ATAD Implementation: Impact in Spain with a Focus on Holding Entities
One of the keynote speakers at our second annual international tax conference in Barcelona was Brígida Galbete, a Senior Tax Associate with Cuatrecasas, one of the largest law firms in Spain.
Brigida updated us on some of the trending issues in Spanish taxation, more specifically playing close attention to the implementation of the Anti-Tax Avoidance Directive (ATAD) and how it would impact Spain’s holding entities’ regime.
If you missed our conference and are looking for information on holding companies in Spain, check out the full transcript below.
There’s also a Power Point presentation that can be accessed and downloaded HERE.
For now, here are some of the presentation’s main highlights.
On the Current Appeal of Spain’s Holding Structure
Brígida Galbete: “The Spanish holding regime is very attractive from the perspective of the shareholders because these shareholders will not be taxed in Spain for the dividends and capital gains that they obtain out of the holding company. And this is what makes the holding regime very attractive, unless the shareholders are tax residents in a tax treaty jurisdiction. So, in that case, these benefits will not apply and they will be subject to tax at the standard 19% tax rate.”
“Plus, it's relatively easy to incorporate a holding entity; we can have a limited liability company in Spain up and running in an average of 15-20 days at maximum and the cost of maintenance is relatively low because there is not much to maintain in a holding company. So this has given rise to the proliferation of holding companies in Spain in the last years. And the situation currently is that we have very few precedents of the tax authorities challenging the application of the holding regime to Spanish companies.”
On the Issue of Economic Substance
Brígida Galbete: “What we don't have in our regulations is: What an adequate level of substance means? What is enough, in practice, for a holding company to enjoy this regime? What we see is that there have been some tax rulings and case law developing these ideas. Basically, it’s stated that human and material resources are needed, but mostly human resources are needed. This means that there must be someone who takes care of the management, someone who is committed to the management, someone who knows the business, mostly of the underlying subsidiaries, and who can be devoted to the proper management of the shares, not the company itself. This person can be an employee, but can also be a member of the board of directors, could be a director of the company. So if this person that has proper knowledge of the business and is engaged in the business, is already a director in the board of directors, we do not need an employee or someone external to take care of those functions. The functions that this person needs to take care of are to make sure that he's going to exercise the rights as a shareholder.”
On Spain’s Anti-Abuse Provisions
Brígida Galbete: “Here we have a set of anti-abuse provisions that we need to be aware of. First, we have the general anti-abuse provision in our general tax law. This anti-abuse provision is mainly focused on fráu légis and sham transactions rules. And this general anti-abuse provision is older or was in our system long time before the general anti-abuse provision of the ATAD directive. So, we don't need to implement the ATAD directive because we already have this in our system and, as you may know, the ATAD directive is a minimum level protection, so we don't need to make any amendment on that point. But we do not only have this general anti-abuse provision, we also have the special anti-abuse provision for dividends distributed to a European parent company. In Spain, we implemented the parent subsidiary directive but we also introduced this special anti-abuse provision a long time before the parent subsidiary directive was amended in 2015 to include one. And, according to this general anti-abuse provision, if the majority of the voting rights of the parent company are in the hands of non-European entities, then the exemption on the withholding tax will not apply unless there are commercial reasons for the existence of the parent company and this parent company has an activity. The wording of the anti-abuse provision was changed because of the introduction of changes in the parent subsidiary, but we already had these in place.”
On ATAD & CFC Rules in Spain
Brígida Galbete: “Another set of rules that are going to be amended as a result of ATAD and that will have a direct impact on holding entities are the CFC rules. In Spain we already have a very extended regulation about CFC rules, but these will be amended to what ATAD proposes. And the first thing to notice is that these changes will affect corporations.”
“In Spain, the model of CFC rules that we have implemented is the model according to which only 13 types of income will be considered as tainted income. Under this model, what we find is that because of ATAD, we are in the need of allotting the types of income that will be considered as tainted income. So now we will be including income from financial listings, insurance, banking and other financial activities that are not carried out as an economic activity, and we’ll be also including income from the sales of goods and services that are agreed with later parties when that related party has none or very little economic value in the transaction. We will also have to include changes in relation to the exceptions to the CFC rules. Currently, what our regulation says is that if the CFC companies located in the European Union, as long as it is incorporated for sound business reasons, as long as it carries out business activity, then the CFC rules will not be applicable. We will enlarge these to include not only European companies incorporated in the European Union, but also companies included in the European Economic Area. This includes Norway, Liechtenstein and Iceland but most importantly maybe the UK in the future. And this has been modified as well to consider that the CFC rules will not apply as long as this company carries on a substantive economic activity supported with staff, employees, equipment, assets and premises. So there is a more specific requirement about the level of economic substance that the foreign company needs to have in order to avoid the application of the CFC rules.”