Spain’s recently published tax reform measure modifies the tax regime for companies, individuals and non-resident taxpayers.
The new regulation will come into force as of 1 January 2015, although there are certain exceptions that will be noted below.
Following are the main tax developments introduced in the new regulation.
A. CORPORATE INCOME TAX
1. Valuation of assets
In regard to valuation of assets, the new legislation introduces relevant changes.
First of all, in order to broaden the taxable base, the new provisions set forth that impaired assets (tangible, intangible, real estate and participations in subsidiaries) will not be tax deductible until they are sold to third parties or during their useful life through depreciation.
In regard to amortization rates, the depreciation tables in the tax regulations are simplified.
With regard to intangibles, the new legislation provides the tax deductibility of their amortization even in the case of acquisitions from group companies (this is not allowed under the old legislation).
2. Hybrid instruments
In response to the BEPS initiative, a special anti-abuse provision for hybrid instruments operates to prevent the deductibility of expenses incurred in transactions with related parties where, as a result of different tax characterizations: (i) income would not be subject to tax; (ii) no income would be generated; or (iii) the income would be subject to a nominal tax rate below 10 percent.
In connection with such provision, the law sets forth that the participation exemption regime will not apply to dividends received if such dividends are tax deductible for the entity making the distribution.
In addition to such anti-abuse provision, intra-group profit-sharing loans will be characterized as equity instruments for Spanish tax purposes. Consequently, expenses derived from the same will not be tax deductible for the borrower. In line with such tax treatment and under certain circumstances, interest income deriving from intra-group profit-sharing loans will qualify as a dividend which will be exempt for the lender under the participation exemption regime.
3. Interest deduction limitation
The general limit on the deductibility of net financial expenses (30 percent of EBITDA) exceeding €1 million remains unchanged. However, the 18-year period to deduct the interest expenses exceeding the above limit has been eliminated, so they will be able to be carried forward indefinitely.
Further to such limitation, in the case of leveraged acquisitions and in order to restrict debt push-down structures by means of tax consolidation or a merger, an additional limit has been introduced.
This restriction aims to limit the deductibility of interest on loans to purchase shares (acquisition debt) to 30 percent of the acquiring company's EBITDA, without including the profits of the acquired business. Additional rules are introduced so that such limit applies where the acquired and acquiring entities are merged within a four-year period or join the same tax group.
The new legislation introduces an escape clause under which that limit will not apply in the acquisition year if the acquisition is not more than 70 percent debt financed and will not apply in the following eight years, provided the acquisition debt is proportionally amortized until the acquisition debt does not exceed 30 percent of the total consideration.
4. Tax losses carry-forward
There are relevant tax changes in regard to the use of carry-forward losses.
First of all and as already applicable in other EU jurisdictions, tax losses may be carried forward indefinitely.
The prior temporary measure which limits the use of tax losses from previous years has finally been introduced as a general rule: as of 2016, tax losses from prior years can be offset against up to 60 percent only and, as from 2017, up to 70 percent only of the taxable base (with a minimum threshold of €1 million)1.
Although under Spanish tax legislation the statute of limitation period is four years, the new legislation sets forth that tax losses could be audited by the tax authorities for a period of 10 years.
Finally, the change of control restriction is amended and its scope extended. As of 2015, the use of tax losses of an acquired entity would be disallowed if:
- that entity is dormant for three months (under prior legislation, six months) or
- within two years after the change of ownership, such entity engages in a different or additional activity, making the turnover higher than 50 percent of the average of the previous two years or
- the entity is a pure holding company (sociedad patrimonial) with no human or material resources for carrying out economic activities.
5. Other relevant amendments
Other amendments introduced in the new legislation are summarized below:
- Losses arising in intragroup transfers of tangibles, intangibles, real estate and participations are not tax deductible until (i) such asset is sold to a third party or (ii) the seller or the purchaser leaves the group of companies or (iii) the asset is written down from the balance sheet.
- In regard to related party transactions, the new legislation modifies one of the related party situations: shareholders and entities would be deemed to be related parties in the case of a participation of at least 25 percent (under prior legislation, 5 percent).
- The Spanish participation exemption regime is extended to Spanish subsidiaries and is improved for foreign subsidiaries.
- Certain amendments have also been introduced in relation to the Spanish Controlled Foreign Companies (CFC) regime, including, among others, additional substance requirements to be met by the foreign subsidiary in order to avoid the imputation of the foreign low-taxed income.
- One of the most relevant amendments introduced is the change in the existing 30 percent tax rate: it will be reduced to 28 percent in 2015 and to 25 percent from 2016.
- Finally, with the aim of strengthening the capitalization of companies, the new legislation has introduced a capitalization reserve pursuant to which companies can reduce their taxable base in an amount equal to 10 percent of the retained earnings of a given year (up to 10 percent of the taxable base), provided such retained earnings are not distributed in a five-year period.
6. Tax consolidation
Although the tax consolidation regime remains nearly the same in terms of calculation of the tax base, there are several relevant changes in regard to the composition of the group.
In addition to the minimum 75 percent participation required by the subsidiaries to allow them to form part of the group, the law also requires a minimum of 50 percent of voting rights in such entities.
