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Spain: Keeping an eye on the new Spanish participation exemption


Gonzalo Gallardo

Dividend income and capital gains obtained on transfers of shareholdings in other companies, whether resident in Spain or not, have been exempt from Spanish corporate income tax since January 1 2015 (whereas the previous participation exemption regime covered certain capital gains and dividends only from foreign sources). For this exemption to be applicable, the shareholding must be at least 5% (or its acquisition cost must be more than €20 million ($23 million)) and it must have been owned for an uninterrupted period of at least one year (the 'minimum participation requirement'). If the investee is an entity not resident in Spain, it is also required to have been subject abroad to a tax identical or similar to the Spanish corporate income tax, at a nominal rate of at least 10% ('the minimum taxation requirement'), this latter requirement being presumed met if it is resident in a country with which Spain has signed a tax treaty containing an information exchange clause.

These two requirements apply to the entity which distributes the dividend, or whose shares, upon transfer, give rise to the capital gain (the direct or 'first-tier' shareholding). However, when this entity, in turn, has ownership interests in other entities (indirect or 'second tier' or 'subsequent-tier' shareholdings), whether resident in Spain or not, the rule is that the two requirements must be met concurrently by these other entities.

However, the minimum participation requirement in these other entities is only taken into consideration in cases where more than 70% of the income of the first-tier entity comes, in turn, from dividends or capital gains on transfers of holdings in its investees. In these cases, the calculation is to be made based on the holding owned indirectly by the Spanish company in the capital of these other companies, which must meet the minimum 5% requirement, unless the entities form a corporate group for corporate law purposes, with the first-tier subsidiary as controlling company, and consolidated financial statements are drawn up.

The general rule is that there should be no corporate income tax exemption for the part of the dividend received or capital gain obtained upon the transfer of the shareholding derived from second or subsequent-tier investees which do not meet the two requirements, subject to the special provision mentioned above regarding the minimum shareholding in these indirectly-owned investees. Strangely enough, in the case of capital gains, the rule stipulates how the exempt part is to be calculated if any of the investees does not meet the minimum taxation requirement, but not when it is the minimum participation requirement which is not met.

These rules could give rise to the taxation in Spain of all or a part of the dividend income received or capital gain obtained on the sale of a shareholding in an entity in which the applicable requirements are apparently met. The aim is possibly to prevent the minimum requirements from being applied inappropriately by structuring an investment in a particular way. However, as the law is drafted, the structure could be decisive in the tax treatment of such income.

Gonzalo Gallardo (

Garrigues – Taxand, Madrid


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