Would a private equity fund vehicle formed in your jurisdiction be subject to taxation there with respect to its income or gains? Would the fund be required to withhold taxes with respect to distributions to investors? Please describe what conditions, if any, apply to a private equity fund to qualify for applicable tax exemptions.
Spanish ECRs are non-transparent entities and, therefore, are subject to Spanish corporate income tax (CIT).
In general terms, pursuant to the CIT general tax regimen (article 21 of the CIT Act), entities subject to CIT will benefit from a full exemption on dividends and gains obtained from their participation in resident and non-resident companies (except tax haven companies), when the following requirements are met:
- that the participation is held for at least a year and represents at least 5 per cent of the investee company (or its acquisition value is over €20 million); and
- in the case of stakes in non-resident investee companies, that said companies be subject to a CIT that applies at least a 10 per cent tax rate (presumed to be the case if resident in a country that has a double tax treaty with Spain with an information exchange clause).
If the investee company receives dividends or gains from participating companies that represent more than 70 per cent of its income, in order to benefit from this exemption for the income received attributable to said indirectly participating company, the indirect participation in said entity must also comply with the above-mentioned requirements, in particular, if said dividend or gain was not subject to taxation in the directly participating company or came from a tax haven jurisdiction.
Notwithstanding the above, pursuant to article 50 of the CIT Act, ECRs do enjoy an even more privileged tax regime on dividends and gains derived from ‘typical’ or ‘qualified investments’ (as set out by Law No. 22/2014 regulating ECRs), and also with respect to distributions made to Spanish corporate investors and non-resident investors (except tax haven investors).
The main features of the special CIT regime applicable to ECRs can be summarised as follows.
ECR special tax regime under Spanish corporate income tax
Dividends and gains obtained by an ECR from ‘typical investments’ in accordance with Law No. 22/2014 regulating ECRs (generally, investments in non-listed companies - other than public to private transactions - either Spanish or non-Spanish that do not qualify as financial or real estate entities) will be subject to the ECR special tax regime pursuant to Chapter IV of Title VII of the Spanish CIT Act, which states the following:
- gains that do not qualify for the article 21 CIT Act full exemption that are obtained by the ECR from the transfer of securities representing a participation in the share capital of the investee company (considered as an ECR typical investment) will benefit from a 99 per cent CIT exemption at the level of the ECR, provided that the investment holding period is longer than one year and does not exceed 15 years (subject to the approval of the Spanish Tax Authorities, this term may be extended to up to 20 years in certain cases), except in the event that said participation does not meet the criteria set out in article 21 of the CIT Act and the following is true:
- the acquirer is resident in a tax haven jurisdiction or the gain is obtained through a tax haven;
- the acquirer is to be considered related to the ECR pursuant to the CIT Act (unless it is another ECR); or
- the participation was acquired by the ECR to a related person or entity pursuant to the CIT Act; and
- dividends obtained from said Spanish resident or non-resident investee companies (except if obtained through a tax haven) will benefit at the recipient ECR level from the full tax exemption contained in article 21.1 of the CIT Act, regardless of the investment holding period and the percentage stake held in the company paying out the dividend.
When the investments executed by the ECR are not considered as ECR typical investments, the gains and dividends obtained from them will be taxed at the level of the ECR in accordance with the general tax regime established in the CIT Act. Therefore, although the ECR will not benefit regarding these investments from the above-mentioned ECR privileged tax regime, the ECR may be able to benefit from the general tax credits and exemptions applicable pursuant to the CIT Act (eg, article 21 of the CIT Act). Likewise, interest, royalties and any other income that does not qualify as dividends, distribution of profits or gains from ECR typical investments will be subject to the CIT general regime at the ECR level.Local taxation of non-resident investors
Would non-resident investors in a private equity fund be subject to taxation or return-filing requirements in your jurisdiction?
Income obtained by non-resident entities or individuals without a permanent establishment in Spain, deriving from their participation in the ECR (ie, dividends, distribution of benefits or capital gains from the reimbursement or transfer of their stake in the ECR, but excluding interests or other types of income) will not be considered to have been obtained in Spain for Spanish tax purposes and, consequently, will not be subject to taxation in Spain (articles 50.3 and 50.4 of the CIT Act). Notwithstanding the above, if the income or gains received by the non-resident investor are attributable to income obtained by the ECR through a tax haven jurisdiction, this special tax regime may not be applicable and the relevant domestic and international tax treaties shall apply. Likewise, if the non-resident receives income from the ECR through a tax haven jurisdiction or when the acquirer is a tax haven resident, this special tax treatment shall not apply (article 50.5 of the CIT Act). Pursuant to the above, non-resident investors may have to provide the ECR with a tax residence certificate to ascertain their proper non-resident status.Local tax authority ruling
Is it necessary or desirable to obtain a ruling from local tax authorities with respect to the tax treatment of a private equity fund vehicle formed in your jurisdiction? Are there any special tax rules relating to investors that are residents of your jurisdiction?
The ECRs’ special tax regime is expressly regulated by the Spanish tax law and applies to all ECRs duly registered in the Spanish CNMV; therefore, its application is not subject to a tax ruling. However, an investor may request from the Spanish tax authorities the issuance of a ruling to confirm or clarify any doubt or question regarding the application of the Spanish ECRs’ regime or any other Spanish tax laws or regulations.
Tax treatment of companies resident in Spain, investing in ECRs
Spanish resident companies subject to CIT investing in ECRs will benefit from the ECR special tax regime (articles 50.3 and 50.4 of the CIT Act) as follows:
- for gains obtained from the transfer or redemption of ECRs’ shares or units - the Spanish CIT investor will benefit from the tax exemption contained in article 21.3 of the CIT Act regardless of the holding period and the percentage stake held in the ECR (article 50.4 of the CIT Act); and
- for dividends and benefits distribution, the Spanish CIT investor will benefit from the tax exemption contained in article 21.1 of the CIT Act, regardless of the holding period and the percentage stake held in the ECR (article 50.3 of the CIT Act).
