This country-specific Q&A provides an overview to tax laws and regulations that may occur in Spain.
It will cover witholding tax, transfer pricing, the OECD model, GAAR, tax disputes and an overview of the jurisdictional regulatory authorities.
This Q&A is part of the global guide to Tax. For a full list of jurisdictional Q&As visit http://www.inhouselawyer.co.uk/index.php/practice-areas/tax-second-edition/
How often is tax law amended and what are the processes for such amendments?
As a part of the economic politics of the country, Tax regulations are modified at least once a year, in order to include the changes derived from such politics. Nevertheless, the regularity of the modifications lessens when it is about changes aiming at fulfilling political programs of governing parties, whether they are in coalition or not.
Usually, when the regulation to be modified is a Law, the procedure shall be processed by Parliament, which has two chambers: the Congress and the Senate.
Regulations of a lower rank, such as Royal Decree or a Ministerial Order are directly modified by the Government or by the Ministers.
The above mentioned are the general regulations which regulate matters of State competence. Things change when we come to regulations which are competence of the Autonomous Communities. In such case, the entitled body is the Parliament of the relevant Autonomous Community which only has one chamber (it does not have a Senate) and processes its own Laws.
The Autonomous Communities are governed by an entity receiving varied names such as Autonomic Government, formed by Counsellors. Autonomic Governments are entitled to pass tax regulations within their competence scope.
Last, there is another way of modifying a tax regulation when we are speaking of a local regulation. In these cases, it is the plenary session of the relevant Town Council the one empowered to modify the local bylaws.
What are the principal procedural obligations of a taxpayer, that is, the maintenance of records over what period and how regularly must it file a return or accounts?
The maintenance period of the records varies from a tax and a corporate perspective.
From a corporate perspective, according to article 30 of Commerce Code, the books, the mail, the documentation and receipts relating to a company have to be maintained for 6 years from the last accounting entry made in them.
According to tax regulations, articles 66 to 70 of General Tax Law, the accounting books and other mandatory logbooks depending on the applicable tax regulation (PIT, VAT, CIT, Inheritance Tax, etc.), as well as the documentary supports justifying the notes made in these books (including IT supports) need to be maintained at least during the tax time limit of 4 years. In case this time limit was interrupted, a new prescription period would begin for another 4 years implying that the maintenance obligations could last for more than the 6 years required by Commerce Code.
Regarding the submission of annual tax returns, both individuals and corporations are obliged to do them once a year. In particular, individuals are obliged to submit their Personal Income Tax return by the end of June and corporations need to submit the Corporate Income Tax return by the 25th of July or the next labour day if such day was bank holiday.
For both individuals and corporations, the fiscal year coincides with the natural year, beginning on the 1st of January and ending on the 31st of December.
Who are the key regulatory authorities? How easy is it to deal with them and how long does it take to resolve standard issues?
The top authority regarding tax matters is Tax Ministry and after that, Tax Agency.
Both the public and the professionals of the sector can access the counters provided by Tax Agency in order to give the due information or to receive assistance from qualified personnel. Standard issues can be solved on the go (at an appointment on request) and there is also the possibility to consult the FQ&A available on the web page of Tax Agency.
More complex issues derived from tax audits could last 18 months according to General Tax Law and in case the audited subject disagrees with the result of the audit, he would need to litigate at Court for several years, depending on the complexity of the matter.
Are tax disputes capable of adjudication by a court, tribunal or body independent of the tax authority, and how long should a taxpayer expect such proceedings to take?
Once the due proceeding before the relevant tax authority is over, there are several ways to proceed depending on the appealed act and its amount.
First, we have Economic-Administrative Tribunals which are administrative bodies but independent from tax authority and they can be local, regional or central. The period these administrative courts take to solve an issue is usually not shorter than 2 years.
