By Joan Riera – Lawyer – AVQ
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In Spain, there is a special tax regime, granted by the Corporate Income Tax Law1, applicable to entities whose activity is the management and administration of its participation of non-resident entities in Spanish territory, that is, holding entities. It is known as the regime of entities holding foreign securities (ETVE), whose fiscal appeal we will develop below.
Firstly, it is worth mentioning that in Spain, corporate investors holding more than 5% of the equity of a Searchfund (SF), whether resident in Spain or not, and with a minimum uninterrupted ownership period of one year, benefit from a 95% tax exemption, previously 100%, on the distribution of dividends or transfer of shares. An additional requirement is that such income does not originate from entities based in tax havens.
For practical purposes, this implies that if a dividend of 1 million euros is distributed or a capital gain of 1 million euros is realized, this amount would only be subject to an effective tax rate of 1.25%, whereas another dividend or capital gain would have incurred a 25% taxation rate.
With this scenario, we can ask ourselves what the difference is between structuring investments in SF through a regular legal entity or through an ETVE. The answer to this question is very clear: It becomes relevant if it involves a non-resident individual or legal entity partner.
This is due to, under usual conditions, a non-resident entity or individual outside of EU receiving a dividend or business capital gain is subject to withholding tax, determined on the Double Taxation Avoidance Agreement (DTAA), which can range from 5%, 10%, or 19%. In contrast, by meeting certain requirements, the dividend distributed by the ETVE will not be subject to taxation in Spain. Let’s elucidate this with a concrete example:
Investor from an “A” Country, with few DTAA signed, who wants to invest in SF worldwide. Three options may arise in the case of success:
1. The ETVE receives dividends and capital gains from a SF located in other countries with more than 5% ownership and one year of holding.
In this case, the ETVE will be subject to a 1.25% tax on the income received, benefiting from the DTAA signed by Spain. When distributing the net profit, it will not incur withholding tax; it will only be subject to taxation if the rules of Country “A” dictate so.
In conclusion: Only 1.25% tax applies, no withholding tax, and the benefits of the DTAA signed by Spain are applied.
2. The ETVE receives dividends and capital gains from SF located in Spain with more than 5% ownership and one year of holding.
In this case, it will be subject to a 1.25% tax and will not incur withholding tax.
In conclusion: Only 1.25% tax applies, no withholding tax.
3. The ETVE receives dividends and capital gains from SF located anywhere but with less than 5% ownership.
In this case, the taxation will be 25%, and the distribution of dividends will incur withholding tax. The only benefit would be to apply the DTAA signed by Spain.
In conclusion: All DTAAs signed by Spain can be applied.
In summary, this is a very interesting special tax regime for non-resident investors who will hold more than 5% of the SF, whether it is located in Spain or elsewhere.
1 Law 27/2014, of November 27, on Corporate Tax (LIS).
