of income) Distribution or return from this defined in the CIT Act). However, on all Spanish sourced incomes account should be carefully net interest expense is tax- paid to non-resident entities. In reviewed as it may have adverse deductible if it does not exceed general terms, these withholding tax consequences. €1 million per year (known as the taxes also apply to payments 5.1.3 Distributions of paid-up minimum allowance). Net financial made from a Spanish branch capital expenses exceeding this 30% or permanent establishment to EBITDA limit can be carried forward A 1% capital duty applies on capital its head office. EU legislation or and deducted in the following reductions or when liquidating double-taxation treaties will relieve years, subject to the same 30% the company, to the extent that (or even eliminate) this withholding EBITDA limit. Additional restrictions there is a stake to be distributed to tax obligation. apply for leveraged buyouts and the shareholders. intra-group indebtedness. 5.0 FINANCING A 5.2 Debt financing COORPORATE SUBSIDIARY Interest accrued on profit- 5.2.1 Withholding tax implications 5.1 Equity financing participating loans granted by 5.1.1 Contributions for shares Spanish entities can borrow funds companies of the same group are from related or third parties. Interest non-deductible for CIT purposes, Where an equity investment is payments made by a Spanish as they are treated as “equity made into a Spanish company in resident company to a non-resident (dividend) contributions,” regardless exchange for shares, the amount at arm’s length are generally of their consideration as a debt for of the investment is added to the subject to a 19% withholding tax. accounting purposes. However, if entity’s “stated capital” account. As previously mentioned, the the relevant requirements are met, Incorporation of entities and share withholding tax rate can be reduced this type of interest can benefit from capital increases are generally or eliminated under EU legislation the participation-exemption regime exempt from taxation (exempt or a double-taxation treaty. It is a (explained below in point 6.2).

dentons.com • 169 5.3 Stamp duty As discussed above, non- unless otherwise specified in a Spanish stamp duty is levied on resident entities not operating double-taxation treaty. Additionally, notarial deeds, certain administrative in Spain through a permanent capital gains realized by non- and commercial documents. For establishment would be subject to residents as a consequence of instance, when purchasing a real NRIT (as opposed to CIT), with the the sale of Spanish real estate are estate asset or granting a mortgage applicable rate being 19% / 24% subject to a 3% withholding tax that loan, this tax could be triggered as depending on the type of rent and must be withheld by the purchaser the transaction would be performed on the tax residence. of the real estate on the purchase price. Such withholding tax must in a notarial deed. If the transaction 6.2 Capital gains is subject to capital duty or transfer be paid to Spanish tax authorities Broadly, capital gains are part of tax (as opposed to VAT), no stamp by the purchaser as a payment in the CIT and NRIT . duty can be levied. advance of the final tax due accrued Under CIT, the very common from the sale of the real estate. This The applicable tax rate depends on “participation-exemption regime” withholding tax would offset the the autonomous regions in which the applies to capital gains obtained final tax due from the seller. taxable event occurs. Generally, the from the sale of shares. This rate varies between 0.5% and 1.5%. also applies to the distribution Capital gains realized on a transfer However, some autonomous regions of dividends when both of the of shares by non-residents that have included increased rates that following requirements are met: do not act through a permanent vary between 1% and 3% to certain establishment are exempt from i. Minimum 5% participation in the transactions (mainly real estate). NRIT, provided that the taxpayer is subsidiary’s (either resident or tax resident in an EU member state, 6.0 CORPORATE INCOME TAX non-resident) share capital or, and that the requirements of the 6.1 Income tax rate alternatively, the stake must have participation-exemption regime a value higher than €20 million under CIT rules apply. However, The CIT standard rate applicable this exemption may not apply if to resident companies, including ii. The participation must have been the asset figure of the Spanish Spanish permanent establishments, held for more than one year or, company is formed, directly or is 25%. Special tax rates apply to failing this requirement in the indirectly, by real estate assets. certain entities, most significantly: distribution of dividend, the stake must be maintained for the time 6.3 Computation of taxable • A 15% tax rate applies to newly necessary to complete a year. income created companies during their Particular rules apply when more first two fiscal years in which the 6.3.1 Taxable base than 70% of the subsidiary’s income taxable base is positive Taxable income is calculated as comes from dividends or capital worldwide income less deductible • 1% is the applicable rate for gains obtained through the sale expenses. This is obtained from the investment funds of shares in other entities. There organization’s financial statements, are other instances where this • 0% is the applicable rate calculated under Spanish GAAP participation-exemption regime does for Spanish REITs (known in (i.e., the Commercial Code and the not apply, such as when the non- Spain as SOCIMIS) Spanish General Accounting Plan). resident subsidiary is not taxed at a The taxable base is the result of • 30% is the applicable rate minimum nominal tax rate of 10%, applying certain tax adjustments to for bank institutions and or when the payment of dividends the abovementioned taxable income. companies belonging to generates a deductible expense. the hydrocarbons industry Although tax losses resulting Generally, non-residents without • 0% applicable to charitable from the performance of the the presence of a permanent entities, nonprofits and company’s business activity can establishment in Spain are subject pension funds. be carried forward indefinitely with to NRIT at a rate of 19% on capital no time limitation, tax losses from gains on assets located in Spain,