Second, we have Judicial Courts. The competence regarding tax issues belongs to the Contentious-Administrative Jurisdiction. Depending on the appealed act and its amount, we shall come to a first instance judge, or to the Superior Court of Justice, the National Audience and finally, to the top judicial body: Supreme Court. These tribunals take at least 2 years and even more than 5 years to solve tax issues, depending on the complexity of the matter.
Are there set dates for payment of tax, provisionally or in arrears, and what happens with amounts of tax in dispute with the regulatory authority?
Taxes have their date of payment and a late payment is only allowed if there is an agreement with Tax Administration with or without the relevant warranties. If we incur in late payment, it shall be made as soon as possible in order to avoid an obligation surcharge and the accrual of interests.
When there is litigation with Tax Administration, the amounts payable of taxes accrue interests until the obligation to pay is whether fulfilled or annulled. And if during the lawsuit, we have not paid the debt to Tax Administration, we are obliged to warranty it (by means of an endorsement or a mortgage).
Is taxpayer data recognised as highly confidential and adequately safeguarded against disclosure to third parties, including other parts of the Government?
According to article 95 of General Tax Law, “the data, reports or precedents obtained by Tax Administration in the performance of its functions are confidential and they shall only be used for the effective application of the relevant taxes and for imposing the due penalties, being forbidden to transfer or communicate them to third parties.”
Confidential data of tax payers might be assigned between Public Administrations both at a tax and social security levels.
Regarding the above, we shall outline that European General Regulation for Data Protection (EU Regulation 2016/679) is the legal framework ruling the use of personal data and is applicable from the 25th of May 2018. By means of this new regulation, it is intended to empower the contributors so that they have a major control over their personal data, both in social media, smart phones, online banking, etc.
Is it a signatory (or does it propose to become a signatory) to the Common Reporting Standard? And/or does it maintain (or intend to maintain) a public Register of beneficial ownership?
Spain is a signatory part of the Common Reporting Standard (CRS) from the date of the beginning of the adhesion process to the Template Agreement for the Competent Authority for the automatic exchange of information between countries developed by the OECD. Such exchange system allows tax administrations of the adhered countries to have periodical tax information about the investments of their contributors in financial institutions located abroad.
The implementation of the CRS has been made by means of Directive 2014/107/UE of the Counsel, of 9th December 2014, which modifies Directive 2011/16/UE of the Counsel, of 15th February 2011. Spain has transposed the regulation changes into its body of laws by means of the modification of the General Tax Law and Royal Decree 1021/2015, of 13th of November, which establishes the obligation of identifying the tax residence of the individuals who own or control certain financial accounts and of informing about them in the scope of mutual assistance. Such Decree develops the regulations stating the information obligations and the due diligence proceedings that banks need to fulfil in order to obtain information from their clients.
On the other side, as a novelty, by virtue of Ministerial Order of 21st of March 2018 of the Ministry of Justice, there is the obligation to identify the real owner of a corporation at the moment of submitting its annual accounting books before the Public Registry of Commerce. It implies that corporations in which the real owner of more than 25% of the equity is an individual shall make the statement. In the following years, such statement shall only be made if there are relevant changes in the shareholders of the corporation.
What are the tests for residence of the main business structures (including transparent entities)?
In order to prove where a corporate group is residing, the main thing to take into account is where the core of the activity takes place, hence, where the business centre is.
Can the policing of cross border transactions within an international group to be a target of the tax authorities’ attention and in what ways?
Within the policy of surveillance of cross border transactions, Spain signed, on the 7th of June 2017, the multilateral Agreement to implement measures related to the Tax Treaty to avoid BEPS signed by the OECD/G20. These measures affect bilateral agreements signed in order to avoid double taxation and they imply a multilateral initiative to fight against evasion and international tax fraud.
Likewise, and because cross border transactions are the weak link of Value Added Tax, Spain is studying different alternatives to palliate such a problem.
Brussels is preparing a pile of Directives with the goal of controlling the de-taxation of e-commerce and face the VAT fraud plots and plans to enforce them in the next years. This regulatory offence will not only increase the information obligations of international corporate groups but will also clarify the chaos that the taxation of cross border transactions implies nowadays, by instituting the payment of VAT at destination.
