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Spain: New tax rules to consider in the context of inbound investments


Francisco Lavandera

As is widely known, Spain recently implemented a major tax reform, mainly focused on corporate income tax. But domestic situations are not the only ones affected by the new set of provisions. Certain rules with international tax implications have also experienced substantial changes which are likely to have an effect on the way inbound investments are structured.

Participation exemption

The most remarkable change is the extension of the existing participation exemption rules – hitherto confined exclusively to shareholdings in foreign entities – to domestic subsidiaries. Although Spanish-source dividends already enjoyed full exemption under certain conditions, the new framework allows for the tax-free treatment of capital gains arising from share disposals in a purely domestic context.

This new regime means that, from now on, Spanish holding companies will not only provide for a beneficial tax treatment where foreign subsidiaries are involved, but also (subject to certain conditions) where Spanish participations are held.

EU holding companies

One of the principles inspiring the tax reform has been to align domestic tax provisions with EU law. This is the idea behind another significant change, consisting of the extension of the participation exemption to EU holding companies that invest in Spanish subsidiaries.

Under the former rules, foreign holding companies realising gains on transfers of a Spanish subsidiary were taxed unless the transferor was an EU-resident entity that did not have a substantial participation (the threshold was 25%) or a tax treaty (lacking a substantial participation clause) could be invoked.

In practice, non-Spanish holding companies owning a substantial stake (25% or more) in the Spanish subsidiary could only qualify for a tax-free capital gain if treaty relief was available. EU parents that were resident in countries such as France, Belgium or Portugal suffered Spanish taxation, as their respective tax treaties contain substantial participation clauses. The outcome was the same for Danish parents, since there is currently no tax treaty in force between Denmark and Spain.

The new rule covers these situations, granting an exemption to EU-resident parent companies that fulfill the applicable requirements.

Interestingly, the placement of EU and Spanish holding companies on the same footing has not been extended to gains connected to real estate subsidiaries. Whereas these gains may qualify for the exemption in a domestic scenario, no such benefit is foreseen when the transferor is an EU-resident, despite the apparent discrimination transpiring from this provision.

Parent-Subsidiary Directive

Finally, the new law reformulates the anti-abuse clause contained in the legislation implementing the EU Parent-Subsidiary Directive, which comes into play where the ultimate control of the EU parent lies in the hands of non-EU residents.

The new clause is simpler and solely refers to the existence of valid business reasons and substance behind the EU parent's existence and operation.

It remains to be seen how this provision will be interpreted by our tax administration and courts, especially in light of the uniform anti-abuse clause recently incorporated in the Directive and the level playing field it intends to create.

Future investment structures

Given the importance of these rules, careful consideration should be given to all of them before structuring investments in Spanish entities.

Francisco Lavandera (

Garrigues – Taxand, Barcelona


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