The Spanish General Directorate of Taxes considers that if a company wants to apply the special tax regime for entities holding foreign securities, it must prove to the Tax Authorities that in outsourcing its own management and accounting services, it does not also outsource management of participations in non-resident companies in Spain.

The Spanish Corporate Income Tax Act ( “CIT Act”) authorises the Spanish special tax regime for entities holding foreign securities (“ETVE Regime”) for Spanish companies which hold foreign participations. The application of the ETVE Regime requires the corporate purpose of the entity to be the supervision and management of participations in non-resident companies in Spain, through the corresponding organisation of material and human resources. Moreover, the corporate purpose of an entity which applies the ETVE Regime does not need to be exclusively the administration of a foreign portfolio, and it can therefore carry out other types of activity.

The Spanish General Directorate of Taxes (“DGT”) has responded to a request from an entity with a sole Director whose corporate purposes includes the management and administration of non-resident companies in Spain and which seeks to apply the ETVE Regime. Furthermore, the entity wants to change the sole Director for a board composed of three members, two of whom are resident in Spain and the third a non-resident. The participations will then be transferred to a non-resident company in Spain owned by non-resident individuals and, afterwards, the application of the ETVE Regime will be reported to the Spanish Tax Authorities. Although the accounting and management of the entity is outsourced, the company claims this does not imply that the management of the participations in non-resident companies in Spain has also been outsourced.

The analysis undertaken by the DGT focuses on the validity and suitability of the organisation of material and human resources that the entity might have for the supervision and management of direct or indirect participations in non-resident companies, as stated by the CIT Act. In this respect, the DGT restates that a proper organisation of material and human resources is compulsory in order to apply the ETVE Regime. However, the DGT remarks that this organisation must entitle the company to exercise all the rights and obligations that derive from its position as shareholder in the participated companies (i.e., exercising the economic and political rights that derive from its participation in the foreign subsidiaries: attendance at the General Shareholders Meeting, voting rights, subscription for preferential shares, etc.) rather than being in charge of the management of the participated companies.

Therefore, if the faculty to manage all the shares in non-resident entities is outsourced, the requirement to have an organisation of material and human resources adequate to fulfil its corporate purpose would not be met. Nevertheless, as the entity points out, the outsourcing of its own management and accounting services does not imply that the faculty to manage the shares in non-resident entities has also been outsourced. The DGT finally ruled that, if the company wants to apply the ETVE Regime, it must prove to the Tax Authorities that the outsourcing of its own management and accounting services does not include the outsourcing of the management of the participations in non-resident companies in Spain.