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.
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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 nearly 70 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".
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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).
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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%.
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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 19%
(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.
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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.
i) 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.
ii) 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%.
iii) 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.
iv) 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.
v) 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.
vi) Capital Taxes: Denmark
has no taxes on the issue of shares whereas Spain has
a 1% tax.
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