Two of the most common problems that investment funds faced in Spain have been resolved in just under a month.
On October 19, 2019, the Official Gazette published Royal Decree 595/2019 of October 18, 2019 (the Decree) amending the Spanish tax regulations to ease the tax residence certification procedure for European pension and collective investment funds (pensions funds, UCITs and AIFs), making it easier for them to claim Spanish withholding tax exemption on interest payments and capital gains.
On November 5, 2019, the Spanish General Directorate of Taxes published a draft resolution that provides guidelines to determine whether a foreign entity is to be regarded as tax transparent for Spanish tax purposes. The draft resolution is subject to public consultation and comments on the proposals are requested by November 26, 2019.
New rules to evidence tax residence status
Until now, European pension and collective investment funds have been required to evidence their tax residence status through a certificate of residence issued by the relevant tax authorities. The effective application of the Spanish withholding tax exemption was often hampered by the difficulty of proving the tax residence status of the funds or of their participants (where the funds do not have a legal personality or are tax transparent). As a result, the relevant tax authorities often fail to grant the required certificate of tax residence that the funds would need in order to obtain the Spanish withholding tax exemption.
The new rules provide for a special regime for accrediting the tax residence status of pension and collective investment funds that are able to benefit from the withholding tax exemption:
- Pension Funds: The tax residence status can be proved through a statement made by the representative of the pension fund in a form to be published by the Ministry of Finance. For pensions funds regulated under Directive 2016/2341, a certificate issued by the regulatory or supervisory authority in its country of incorporation will also be accepted.
- UCITs: The tax residence status can be proved through a certificate issued by the regulatory or supervisory authority of the fund in its country of incorporation.
- AIFs subject to authorization, registration or supervision and managed by AIFM: The tax residence status can be proved through a certificate issued by the regulatory or supervisory authority of the fund in its country of incorporation or through a statement made by its representative in a form to be published by the Ministry of Finance.
On the other hand, both UCITs and AIFs – which are treated as tax transparent for Spanish tax purposes – will be able to prove their tax transparent status and the percentage of participation of their members that are resident of the EU and therefore benefit from the withholding tax exemption by means of a statement made by the representative in a form to be published by the Ministry of Finance.
Draft guidelines on treatment of foreign entities treated as tax transparent entities in their country of incorporation
The draft resolution should be welcomed by many foreign alternative investments funds (AIFs) as there has been a long period of uncertainty on the question of their tax classification for Spanish tax purposes. Under Spanish tax regulations, tax transparent foreign entities are defined as those that have “similar or identical legal nature” to Spanish tax transparent entities. Until now, ascertaining whether the legal nature of a particular foreign investment vehicle or fund is identical or similar to a particular Spanish entity has been a complex task, mainly due to the fact that the Spanish tax transparent entities have different legal characteristics and that the legal characteristics of the foreign entities may coincide only in part with the Spanish tax transparent entities. Moreover, the absence of clear guidelines by the tax authorities has created uncertainty around the tax treatment of these vehicles and funds.
In the new approach proposed in the draft resolution, the Spanish General Directorate of Taxes establish the following three basic characteristics that a foreign entity must have in order to be considered in Spain as tax transparent:
- the entity is not subject to income tax in the country of incorporation;
- income generated by the entity is allocated, for tax purposes, to its participants, who are liable to pay tax on such income; and
- income in the hands of the participants retains the same nature as the income of the entity.
The criteria set forth by the resolution – in line with other European regulations – mainly implies that, when a foreign entity is considered to be tax transparent in the country of incorporation, Spain will largely follow this characterization. This approach is likely to greatly simplify the factors to be considered when characterizing foreign tax-transparent entities for Spanish tax purposes.