In line with several EU court cases, Spanish legislation has extended the scope of the tax group concept in order to allow:
- subsidiaries held indirectly through a foreign intermediary company to form part of the tax group and
- horizontal tax consolidation - Spanish direct or indirect subsidiaries of a common foreign parent company will be able to form a Spanish tax group.
Finally, permanent establishments of foreign companies will also be able to form part of a tax group, not only as the dominant entity but also as a member of the group.
7. Tax neutral regime for reorganizations
No relevant amendments have been introduced in the tax neutral regime, which is regulated by a European Union Directive. The main changes are of a technical nature and are in accordance with other changes already mentioned in this article:
- On the one hand, no merger goodwill nor assets step-up will be recognized for tax purposes, which is consistent with the participation exemption regime applicable to the transfer of Spanish subsidiaries (but not with taxation on individuals).
- On the other hand, tax losses carry-forward can be transferred together with a branch of activity to the acquiring entity (mergers, partial or total spinoffs and contributions in kind). Under prior legislation, this was only possible if the company owning the tax losses was extinguished (mergers and total spinoffs).
B. PERSONAL INCOME TAX
1. Severance payments
The exemption for severance payments is limited to an amount of €180,000.
This restriction applies to severance payments for dismissals or terminations that take place on or after 1 August 2014.
2. Irregular income
- The 40 percent reduction applicable to irregular income (e.g. income earned over a period that is longer than two years) is reduced to 30 percent, maintaining the limit of €300,000.
- In addition to the "irregular" nature of the income, the law also requires that the income is recognized only in one tax period.
- Previous specific limits applicable to income derived from the exercise of stock options are eliminated.
3. Tax rates
Tax rates have been decreased. The table below shows the expected minimum and maximum average tax rates for 2014, 2015 and 2016 onwards (note that the final tax rate will depend on the tax scale approved by the autonomous communities):
Click here to view table.
4. Inbound expatriate regime
The inbound expatriate regime is subject to the following changes:
- The application of the regime is extended to directors of entities with less than a 25 percent interest in the share capital of the company.
- The prior requirements that the work must be (i) carried out in Spain and (ii) for a company or entity resident in Spain are abolished.
- The quantitative requirement that the expected compensation does not exceed €600,000 is removed.
- Dividends, interest and capital gains from the transfer of assets will be taxed separately from other income at the rates described in section B.3.
- Other income will be taxed according to the following rates: the first €600,000 of income will be taxed at 24 percent and the excess will be taxed at 45 percent (47 percent in 2015).
5. Change of tax residence: exit tax
An exit tax is established on unrealized capital gains of shares for taxpayers that lose the status of tax resident in Spain due to a change of residence.
C. NON-RESIDENT INCOME TAX
The new regulations for non-resident income tax will be applicable as from 1 January 2015.
1. Non-Spanish resident not acting through a permanent establishment in Spain
The general tax rate is reduced from 24.75 percent to 24 percent. EU residents will benefit from a reduced tax rate of 20 percent in 2015 and 19 percent in 2016 onwards.
The tax rate for dividends interest and capital gains is also reduced from 21 percent to 20 percent in 2015 and to 19 percent in 2016 onwards.
2. Non-Spanish resident acting through a permanent establishment in Spain
In general terms, the taxable base of non-residents with permanent establishment (PE) in Spain is determined according to corporate income tax provisions and, consequently, the tax developments explained in section A apply mutatis mutandis to non-residents with PE in Spain.
Tax rates have also been reduced for taxpayers with PE in the same terms explained for corporate income tax.
3. Parent-subsidiary and royalties directives: new anti-abuse rules
The requirements for the application of both directives have been hardened to avoid abuse situations that were taking place when the majority of the participation the parent company was held by non-EU resident companies. Under the new amendment, in these cases it will be necessary to evidence the existence of valid economic purposes and solid business reasons for the incorporation of the EU parent company.
4. Exit tax
Where the PE or the assets linked to the PE are transferred to an EU country, taxpayers may request a deferral of the exit tax until the PE or the assets are transferred to third parties.
New VAT measures are applicable as from 1 January 2015.
1. Telecommunication, broadcasting and electronic services
One of the objectives of the VAT reform is the implementation of Council Directive 2008/8/EC as regards the place of supply of telecommunication, broadcasting and electronic services supplied to non-taxable persons.
As of 1 January 2015, the place of supply of these services shall be the place where the consumer is established, has his permanent address or usually resides (which means using different countries' VAT rates and rules), regardless of whether the supplier is based in or outside the European Union and of whether the customer is a business or consumer. However, where the business or consumer is outside the European Union, the service will be subject to Spanish VAT if the service is effectively used and enjoyed in Spain (use and enjoyment rule).
This change of the place of taxation is followed by a new special regime called the "Mini One Stop Shop" (MOSS). MOSS simplifies the VAT compliance requirement and reduces the "indirect cost" derived from the new rules by allowing a single registration in Spain so that the VAT due in other EU states can be accounted for in one online VAT return.
2. Refunds to traders not established in the EU
No reciprocity is required for the refund of the VAT charged on access, hotel, restaurant and transport services linked to the attendance of commercial or professional events, conferences and exhibitions that take place in Spain.