A SPANISH FIRM AS A HOLDING COMPANY

by Dr. Federico Frühbeck


1. Taxing a Spanish company’s income from foreign permanent establishments and subsidiary companies.


A. Subsidiary companies.

a) Dividends.

The dividends paid and profits distributed by non-resident entities to a Spanish resident company are exempt from Spanish corporate taxation (Impuesto sobre Sociedades), if the following requisites are met (Art. 21.1 Spanish Corporate Tax Act):

a) The direct or indirect interest of the Spanish company in the non-resident entity shall be of at least 5% and have been held for an uninterrupted period of at least one year.

b) The affiliated non-resident entity must be subject to a foreign tax similar to the Spanish corporate tax during the financial year in which the profits were optained and should not reside in a tax heaven (tax heavens have been definded in Spain by means of a closed list).

c) The distributed profits must have been obtained in the course of business activities outside of Spain.

b) Capital gains.

The income obtained from the alienation by the Spanish holding company of its interest in the subsidiary companies will also be tax exempt if the above-mentioned requisites are met.

B. Permanent establishments.

Income obtained by a Spanish resident company from a permanent establishment situated abroad is exempt from the Spanish corporate tax, provided that the following requisites are met (Art. 22 C.T.A.):

a) Income of the permanent establishment must have been obtained in the course of business activities outside of Spain.

b) The permanent establishment must be subject to a foreign tax similar to the Spanish corporate tax and should not be situated in a tax heaven.




2. Profit distribution by the Spanish company.

Distribution of profits to a Spanish resident company’s non-resident shareholders is subject to withholding tax (Impuesto sobre la Renta de no Residentes) at a general rate of 25% or at such lower rate as set out in the applicable tax treaties. The withholding tax rate varies between 5% and 15%, depending on the applicable tax treaty and the percentage of interest of the shareholder in the capital of the Spanish company.

If the foreign shareholder of the Spanish company is an EU company, having an interest of 25% or more, the EU directive will apply and therefore no withholding tax will be levied when distributing profits are made by the Spanish company.


3. Tax effective depreciation of the good-will paid upon acquisition of an interest in non-resident companies.

A Spanish company acquiring a non resident company and meeting the requisites set out under section 1 above, will be entitled to depreciate the good-will paid upon acquisition of such shares according to the following (Art. 12.5 C.T.A.):

• The amount of good-will will equal the difference between the consideration paid for acquiring the shares less the amount of equity in the subsidiary company corresponding to such interest less the amount of latent reserves in the subsidiary company corresponding to such interest.
  
  
• Such amount may be deducted from the taxable base in the corporate tax in the Spanish company during a period of 20 years at a rate of 5% per financial year.
  

Such a right to deduct the good-will amount paid upon acquiring foreign shares from the taxable base ot the Spanish corporate tax is only interesting if the Spanish holding company obtains otherwise taxable income which can be compensated by the good-will depreciation. This will not be the case if the Spanish company acts exclusively as a holding company and therefore only obtains tax-exempt profits from foreign subsidiary companies and permanent establishments.


4. Entidad de Tenencia de Valores Extranjeros.

An “ Entidad de Tenencia de Valores Extranjeros “ (ETVE) is a Spanish company whose objects comprise the holding of shares in non-resident companies and fulfilt the requisites set out under articles 116 to 119 of the Coporate Tax Law.


As any other Spanish company, an ETVE will be entitled to apply the tax exemptions described under section 1 above. In such case, the minimum interest of 5% will not be compulsory, if the acquisition value of the shares is higher than 6 million Euro.


The advantage of an ETVE with respect to a normal company is that the distribution of its profits in favour of its foreign shareholders will not be subject to withholding tax in Spain, except when the shareholder resides in a tax heaven (defined by means of a list).

In order to become an ETVE, the company must notify the Tax Office and communiacte its decision to become an ETVE. Once notifiacion has been made, the company becomes an ETVE auomatically, without needing the Tax Office to reolve any issue. In such notification, the company must communicate to the Tax Office the name and domicile of all its shareholders. The shares must be registered shares, and each transfer thereof must also be communicated to the Spanish Tax Office.


5. Conclusions.

Use of a Spanish firm as a holding company has the advantage of exempting from taxation all profits and capital gains arising abroad, provided the above-mentioned requisites are fulfilled. Furthermore, it permits tax-efficient depreciation of goodwill paid upon acquiring shares in foreign companies, which is a unique case in Europe.

Such advantages apply to all Spanish companies, so that the Spanish company does not need to be an ETVE. The Spanish company’s distribution of profits to its shareholders shall in most cases be subject to no withholding tax or to withholding tax at a low rate, since Spain is an EU-member and has entered into tax treaties with most important countries in the world.

If a foreign shareholder of the Spanish company is not be entitled to application of the EU-directive or a tax treaty, then it could be advisable for the Spanish company to gain ETVE status. Such status would free the shareholder from withholding tax on profit distributions, except for those shareholders who reside in a tax heaven. Anyway, the Spanish tax heaven list does not comprise all low taxation jurisdictions (for example, Madeira and Uruguay), so that even a connection with a tax heaven is possible.

Therefore, if a company resident in Uruguay holds a Spanish ETVE ( and both are zero-tax jurisdictions for foreign income) no withholding tax will be paid in Spain upon ETVE distribution of its profits.

Dr. Frühbeck Abogados y Economistas y Cia S.C. Dr. Federico Frühbeck Marqués del Riscal, 11, 5º E - 28010 Madrid Spain Telephone: +34 91 700 4350 Fax: +34 91 310 2882 eMail: madrid@fruhbeck.com Internet: www.fruhbeck.com