170 • dentons.com previous years can only be offset against up to 70% of the taxable base. This limitation is more stringent to entities with an operating income exceeding €20 million. A minimum allowance of €1 million would apply in any case.

The CIT Act establishes certain exceptions where the mentioned limitation does not apply, such as when income is recognized on debt waivers or where there are deferrals under an agreement with creditors. Finally, Spanish tax authorities can audit, without limitations, tax losses and tax deductions generated in the past 10 years, regardless of the general statute of limitations, which is normally four years.

6.3.2 Deductibility of expenses Special provisions are established for the following expenses:

• Depreciation of assets must be calculated within the limits provided in the CIT Act, unless a higher depreciation can be proven

• Impairment of assets: tangible assets, intangible assets including goodwill, real estate, participations in subsidiaries, debt instruments, etc.

• Exempt income (e.g., dividends distributed by a subsidiary in case the participation-exemption regime applies)

• Net financial expenses

• Accruals

• Non-deductible expenses (e.g., penalties, donations, etc.)

• Non-monetary transactions

• Transactions between related parties

• Change of tax residence

• Temporary allocation.

6.4 Income tax reporting CIT due must be paid within 25 calendar days following six months after the company’s tax period. During the tax year, resident companies and permanent establishments must make tax payments on account, also known as CIT prepayments of the final tax due of the ongoing tax period. Such prepayments are made in three installments with due dates of April 20, October 20 and December 20.

dentons.com • 171 7.0 CROSS-BORDER PAYMENTS resident entity is provided (through The minimum varies from €858.60 7.1 Transfer pricing the issuance of a tax residence to €1,199.10, depending on the certificate by the relevant authorities). employee’s job position, which would Spain’s transfer pricing regime determine their contribution group. generally follows the principles 7.3 Withholding tax on of the Organisation for Economic services fees 8.2 Payroll taxes Co-operation and Development When a payment is made to a Spanish companies and permanent (OECD) transfer pricing guidelines. Spanish non-resident with reference establishments of foreign entities Spain provides the following to services performed in Spain, the are obliged to withhold a portion of possible methods to comply with payer must withhold a 24% tax rate an employee’s wages and pay it to the transfer pricing requirements: of the payment. This rate will be 19% Spanish tax authorities, as a payment cost plus, resale price, profits when the recipient of the services in advance of the employee’s split, transactional net margin and is resident in the EU or the EEA. personal income tax. comparable uncontrolled price. However, rates may vary or services 9.0 INDIRECT TAXES Spanish tax authorities can impose may be exempt of withholding a transfer pricing adjustment in taxation due to the application of a 9.1 Goods and service tax respect of a transaction that has double-taxation treaty. Spain’s VAT is a European- harmonized value-added tax not been made on arm’s length 8.0 PAYROLL TAXES terms or conditions, as required imposed on the final domestic by OECD principles. If a difference 8.1 Introduction to the Spanish consumption of most goods, arises, Spanish tax authorities social security system services supplied, self-supplies, will apply the tax treatment that Companies that develop activities intra-EU transactions and corresponds to the real nature of in Spain must be registered with importation of goods in Spanish VAT such income. Spanish taxpayers the General System of Social territory (which does not include are also required by law to prepare Security and must also register the Canary Islands, Ceuta or Melilla). specific documentation such as their employees. Social Security Specific rules with respect to the local files, master files or country- allowances mainly cover medical place of supply exist to determine by-country reports for related services, temporary illness, whether a supply is deemed to party transactions. permanent and total disabilities, be . For example, a maternity situations, unemployment special localization rule applies to 7.2 Withholding tax on situations, retirement and death. real estate properties and services passive income related to these assets. Employers and employees must Payments made by a resident pay a monthly contribution to Social The current standard VAT rate is of Spain to a non-resident in Security, but the employer must do 21%. A reduced rate of 10% applies respect of certain types of it on behalf of the employee. For to goods such as food or services interest payments, rents, royalties, an employee whose employment as transport. Essential products or dividends, management or contract is for an indefinite term, services have a special reduced rate administration fees are subject to the employer contributes 29.9% of 4%. Some goods or services are tax at the rate of 19% / 24%. of the employee’s wages and the exempt from VAT. However, this withholding rate may employee contributes 6.35%. The employer also is required to make VAT tax reporting is generally made be eliminated or mitigated under quarterly, although in some cases applicable EU legislation and/or a contribution for professional contingencies at a rate between monthly tax files are required. In a double-taxation treaty signed the latter case, the taxpayer must by Spain. It would require that the 0.9% and 7.15%, depending upon the nature of the employer’s activities. register in the real-time reporting recipient be the beneficial owner, VAT system (in Spanish, Suministro the “substantial and economic The maximum contribution base is Inmediato de Información or SII business reasons” are met and that capped at €3,803.70 per month. System). Spanish entities that carry proof of tax residence from the non-