Is there a CFC or Thin Cap regime? Is there a transfer pricing regime and is it possible to obtain an advance pricing agreement?
In Spain, we do have a CFC regime, known in tax regulations as International Tax Transparency Regime and it applies both to individuals and to corporations. By means of this regime, contributors residing in Spain are obliged to impute in their tax base the positive income obtained by a non-resident entity in which they have a participation, in the following circumstances:
- Participation in the equity equal or superior to 50%.
- A tax analogous to the Spanish Personal or Corporate Income Tax has been paid but it represents less than the 75% of due taxation in Spain.
This regime shall not be applicable when the non-resident entity is resident in another country member of the European Union, except if the country in which it resides is considered to be a tax haven.
Regarding the Thin Cap regulations, they are not applicable in Spain anymore. In their place, the CIT Law establishes a limitation to the deductibility of net financial expenses, which will be deductible with the limit of the 30% of the EBITDA.
On the other hand, we need to outline that in Spanish Law there are the so-called transfer prices regulated in CIT Law, which affect operations between linked corporations, belonging to the same group, directly and indirectly.
Following the instructions of the OECD, Spanish legislation offers to contributors the possibility to reach agreements regarding transfer prices and the valuation of linked operations with Tax Administration prior to carrying out such operations and deals in order to avoid tax audits and penalties.
Is there a general anti-avoidance rule (GAAR) and, if so, how is it applied by the tax authority? Eg is the enforcement of the GAAR commonly litigated, is it raised by tax authorities in negotiations only, etc?
The GAAR is a part of the Spanish taxation system as it is included in General Tax Law. It is usually called as “conflict in the application of tax regulations” and it was modified in 2015 in order to include diverse penalties. These penalties arise when any of the following situations is evidenced:
a) The lack of payment of all or a part of the tax debt within the period set in the relevant tax regulation.
b) Obtaining an undue refund according to the relevant tax regulation.
c) The request of an undue tax refund, benefit or incentive.
d) The unfair setting or proof of positive and negative records or tax credits to be compensated or deducted from the tax base or the instalment of future returns, both of the own contributor or of a third party.
By means of this change of the regulations, tax authority is entitled to impose penalties to contributors who, without breaching directly tax regulations, carry out abusive taxation by means of corporate restructurings or other strategic corporate decisions that seek for potential tax savings and take advantage of the existing maladjustments.
The number of penalties has increased significantly and therefore there is also a higher number of litigations at Court.
Are there any plans for the implementation of the OECD BEPs recommendations and if so, which ones?
There is a plan for the implementation of the OECD BEPS recommendations. In fact, they are already implemented in Spanish regulations: BEPS 2 (Hybrids), BEPS 3 (TFI), BEPS 4 (Deductibility of interests), BEPS 6 (Anti-abuse); the rest of the BEPS recommendations till number 13 are being implemented by means of European regulations.
Furthermore, on the 7th of June 2017, 76 countries signed a Multilateral Agreement to implement measures regarding the Tax Treaty for the prevention of the OECD/G20’s BEPS. By virtue of such Agreement, many measures are being carried out in Spain to prevent BEPS.
How will BEPS impact on the government’s tax policies?
The enforcement of the Multilateral Agreement for the prevention of the OECD/G20’s BEPS modifies the bilateral agreements for the prevention of double taxation, regarding the BEPS relating to hybrids, breach of agreements and branch offices. The Agreement also strengthens the articles referring to amicable settlements, even by means of a binding and compulsory arbitration.
From the date of the signing of the Multilateral Agreement, each party State shall implement the necessary internal proceedings in order to warranty its enforcement. There are already five States which have finalized these internal proceedings and have ratified the Agreement. The Multilateral Agreement will enter into force on the 1st of July 2018.
