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Spain: New taxation of capital gains obtained by non-residents

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Luis Manuel Viñuales

So far 2015 has been an exciting year for Spanish tax practitioners thanks to the major reforms we have seen in the area of income taxes. Although the focus has been on a brand new Corporate Income Tax Law and on the relevant changes to the Personal Income Tax Law, we should not overlook the amendments made to the Non-Resident Income Tax Law (NRIT Law) and, in particular, to the tax treatment of capital gains obtained by non-residents on the transfer of shares of Spanish companies. The domestic NRIT Law in force until December 31 2014 stated that capital gains obtained by EU residents on the transfer of shares of Spanish entities could only be taxed in Spain if a) the underlying assets were mainly real estate located in Spain or if b) the seller owned at least 25% of the company during the 12 months before the transaction. Capital gains obtained by non-EU residents on the sale of Spanish non-listed entities were always taxed in Spain unless a tax treaty provided otherwise.

Furthermore, over the past few years the Spanish Tax Administration had renegotiated a number of tax treaties to include 'substantial participation clauses' and/or 'underlying real estate assets clauses', aimed at taxing in Spain capital gains obtained by non-residents where they owned a substantial participation in a Spanish company or where the assets of the Spanish company consisted, mainly, of real estate located in Spain.

Just when the Spanish Tax Administration's trend and aim seemed clear (that is, to tax in Spain gains on substantial participations and on the sale of real estate companies), some surprising changes have arisen in the tax treatment of capital gains as of January 1 2015, which may significantly alter the landscape as follows:

  • The substantial participation clause included in the NRIT Law is now limited to private EU individuals only, without applying to EU entities. Thus, capital gains obtained by EU-resident entities that would have been taxed in Spain until December 31 2014, also based on those tax treaties which included a substantial participation clause (this was the case, for example, for French entities owning Spanish affiliates) will not be taxed any longer, based on Spanish domestic law, if sold or transferred after January 1 2015.

  • The underlying real estate assets clause, however, remains in place in the NRIT Law. But there is an issue as to whether this clause might have become discriminatory under EU law, as the gain obtained by a Spanish-resident entity on the sale of a similar Spanish real estate company might now enjoy a domestic CIT exemption. Indeed, the new CIT Law in force as of January 1 2015, provides for a domestic participation exemption regime which may apply to the gain obtained by a Spanish entity on the sale of the participation in another Spanish entity, regardless of whether the assets of the latter consist mainly of real estate located in Spain.

Actually, the new Spanish domestic participation exemption regime might change the way in which many multinational investors structure their investments in Spain, mainly those related to Spanish real estate. Looking for a suitable tax treaty jurisdiction to locate a holding company, paying due attention to substance and business reasons tests, may not be necessary any longer if those reasons exist for having a holding company in Spain. This Spanish holding company could sell the participation in other Spanish entities and distribute the proceeds to either the EU parent free of withholding tax, or to the tax treaty parent applying the reduced dividend withholding tax rates provided by the treaty, normally at lower than rates those applicable to capital gains.

This is an interesting time to review existing investment structures and to innovate going forward, during a period in which the Spanish economy has come back to life and a good number of M&A deals are announced in the Spanish financial press every day.

Luis Manuel Viñuales (luis.manuel.vinuales@garrigues.com), Madrid

Garrigues, Taxand Spain

Tel: +34 91 514 52 00

Website: www.garrigues.com

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