Since 2015, the availability of benefits under the EU Parent-Subsidiary Directive ("PSD") has been substantially restricted in Spain. The wording of the new Law, and the envisaged restrictive interpretation by the Spanish Tax Authorities, make it advisable to seek greater legal certainty through tax treaties.

Dividend payments made by a Spanish company to its EU parent should not be subject to withholding tax providing certain requirements are met. Notwithstanding the above, in those cases in which the ultimate parent company/owner is resident outside the Economic European Area ("EEA"), and that company directly or indirectly controls the Spanish subsidiary paying the dividend, tax on the dividend should be withheld unless the intermediate parent company is an active holding entity or it is actively engaged in a business activity related to the business activity of the Spanish entity, or when it has not been created with the purpose of taking advantage of the parent-subsidiary withholding tax exemption (hereinafter, the "safe harbour rules").

The implementation of the PSD in Spain has led to  conflicts between taxpayers and the Spanish Tax Authorities, who have adopted a restrictive approach denying in many cases the withholding tax exemption on dividend distributions made to EU parent companies, when the ultimate owner is located outside the EEA and controls the subsidiary, leading to in many court proceedings.

From the fiscal year 2015 onwards the previous safe harbour rules are amended by introducing a new escape clause, under which the dividend paid is subject to withholding tax unless the incorporation and operations of the parent company are for valid business purposes and substantive entrepreneurial reasons.

It is still uncertain how the Spanish Tax Authorities will interpret this new escape clause but it is likely that they will continue to have a restrictive view of it.

In consequence both multinational companies and/or funds are reviewing their holding structures in Spain in order to mitigate the effects of the potential withholding tax.

In this respect, it is worth noting that from fiscal 2015 onwards, a new exemption has been included in Spanish domestic law for capital gains arising from the sale of Spanish subsidiaries by their EU parent companies provided that certain requirements are met. This means that groups may want to consider to re-organize their holding structures in order to achieve the protection of Tax Treaties and avoid the restrictive interpretation of the dividend withholding tax exemption likely to be applied by the Spanish Tax Authorities