On March 2, 2010, Act 2/2010 (the Act), dated March 1, 2010, was published in Spain´s Official Gazette, having effects retroactive to January 1, 2010. The Act makes significant amendments to the current Spanish VAT regulations, as well as to the Spanish Non-Residents’ Income Tax (NRIT) and Corporate Income Tax (CIT) Act. Please find below a brief summary of some of the most relevant features of the Act.
The Act implements the measures included in the so-called “VAT package” approved by the EU Council of Ministers on February 12, 2008, and includes, among others, the Directive 2008/8/EC, which amended Directive 2006/112/EC with respect to the definition of “place of supply of services” for VAT purposes.1
The main amendments introduced to the Spanish VAT regulations relate to the modification of the rules related to the “place of supply” of intra-EU services and how such services will be treated for VAT purposes as from January 1, 2010. Under the prior VAT regulations, the place of supply of a service was, as a general rule, deemed to be where the service provider was located. However, this general rule included several exceptions (such as professional, telecom or electronic services), in which the services performed were deemed to be located for VAT purposes in the jurisdiction where the recipient was established.
With the entry into force of the new VAT regulations, the determination of the place of supply of services will depend on whether its recipient is an entrepreneur (B2B services) or a private consumer (B2C services). In connection with B2B services, the place of supply will generally be the jurisdiction where the customer is established (or, in case the service is rendered to a permanent establishment, the jurisdiction where such establishment is located), whereas B2C services will generally be located where the service provider is located (or, in case the service is rendered by a permanent establishment, the jurisdiction where such establishment is located). In order to facilitate the classification of a recipient of services within the mentioned categories, the definition of entrepreneur for VAT purposes is expanded to include as entrepreneurs all recipients having a Spanish VAT number.
Notwithstanding the new general rules, there are some special rules that still apply for certain specific services, such as services related to real estate property, transportation services, fairs and exhibitions, such as the leasing of vehicles, restaurant and catering services, services rendered by intermediaries to non-VAT taxpayers, services related to tangible property, telecommunication services and electronic services. The determination of the place of supply of the mentioned services for VAT purposes will require a case-by-case analysis. Likewise, as an exception to the new general rules, it should be noted that the Spanish VAT Act provides for a “use or enjoyment” rule (Section 70.2 of the VAT Act) that allows Spain to attract to its territory (and tax accordingly) services that are used or enjoyed within Spanish territory, regardless of the fact that such services would be located outside of the EU territory under the rules that govern the place of supply of services.
Non-Residents’ Income Tax
The Act also provides for certain amendments to the NRIT Act, most of which are justified by the Spanish government’s intention to change certain provisions of the applicable regulations that could eventually be regarded as discriminatory under EU law principles. In this regard, the following amendments were made to the NRIT regulations:
- The scope of the tax exemption applicable to the Spanish-source income derived from the lease or sale of containers, ships or aircrafts used in international sea or air navigation is widened, and the exemption is now deemed to apply with respect to air carriers running essentially an international operation (i.e. where, taking into account the total amount of kilometres flown by all aircrafts leased by such air carrier, the kilometres flown abroad represent more than 50 percent).
- Spanish-source dividends obtained by EU-resident Pension Funds that are deemed to be similar to a Spanish regulated Pension Fund (or by permanent establishment of such Funds in another EU country) will be tax-exempt in Spain. In this regard, an EU-based Pension Fund will be deemed to be similar to a Spanish Fund when such Fund provides for certain specific features, such as: (a) the Fund must have as one of its purposes making payments to its participants in case of retirement, death, disability or dependency; (b) the contributions made by a participant’s employer to such Fund should be allocated for tax purposes to the participant on behalf of whom the contribution is made, and the future benefits derived from such contribution should be attributable to such participant as well; and (c) the Fund must provide for a deferral of taxes in connection with the contributions made by the participants and by their employers to the Fund, and provide for the effective taxation of all contributions and awards at the moment when a draw-down is made. In any event, it should be noted that such exemption will not be applied automatically; the Act also requires that the tax is withheld by the payor on such dividend income, meaning that in order for this exemption to be effective, the foreign taxpayer will be required to request a tax refund before the Spanish Tax Authorities.
- Spanish-source dividends obtained by EU-based Collective Investment Vehicles (CIV) regulated by Directive 2009/65/EU, dated July 13, 2009, will be tax-exempt. However, the new rule provides for a caveat: the applicability of this exemption should not lead to a taxation of such dividend income lower than the taxation applicable to Spanish-resident CIVs under the Spanish Corporate Income Tax rules (currently, Spanish CIVs are subject to a one percent tax rate). In practice, this should mean that the dividends obtained by EU-resident CIV will be subject to a one percent tax in Spain. In any event, it should be noted that such partial exemption will not be applied automatically; the Act also requires that the tax is withheld by the payor on such dividend income, meaning that in order for this exemption to be effective, the foreign taxpayer will be required to request a tax refund before the Spanish Tax Authorities.
- The Act provides for a new rule on the deductibility of expenses related to the generation of Spanish-source income. Under the prior regulations, as a general rule the Spanish-source income obtained by a non-resident (EU or non-EU resident) was subject to tax on its gross amount (except for certain services). With the amendment, all the expenses that could have been deductible in case the recipient were a Spanish-resident individual would be deductible for Non-Residents’ Income Tax purposes as well, provided that the taxpayer is able to prove that such expenses are directly related to the generation of Spanish-source income and that such expenses are linked to the activity carried out by such taxpayer in Spain. Likewise, the methodology for calculating capital gains will follow the criteria set forth under the tax rules applicable to Spanish-resident individuals. It should be noted that this new rule applies only when the taxpayer is resident in an EU Member State (non-EU residents will not be entitled to such deductions).2
Corporate Income Tax
The Act also makes certain amendments to the current Spanish Group regime, which, in principle, may apply in situations where a Spanish parent entity holds, directly or indirectly (although such indirect participation must be held by another Spanish entity), at least a 75 percent stake in other Spanish entities. (The required stake is reduced to 70 percent if the shares of the parent and subsidiary are listed in an organized stock market).
With the enactment of the Act, such lowered 70 percent threshold would also apply with respect to non-listed lower-tiered entities whose shares are held through an intermediate listed company (with at least 70 percent of such intermediate listed company owned by the parent entity).
It should be noted that the amendment made to the CIT Act does not address situations similar to the situation described in the ruling of the European Court of Justice in the Société Papillon case (C-418/07), which could lead to the conclusion that the Spanish CIT Act should allow that a Spanish parent company should be able to form a consolidated Group for tax purposes with a lower-tier Spanish subsidiary whose shares are held by an intermediate EU-resident holding vehicle. In this respect, the Spanish Tax Authorities do not seem to acknowledge the ECJ decision in the Papillon case either: in a recent binding ruling dated January 20, 2010, the Spanish Tax Authorities ruled that the subsidiaries held by intermediate EU holding companies should not be included in the Group formed by an upper-tier Spanish parent company.