Global Tax Alert | 21 March 2014

Spain releases report on proposal to reform the Spanish tax system

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Executive summary

The Spanish Government has announced its intention to carry out a reform of the Spanish tax system for 2015. On 14 March 2014, the Committee of Experts (Committee) designated by the Spanish Government to analyze the Spanish tax system delivered its conclusions regarding the content of a potential tax reform (the Report).

The Report contains proposals that shift the tax burden from direct taxation to indirect taxation and that include the modification of all taxes which are now reduced by numerous exemptions, rebates and reductions. The measures proposed by the Committee also aim to reduce tax fraud. While the conclusions and recommendations are not binding for the Government, they may be an indication of areas to be amended in the upcoming reform.

This Alert covers the main direct tax proposals included in the Report. A separate Alert on indirect tax proposals will be published.

Detailed discussion

Corporate Income Tax

The Spanish Corporate Income Tax (CIT) is characterized by a high tax rate (at 30%, it is among the highest in the EU), the effect of which can be reduced by numerous tax credits and incentives which reduce the effective tax rate. The Committee's recommendation is to gradually reduce the rate to 20% (with an interim 25% rate) while eliminating most of the tax benefits. The following is a summary of other relevant proposals in this area.

  • Amendment of the general limitation to the tax deductibility of financial expenses (30% EBITDA): the minimum deductibility threshold for net financial expenses at €1 million is maintained but net financial expense above such threshold would not be deductible under the new proposed rules if in excess of a thin capitalization rule (suggested debt to equity ratio is set at 1:1 ratio).
  • An in-depth review of tax depreciation rates to simplify the system and align these to the useful life of assets and the suppression of free and accelerated tax depreciation is recommended. A reduced tax depreciation rate (no higher than 2.5%) for the amortization of goodwill and intangible assets with an indefinite useful life is also proposed.
  • The Report proposes to delay the tax deductibility of unrealized accounting losses until materialization, i.e., amortization, depreciation, disposal.
  • An additional proposal consists in the amendment of the requirements for the application of the participation exemption regime for dividends and capital gains derived from nonresident subsidiaries so that it is conditioned on meeting the following requirements: (i) minimum percentage and holding period; (ii) minimum level of taxation at the foreign subsidiary level set at a 10% (now the regime just requires that the foreign participated entity is subject to taxation under a tax identical or analogous in nature to the Spanish CIT, this requirement is deemed as met insofar as the foreign subsidiary is tax resident in a tax treaty country with an exchange of information clause). Elimination of the so-called “business activity test” as a requirement to access participation exemption benefits also is proposed.
  • The Committee suggests increasing the foreign subsidiary's minimum acquisition cost requirement for the application of the special holding regime (Entidades de Tenencia de Valores Extranjeros - ETVE) which is currently set at €6 million.
  • Substitute the domestic tax credit to avoid double taxation by an exemption subject to a minimum 5% participation requirement.
  • Suppress all tax credits (including among others the tax credit for R&D activities) except for those that seek to promote job creation for disabled employees.

Nonresidents' Income Tax

The Report does not contain many amendments to the Nonresidents' Income tax regime, other than the recommendation to amend the so-called “impatriates” regime” under which individuals who move to Spain and become Spanish tax residents may enjoy nonresident income tax treatment under certain conditions during the year in which the change of residency takes place and the following five years.

The Committee proposes to widen the scope of this special regime so that it may also benefit individuals moving to Spain to carry out economic activities, as well as directors, shareholders, pensioners etc. (the current regime only applies to individuals moving to Spain under an employment agreement). It is also proposed to suppress the €600,000 maximum income threshold and extend the maximum application period of the regime to 10 years.

Personal Income Tax (PIT)

The Committee proposes to maintain the dual system for determining the taxable base, i.e., a standard base, taxed at a progressive rate, and a savings base, taxed at a fixed rate, but suggests simplifying the PIT calculation, broadening the taxable base by eliminating exemptions and tax credits and reducing tax rates. A general summary of proposed amendments is as follows:

  • The Committee proposes to lower the PIT tax rates to align them with those applicable in other EU countries. In particular, it establishes that the current minimum rate set at 24.75% should be lowered and the maximum rate should not be above 50%. The proposal also includes a recommendation to reduce the number of brackets on the amount of income taxed at the progressive rates and to set the tax rate applicable to the savings tax base at the minimum progressive tax rate.

  • Additionally, the Committee takes the view that income derived from movable and immovable property, as well as capital gains, should be included in the savings tax base and that capital losses should be available to offset other income included in the savings base (currently capital losses may only offset capital gains).
  • The elimination of several exemptions, namely those for (i) severance payments for the termination of an employment, (ii) revenue arising on the hedging of mortgage variable interest rate risk, and (iii) dividends and profits-sharing is also recommended.
  • A broadening of the taxable base for employment income including in the same in-kind payments which are not currently taxed (such as health insurance payments made by employers) is another of the Committee's proposals.
  • The Report proposes to eliminate the attribution of deemed real estate income, which is applicable when the property is not in use, after conducting an in-depth reform of the Real Estate Tax (Impuesto sobre Bienes Inmuebles). While this review is performed, the Committee suggests that all deemed income from property not assigned to the owner's business activities, included dwellings, be included in the PIT savings taxable base (it is currently included in the standard base).
  • A recommendation to lower, from 40% to 30%, the reduction for certain types of income obtained on a non-regular basis over more than a two-year period is made. It is further proposed that the reduction should not apply where the income falls under the savings taxable base.
  • The Committee takes the view that the “self-assessment” method for the estimation of income derived from business activities should be eliminated and considers that the so-called “modules system” is a major source of tax fraud. It is also proposed to lower limits on the reporting obligations to better monitor potential tax fraud.

Wealth tax

The Committee proposes the definite suppression of the Wealth Tax.

For additional information with respect to this Alert, please contact the following:

Ernst & Young Abogados, Madrid
  • Alfonso Puyol
    +34 915 725 010
  • Laura Ezquerra
    +34 915 727 570
Ernst & Young LLP, Spanish Tax Desk, New York
  • Cristina de la Haba
    +1 212 773 8692

EYG no. CM4288