The Spanish interest limitation rule establishes that net financial expenses are deductible for Spanish Corporate Income Tax ("CIT”) purposes with the annual limit of the higher of (i) 30% of the Tax EBITDA (as defined in the Spanish CIT Law) or (ii) EUR 1 million. Currently, dividends derived from subsidiaries in which the taxpayer holds a stake of, at least, 5% and net income obtained through permanent establishments ("PEs”) located outside Spain are included in the Tax EBITDA. However, Spain has amended its interest limitation rule to adapt it to ATAD I and, with effects as of 1 January 2024, tax exempt dividends and net income obtained through PEs will be excluded from the Tax EBITDA for the purpose of the Spanish interest limitation rule. This new rule will mainly affect Spanish holding companies and Spanish multinational groups with subsidiaries or branches outside Spain.
The Spanish Parliament has approved Law 13/2023, of 24 May (“Law 13/2023”) which amends the Spanish General Tax Law to transpose the Council Directive (EU) 2021/514 of 22 March 2021 (so-called “DAC7”) , and also modifies the Spanish interest limitation rule established in article 16 of the Spanish CIT Law to adapt it to the Council Directive (EU) 2016/1164 of 12 July 2016, on rules against tax avoidance practices (so-called “ATAD I”).
Law 13/2023 was published in the Spanish Official Gazette on 25 May 2023, and has come into force with effects as of 26 May 2023. However, the amendment of the interest limitation rule will come into force with effects as of the tax periods starting on or after 1 January 2024.
Net financial expenses (excess of financial expenses over financial income) are deductible for Spanish CIT purposes with the annual limit of the higher of (i) 30% of the EBITDA (as defined in the Spanish CIT Law, i.e., the “Tax EBITDA”) of the tax period or (ii) the amount of EUR 1 million. Interest exceeding the 30% Tax EBITDA or EUR 1 million threshold can be carried forward. In case of a tax group, the 30% Tax EBITDA and the EUR 1 million limits are considered at a "tax group" level.
The Spanish CIT Law establishes that the Tax EBITDA shall be determined on the basis of the accounting operating result (resultado de explotación) which shall be adjusted eliminating the impact of (i) amortisation of fixed assets, (ii) subsidies related to non-financial fixed assets and others, and (iii) impairments of fixed assets as well as capital gains or losses derived from the transfer of fixed assets. In addition, dividend income derived from subsidiaries in which the taxpayer holds a direct or indirect stake of, at least, 5% shall be added to the Tax EBITDA (i.e., increasing the 30% Tax EBITDA limit), except if this stake was acquired with debts whose financial expenses are non-deductible pursuant to the specific anti-abuse rule applicable to interest on intragroup debt to acquire shareholdings in intra-group transactions or to make equity contributions to other group entities, unless the taxpayer demonstrates valid business reasons.
Dividend income can be added to the Tax EBITDA even though article 21 of the Spanish CIT Law provides a 95% tax exemption on dividends derived from subsidiaries in which the taxpayer holds a stake of, at least, 5% for a minimum one-year holding period, provided that the remaining requirements to apply the Spanish participation exemption are met. The situation is similar with net income obtained through PEs located outside Spain, as in this case the PE’s EBITDA is typically registered for accounting purposes within the Spanish head office’s EBITDA, but a full exemption applies on the net income if the requirements to apply the Spanish participation exemption are fulfilled.
Final implementation of ATAD I
The ATAD I requires that Member States implement several rules to strengthen the protection against aggressive tax planning. In Spain, Law 11/2021, of 9 July, on measures to prevent and fight against tax fraud, implemented some of the ATAD I measures such as the amendment of the controlled foreign corporation and exit tax rules. However, it did not include any amendment on the 30% Tax EBITDA limit.
According to article 4.2 of ATAD I, on the interest limitation rule, tax exempt income shall be excluded from the Tax EBITDA of a taxpayer. However, article 11.6 of ATAD I allowed Member States which had national rules equally effective to the interest limitation set forth in the ATAD I, to postpone its transposition until 1 January 2024. The European Commission allowed Spain to apply this transitional rule.
As required by ATAD I, Law 13/2023 introduces the referred restriction into the Spanish CIT Law with effects as of 1 January 2024. Concretely, the Spanish CIT Law establishes that income and expenses not included in the taxpayer’s CIT taxable base shall not be taken into account for determining its Tax EBITDA. The main items impacted by this measure will be qualifying dividends from Spanish subsidiaries outside the tax group and from foreign subsidiaries, as well as net income obtained through PEs located outside Spain, that so far have been included in the EBITDA and benefitted from the 95% (or 100% in case of PEs) tax exemption provided in the Spanish participation exemption.
The restriction to the interest limitation rule introduced by Law 13/2023, in accordance with ATAD I, will mainly affect Spanish holding companies and Spanish groups with subsidiaries or branches outside Spain with high levels of debt as so far dividends and net income obtained from their subsidiaries and branches, respectively, were considered in the Tax EBITDA’s determination and entailed higher interest limitation thresholds. This could involve a higher tax leakage since tax period 2024 and an increase of carried-forward financial expenses to be deducted in the future.
Please note that the Spanish participation exemption applies to 95% of the dividend income, because the amount which benefits from the participation exemption shall be reduced by a fixed amount of 5% due to management expenses related to the shareholdings. As a 5% amount of the dividend income would be included in the CIT taxable base, it could be interpreted that such 5% could be added to the Tax EBITDA, but this needs to be clarified by the Spanish Tax Authorities.
It is also important to highlight that dividends received from subsidiaries in which the taxpayer holds a 5% stake and net income derived from PEs, but do not benefit from the Spanish participation exemption because the taxpayer fails to fulfil any other requirement (e.g., one-year holding period, the so-called “subject-to-tax test”), can be included in the Tax EBITDA.
Spanish multinational companies and holding companies need to analyse how the exclusion from their Tax EBITDA’s determination of exempt dividend income and net income derived from their PEs would impact on the deductibility of their net financial expenses as from the tax periods starting on or after 1 January 2024.