Spanish participation exemption confirmed as full rather than partial for CFC regime

International Tax Review is part of Legal Benchmarking Limited, 1-2 Paris Garden, London, SE1 8ND

Copyright © Legal Benchmarking Limited and its affiliated companies 2025

Accessibility | Terms of Use | Privacy Policy | Modern Slavery Statement

Spanish participation exemption confirmed as full rather than partial for CFC regime

Sponsored by

sponsored-firms-garrigues.png
Full moon in Spain

Nicolás Cremades and Inés Mora-Figueroa of Garrigues detail the impact of the Spanish participation exemption regime’s modification on the controlled foreign company regime, and how a Directorate General of Taxes ruling has enhanced clarity

Controlled foreign company (CFC) regimes are traditionally anti-abuse rules aimed at avoiding the deferral of taxation of income – normally of a ‘passive’ nature – in controlled foreign entities resident in territories with nil or low taxation. Accordingly, in any CFC regime, at least the following requirements should be met with respect to the corresponding foreign subsidiary:

  • Control over such company; and

  • Lower taxation of such company compared with that which would apply if it were resident for tax purposes in the territory in which its parent entity is resident.

In relation to the second requirement, Article 100.1(b) of the Spanish Corporate Income Tax Law (the CIT Law) requires a comparison between the effective taxation borne by the foreign subsidiary and the taxation that would have been borne by the same company had it been resident in Spain. If that comparison shows that the taxation of the non-resident subsidiary is 75% lower than the taxation that would be applicable in Spain in relation to the income in question, and the rest of the requirements are met, the corresponding income must be reported under the Spanish CFC regime.

For tax periods commencing on or after January 1 2021, the exemption regime provided for in Article 21 of the CIT Law was amended in the sense that the amount of dividends and positive income obtained on a transfer of shares to which the exemption of Article 21 applies should be reduced by 5% as management expenses. In practice, this income is generally taxed in Spain at 1.25% (a tax rate of 25% applied to 95% of the income).

The introduction of this legislative amendment opened up two interpretations as to the nature of the exemption in Article 21 of the CIT Law:

  • It was a rule that limited the amount of the exemption quantitatively (to 95%) (i.e., we were dealing with a ‘partial exemption’); or

  • It was a rule that restricted the deduction of certain expenses, estimated on a notional basis at 5% of income, but without affecting its full exemption status.

The aforementioned technical discussion on the nature of the exemption could have an impact on the application of the Spanish CFC regime by a Spanish parent company participating in foreign entities through an intermediate holding entity.

Spanish Directorate General of Taxes issues highly significant binding resolution

The Spanish Directorate General of Taxes (DGT) has finally shed some light on this debate and issued a binding resolution, V2138-24, of October 3, on the matter, stating that the exemption provided for in Article 21 of the CIT Law is a full exemption that must be applied to the income corresponding to the dividends received or capital gain obtained (income that is determined by deducting the corresponding management expenses).

In accordance with this interpretation, the DGT concludes that, in the case in question (a Spanish holding company holding 96% of a Chilean holding company that receives dividends from its operating subsidiaries, which are 100% exempt in Chile), it will not be understood that the dividends obtained by the Chilean holding company have been taxed at less than 75% of the taxation that would have corresponded in Spain, since in both countries such income has a full exemption. Therefore, the DGT concludes that there is no obligation to declare those dividends under the Spanish CFC regime.

Implication of the ruling

The recent DGT ruling provides clarity and legal certainty on an issue that had generated a high level of technical discussions since the introduction of the rule limiting the deduction of portfolio management expenses in the participation exemption regime under Article 21 of the CIT Law.

more across site & shared bottom lb ros

More from across our site

The choice facing governments is not whether to adopt AI in taxation, but how to do so in a way that upholds the principles of tax fairness, writes Neil Kelley
As ITR’s client data reveals discontent with German tax advisers’ cost management, Grant Thornton’s local TP head insists it’s a two-way street
Uncertainty isn’t always a bad thing, but it’s easy to see how the Trump administration’s IRS commissioner merry-go-round may serve to undermine business confidence
The EU defended its ‘sovereign right’ to impose the tax in the face of US tariff threats; in other news, the US deputy Treasury secretary resigned after just five months
Ascoria’s chief revenue officer shares her career wisdom garnered from the disparate worlds of tax technology, electric cables, radio DJing and more
Businesses no longer have a choice when it comes to tax technology transformation. Pavlo Boyko of TMF Group says the question is simply: sink or swim?
The firm is hunting for a senior TP manager in its quest to build a full-service practice in Indonesia, A&M Tax’s Jakarta head Jaap Zwaan tells ITR
With a new government in place, the evolving tax landscape presents both opportunities and challenges for taxpayers
Major economies have expressed concerns, with China arguing a US global minimum tax exemption would be a violation of the principle of fair competition – ITR understands
Senator Richard Colbeck told ITR he was concerned by the decision to let PwC Australia tender for government contracts again after a scandal-induced ban
Gift this article