In the case of Spain, both the signing and the reference to Spanish Parliament by Ministers Cabinet shall be confirmed because the signing was made “ad referendum”.
Does the tax system broadly follow the recognised OECD Model?
Does it have taxation of; a) business profits, b) employment income and pensions, c) VAT (or other indirect tax), d) savings income and royalties, e) income from land, f) capital gains, g) stamp and/or capital duties.
If so, what are the current rates and are they flat or graduated?
Spanish tax system thoroughly follows the OECD´s Template in order to avoid cases of international double taxation and the Government has signed multiple agreements with other countries by virtue of which, we apply reduced rates of withholding in profits, dividends, interests, royalties and resource winnings.
Furthermore, in Spanish Tax system we need to difference between direct and indirect taxation and within direct taxation, between the one affecting individuals and the one referring to corporations.
Beginning by direct taxation of individuals, the most important institution is the Personal Income Tax (known in Spanish as IRPF, Impuesto sobre la Renta de las Personas Físicas). Here, it is key to distinguish two different types of income obtained by the contributor: the general income and the savings income.
The general income is formed by the following:
- Earned income.
- Return on capital (either real estate property or movable assets).
- Economic activity income.
- Ascription of income (real-estate, royalties, etc.)
- Profits and losses deriving from events other than the sale of assets (prizes, losses…).
The savings income is formed by:
- Return on movable assets coming from participating in the shareholders equity of a corporation of any kind.
- Return on movable assets coming from transferring resources to third parties, except those coming from entities linked with the contributor, in some cases.
- Return on movable assets obtained in capitalization deals, life or disability insurance policies and coming from the deposit of funds.
- Gains and losses coming from the sale of assets.
General income pays taxes at a progressive rate going from 19% to 45%. Nevertheless, depending on the Autonomous community where the contributor resides, this rate can be reduced. Savings income pays taxes also at a progressive rate, from 19% to 23%.
On the other hand, corporations and other legal entities residing in Spain shall pay taxes by means of the Corporate Income Tax (in Spanish known as IS, Impuesto sobre Sociedades). It is also a direct tax. The general rate is 25% but, in some cases, it is possible to pay taxes at an inferior rate, like the following:
- Newly incorporated companies: these shall pay taxes at a rate of 15% on the two first years of positive tax base.
- Fiscally protected cooperative corporations: these shall pay taxes at a reduced rate of 20% except for the extra-cooperative profits, which shall tribute at the general rate of 25%.
- Non-profits entities (associations and foundations): they shall tribute at a reduced rate of 10%.
- Variable capital investment companies, finance investment funds, real estate investment companies and funds: their tax rate is 1%.
- Listed limited companies for investment in the real estate market (SOCIMI, in Spanish), which are Real Estate Investment Trusts (REIT): these shall tribute at a rate of 0%. Nevertheless, if some circumstances concur, the entity shall be bound by a special encumbrance on dividends distributed to shareholders with a share equal or higher than 5%. These dividends, at partners’ residence place, are either exempt or subject to a tax rate inferior to 10%.
Regarding indirect taxation, we need to outline the Value Added Tax (VAT) which applies based on European regulations. The applicable tax rate, from 4% to 21%, depends on the good or service to be encumbered.
On the other hand, official stamp and/or capital rights are regulated by the Transfer Tax and Stamp Duty (ITP/AJD Impuesto sobre Transmisiones Patrimoniales y Actos Jurídicos Documentados, in Spanish). By means of this tribute, several documents, both notary, corporate and administrative which have to be registered pay taxes. There is a fixed fee known as notary paper, and a variable rate from 0,5% to 2%, depending on the type of transaction and the region in which it takes place.
Is the charge to business tax levied on, broadly, the revenue profits of a business as computed according to the principles of commercial accountancy?
In Spanish tax system, gains earned by a corporation are encumbered by means of the Corporate Income Tax, always bearing in mind the accounting principles included both in Spanish accounting regulations (General Accounting Plan) and in the International financial reporting standards (NIIF in Spanish).