172 • dentons.com business in Spain are required to Where the taxpayer is the acquirer 10.3 TIVUL register, keep accounting records, of the asset or right, the applicable Transfer of urban real estate assets issue invoices, and collect and remit tax rate varies in each autonomous will be subject to a municipal tax on VAT on such supplies. region, but the general rates are: the increase in value of urban land Each taxpayer is generally entitled • 6% to 11% for transfers of real (TIVUL in its Spanish acronym, also to a VAT refund for the expenses estate property known as the plusvalía municipal), made with direct relation to the provided that the sale of the asset • 1% to 10% for transfers of movable business operative. Conversely, no has not reported a loss. TIVUL will be assets and administrative refund is allowed for VAT incurred payable by the seller of a urban real concessions on expenditure that is unnecessary estate asset, based on the deemed for business purposes or related • 1% on some real estate rights. increase in the value of the land to the acquisition of goods or which forms part of the property. 10.0 MAIN LOCAL TAXES services used for a VAT-exempt The increase in value is calculated activity. However, there are certain 10.1 Business activity tax as a percentage applicable to the exemptions where VAT incurred Business activity tax is a municipal cadastral value of the land, which relating to the of goods is tax levied annually on any business is an official value given to the land, normally fully recoverable. activity conducted within Spanish and the final amount to be paid territory. The tax base will be takes into account other elements 9.2 in the Canary determined on the basis of several such as years of ownership or Islands, Ceuta and Melilla factors, such as the type of activity, the location of the property. Canary Islands sales tax has five the area in which it is conducted and The applicable tax rate will vary types of rates: reduced (3%), general the cadastral value of the real estate depending on the municipality (7%), incremented (9.5%), special asset. Taxpayers that begin their where the real estate assets are incremented (13.5%) and other activity in Spain may apply for a two- located, to a maximum of 30%. special rates that vary between 20% year exemption on this tax if certain 10.4 Works, constructions and and 35%. requirements are met. installations tax (WCIT) Ceuta and Melilla each levy an 10.2 Property tax Refurbishment works that require independent tax on the sale or Property tax is a local tax levied a building license would trigger import of goods or services. The annually on January 1. It applies to WCIT, the taxable base being rate varies depending on the place the ownership of certain rights over the cost of the works, excluding of import and the type of good real estate, including the ownership certain expenses (e.g., VAT, public or service. of real property. The owner or the rates, professional fees, business profit). The applicable rate varies by 9.3 Transfer tax beneficiary of the right over the real estate asset is subject to property municipality but it cannot exceed 4%. Transfer tax is triggered on the tax, which will range between transfer of assets or rights performed 0.4% and 1.1%, depending on by individuals or entities but, in this the municipality. case, only on those transactions out of the scope of their business.

Additionally, transfer tax could also trigger in transactions subject but exempt from VAT, such as certain real estate transactions.

dentons.com • 173