Notwithstanding the above, if the income or gains received by the Spanish resident company are attributable to income obtained by the ECR through a tax haven jurisdiction, this special tax regime may not be applicable and the CIT general regime may apply.
Tax treatment of individuals resident in Spain, investing in ECRs
No particular tax regime applies with respect to individuals resident in Spain investing in ECRs, who will be subject to the general Spanish personal income tax regime.Organisational taxes
Must any significant organisational taxes be paid with respect to private equity funds organised in your jurisdiction?
At present, there is no capital duty applicable on the establishment or capital increase of ECRs or any other Spanish company. However, capital duty may be due in the case of a share capital reduction or winding-up of a private equity company that results in distributions to its investors (generally, 1 per cent over the amount obtained by investors).
Notwithstanding the above, the use of adequate tax planning may help to reduce said capital duty. Finally, the registration of the ECRs in the CNMV registries is currently subject to registration fees.Special tax considerations
Please describe briefly what special tax considerations, if any, apply with respect to a private equity fund’s sponsor.
Regarding an ECR management company, management fees obtained by it from the management service provided to an ECR are exempt from VAT. Therefore, generally, VAT borne by an ECR management company will not be deductible (or may be partially deductible only), depending on the VAT pro rata applicable to the ECR management company, taking into account the services provided to other parties subject to VAT.
If, apart from the ECR management company, there are other sponsors or third parties that provide administration or advisory services to the ECR, such services may be subject to VAT depending on the nature of the services provided, which may result in tax inefficiencies.
Apart from the above and regarding CIT, the ECR management company is subject to the general CIT regime and therefore its annual benefits are taxed under Spanish CIT regular tax rates (25 per cent being the standard tax rate).
With regard to carried interest, depending on the circumstances, it may be structured either as a success fee payable to the ECR management company (and by the latter to its employees), or as a return from the investment made by the management company or sponsors or promoters, in the ECR.
Should the carried interest be structured as a return from an investment made by the founding sponsors or promoters of the ECR, if properly structured and with a very strong economic and legal justification (among others, the subscription as founder partners of a relevant contribution to the ECR), the returns received by the founding sponsors from their participation in the ECR may benefit from the capital gains or dividends tax treatment described above; however, please note that even in such cases, following recent rulings such consideration may still be contested by the Spanish Tax Authorities.
If carried interest was paid as a salary compensation to an employee of the SCR or of the ECR’s management company, it may be treated, depending on the circumstances, either as a regular salary income (paying around 43-48 per cent under personal income tax rules, depending on the region where the Spanish manager is tax-resident) or, up to an annual maximum of €300,000, as an irregular salary income that may benefit from a 30 per cent reduction on the basic tax.Tax treaties
Please list any relevant tax treaties to which your jurisdiction is a party and how such treaties apply to the fund vehicle.
Spain has a wide tax treaty network with third countries. In particular, Spain currently has double tax treaties in force with the following countries: Albania, Algeria, Andorra, Argentina, Armenia, Australia, Austria, Barbados, Belgium, Bolivia, Bosnia and Herzegovina, Brazil, Bulgaria, Canada, Chile, China, Colombia, Costa Rica, Croatia, Cuba, Cyprus, the Czech Republic, Denmark, the Dominican Republic, Ecuador, Egypt, El Salvador, Estonia, Finland, states of the former USSR (except Russia), France, Georgia, Germany, Greece, Hungary, Iceland, India, Indonesia, Iran, Ireland, Israel, Italy, Jamaica, Japan, Kazakhstan, Korea, Kuwait, Latvia, Lithuania, Luxembourg, Macedonia, Malaysia, Malta, Mexico, Moldova, Morocco, New Zealand, the Netherlands, Nigeria, Norway, Oman, Pakistan, Panama, Philippines, Poland, Portugal, Romania, Russia, Saudi Arabia, Senegal, Serbia, Singapore, Slovakia, Slovenia, South Africa, Sweden, Switzerland, Thailand, Trinidad and Tobago, Tunisia, Turkey, the United Arab Emirates, the United Kingdom, the United States, Uruguay, Uzbekistan, Venezuela and Vietnam.
This extensive tax treaty network provides the ECR with a significant advantage when structuring investments in foreign companies in a tax-efficient manner.
As described above, income obtained by non-resident investors (other than tax haven investors) from an ECR (ie, dividends, distribution of benefits or gains, but excluding interests or other types of income) is, generally, considered not to have been obtained in Spain for tax purposes and, consequently, not subject to taxation in Spain, whether or not there is a tax treaty in force with Spain.Other significant tax issues
Are there any other significant tax issues relating to private equity funds organised in your jurisdiction?
The Spanish special tax regime applicable to ECRs contains a number of anti-abuse rules applicable to transactions made by ECRs with related entities, and to transfers to tax-haven residents, which may result in the non-application of the ECRs’ special tax regime to certain transactions. Said rules must be considered when planning a deal with related parties or involving tax haven residents, parties or accounts.
Finally, ECRs may also be entitled, if they meet the corresponding requirements, to other tax regimes, deductions, exemptions and incentives generally applicable to Spanish CIT payers - or even to Spanish individual investors.
In summary, all of the above makes the ECR regime a very competitive one for setting up private equity funds, to raise money and to invest in Spain and abroad (as the ECRs privileged tax regime applies with respect to both Spanish and non-Spanish investments), and it is also very favourable for Spanish corporate investors and foreign investors in ECRs.