Are different vehicles for carrying on business, such as companies, partnerships, trusts, etc, recognised as taxable entities? What entities are transparent for tax purposes and why are they used?
In Spain we have non-legal entities existing exclusively for tax effects, such as temporary unions of companies, groupings of economic interest, consolidated groups. These have a special taxation treatment that eases to group in one entity the results obtained by all the others forming the group and serving the same end.
Likewise, we have the listed corporations of investment in the real estate market (SOCIMI), which are Real Estate Investment Trust (REIT), these shall tribute at a rate of 0%. Nevertheless, if some circumstances concur, the entity shall be bound by a special encumbrance on dividends distributed to shareholders with a share equal or higher than 5%. These dividends, at partners’ residence place, are either exempt or subject to a tax rate inferior to 10%.
On the other hand, we also have the holding entities of foreign securities (Entidades de Tenencia de Valores Extranjeros ETVE, in Spanish) also known as Spanish holdings. These are the corporations benefiting from a special taxation regime which consists of the non-taxation of the dividends or gains they obtain for holding shares in foreign companies. Therefore, they are companies with a big number of foreign investors who, by investing their funds by means of a Spanish holding, manage to develop international investments without paying taxes for the income derived from them.
Is liability to business taxation based upon a concepts of fiscal residence or registration? Is so what are the tests?
The Corporate Income Tax is based on the concept of residence. In order to be a resident in Spain, the company shall:
- Be incorporated according to Spanish Law.
- Have its registered office in Spanish territory.
- Have the headquarters (place where the company’s decisions are made) in Spanish territory.
Are there any special taxation regimes, such as enterprise zones or favourable tax regimes for financial services or co-ordination centres, etc?
There is a special regime for corporations residing in the Canary Islands (Sociedades de la Zona Especial Canaria ZEC, in Spanish). This is an area of low taxation in the framework of the Economic and Tax Regime of Canarias enforced in 2000 aiming at promoting economic and social development of the area and diversifying its productive structures. The rate at which they pay taxes is 4%.
On the other hand, there are many other companies with reduced taxation rates, already mentioned in question 13 and 15, above.
Are there any particular tax regimes applicable to intellectual property, such as patent box?
On the 5th of October 2015, the OECD published the final reports of the BEPS project (Base Erosion and Profit Shifting). In Action number 5 relating to Countering Harmful Tax Practices More Affectively, Taking into Account Transparency and Substance, it treats intellectual property/patent box.
The patent box regime was modified in Spanish regulation regarding Corporate Income Tax by means of Law 48/2015. Such Law established a reduction of tax base in the percentage resulting of multiplying by 60% the income coming from the assignment of intangible assets. Notwithstanding this, such reduction depends on how much the entity participates in the creation of the assigned intangible asset compared to the expenses/investments linked to such asset.
The application of the reduction is conditioned to the fulfilment of the following requirements:
- The assigning company has to assume at least 25% of the cost of creation of the assigned intangible asset.
- The assignee has to use such assets to an economic activity. The results of such activity shall not imply the delivery of goods or services susceptible of generating deductible expenses for the linked assigning company, if that would be the case.
- The assignee shall not reside in a tax haven, except if it is a member of the European Union and the assignee proves that operative responds to valid economic reasons and effectively carries out an economic activity.
- In case that accessory obligations are included in the same assignment contract, these shall be limited in such contract. And
- The entity has to have the necessary accounting records to determine the income and the expenses coming directly from assigning the assets.
When a company fulfils all these requirements, the income coming from intangible assets will have a bonus of 60%. They will pay taxes at a real rate of 10% instead of 25%.
Is fiscal consolidation employed or a recognition of groups of corporates for tax purposes and are there any jurisdictional limitations on what can constitute a group for tax purposes? Is a group contribution system employed or how can losses be relieved across group companies otherwise?
Tax consolidation is used precisely to obtain a unique tax result for a whole group of entities.
In the Basque Country and in Navarra there are special statutory regimes which imply some differences in the Corporate Income Tax compared to the national regime. This could generate some judicial problems regarding the application of consolidation.
Consolidation is the correct process to manage that losses obtained by the entities of the group are taken into account in the final unique result.
Are there any withholding taxes?
In Spanish tax system, there are the following withholding taxes:
- Dividends: dividends paid to a non-resident without the intervention of a branch office in Spain are subject to a withholding tax of 19%. It could be less when a Treaty for avoiding double taxation is applied or when the dividends are exempt of taxation according to European Directive matrix-filial company.
- Interests: Interests paid to a non-resident without the intervention of a branch office in Spain are subject to a withholding tax of 19%. It could be less when a Treaty for avoiding double taxation is applied. In some cases, they do not pay taxes: (i) those obtained by residents in the EU as long as they are not obtained by means of a tax haven; (ii) those derived from Public Debt; (iii)those derived from accounts of non-residents.
- Royalties: Royalties paid to a non-resident are subject to a withholding tax of 24% (in case the percipient of the royalty resides in the EU or the EEE and the country exchanges tax information with Spain, the withholding tax is of 19%.
Are there any recognised environmental taxes payable by businesses?
In Spain there are several environmental taxes. We can classify them in three types: taxes on energy, pollution and resources.
Diverse companies pay environmental taxes, the productive sectors are the ones paying a higher percentage of taxes on pollution and resources. In particular, the sectors of transport and storage, the manufacturing industry and the companies supplying electric energy, gas, water and steam are subject to environmental taxes.
Many of those taxes aim at penalising the noxious effects of certain human activities (such as the production of energy, the emission of polluting gases or transport) but they can also be used to stimulate sustainable behaviours. In this case, we talk about bonuses or discounts regarding the circulation tax for hybrid cars or efficient housing.
Environmental taxation in Spain will be submitted to a deep review and study. The Plan Aire 2017-2019 states so, and it proposes to create a group of work who elaborates a proposal for the modification of environmental taxation and a protocol for the episodes of high pollution. The idea is to unify the different protocols existing now for episodes of high pollution NO2.
Is dividend income received from resident and/or non-resident companies exempt from tax? If not how is it taxed?
Dividends paid to a resident in Spain are subject to a withholding tax of 19% bearing in mind the following:
- If the shareholder receiving it is an individual, the withholding is made whatever is the percentage he holds in the equity.
- If the shareholder is a company with a stake inferior to 5%, the withholding shall be made.
- If the shareholder is a company with a stake equal or superior to 5% and during the whole year prior to the date in which the dividend is minimum required or its value is over 20 million euros, no withholding shall be made.
The withholding tax represents a payment on account of the tax that shall be payable for being the recipient of the dividend, either as an individual or as a company.
Dividends paid to a non-resident without the intervention of a branch office in Spain are subject to a withholding tax of 19%. It could be less when a Treaty for avoiding double taxation is applied or when the dividends are exempt of taxation according to European Directive matrix-filial company.
From the perspective of an international group seeking to re-locate activities from the UK in anticipation of Brexit, what are the advantages and disadvantages offered by the jurisdiction?
Regarding the re-location of activities, the disadvantages of settling in Spain would be more or less the same than if establishing in another EU member. However, regarding advantages of establishing them in Spain, it is important to take into account the following:
a) In Spain, there is a minor cost for the establishment and incorporation of companies.
b) Minor labour costs than in other countries with a similar income per capita.
c) Better life conditions in Spain than in any other country of the EU (sun, beaches, good weather, good gastronomy, lower prices, etc…)
d) Important subsidies in less advantaged areas.
e) In case of obtaining benefits, a rate of 15% in the CIT for the first two years.
f) First level public sanitary assistance, railway infrastructures and roads.
g) Fluid diplomatic relationships with the countries of Latin America and Africa.