Global Tax Alert | 7 August 2014

Spain releases second draft bill amending Spanish tax system

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Executive summary

On 23 June 2014, draft bills modifying the most important Spanish tax laws were released.1 On 1 August 2014, the Spanish Government released the second draft bill, which will now be discussed and voted on by the Spanish Parliament. It is intended that this new legislation comes into force in 2015.

This Alert summarizes the most relevant measures included in the Corporate Income Tax (CIT) and Nonresidents' Income Tax (NRIT) second draft bills. More detailed Alerts on specific topics will follow as the approval process moves forward.

Detailed discussion

Corporate Income Tax

The draft bill gradually reduces the CIT rate from 30% to 25% in 2016 (with an interim 28% rate applicable in 2015) while eliminating most of the tax deductions and other benefits.

The following is a summary of other relevant proposals in this area:

  • Broadening of the CIT taxable base by limiting the deductibility of certain expenses, such as the impairment of assets.
  • The general limitation to the tax deductibility of net financial expenses (30% operating profit) with the minimum deductibility threshold of €1 million is maintained.
  • An additional limitation is proposed for leveraged acquisitions, consisting in limiting the deductibility on interest on loans to purchase shares (acquisition debt) to 30% of the operating profit of the acquiring entity; rules are included so that such limit applies where the acquired and acquiring entities are merged within a four year period or join the same tax group. Under the draft bill's transitory provisions, this limitation could be interpreted so as to affect transactions implemented after 20 June 2014. The second draft bill now includes an escape clause under which the limitation would not apply in the year of the acquisition, if the acquisition debt does not exceed 70% of the consideration for the shares. In the followings years, the limitation does not apply if at least 5% of the acquisition debt is amortized annually until the acquisition debt does not exceed 30% of the total consideration.
  • Intra-group profit sharing loans are characterized as equity instruments for Spanish tax purposes. Consequently expenses derived from the same would not be deductible for the borrower for CIT purposes. The second draft bill introduces an amendment pursuant to which, under certain circumstances, interest income deriving from intra-group profit sharing loans qualifies as dividend that is exempt for CIT purposes for the lender.
  • In response to the European Commission's request to end the discriminatory taxation of investments in nonresident companies (Case 2010/4111), a participation exemption regime is introduced for dividends and capital gains derived from Spanish subsidiaries, substituting the current domestic tax credit to avoid double taxation.
  • The requirements for the application of the participation exemption regime are modified so that this will be conditioned to: (i) a minimum ownership percentage (5%) or cost of acquisition of €20 million (the first draft bill referred to a 50 million acquisition cost) and a one-year minimum holding period in the subsidiary; (ii) for foreign subsidiaries only, a minimum level of (nominal) taxation of 10% under a foreign corporate tax system similar to the Spanish CIT. This second draft bill incorporates an amendment so that this minimum level of taxation is deemed to be met if the subsidiary is resident in a tax treaty country.

The draft bill also eliminates the so-called “business activity test” (commonly referred to as the “85/15 rule”) as a requirement to access participation exemption benefits. The proposed rules also introduce a new system for the calculation of exempt dividend and gains derived from multi-tiered structures, where some of the entities within the chain of ownership are not compliant with the participation exemption requirements. These rules affect also ETVE (Spanish international holding) structures.

  • These same proposed changes have also been introduced in the rules governing the foreign branch exemption rules.
  • The amendments introduced in the draft bill regarding the Spanish transfer pricing rules include changes in the definition of related party perimeter (new 25% participation threshold), suppression of the order established for the use of the valuation methods and simplification of the documentation requirements for companies with a net turnover lower than €45 million and penalty regime. A relevant improvement is the possibility of APAs proposed to have retroactive effects within the statute of limitation period.
  • The reinvestment credit and the profit investment credit are both suppressed and substituted by a capitalization reserve pursuant to which companies can reduce their taxable base in an amount equal to 10% of the increase of their net equity on a given year, provided they book a non-disposable reserve for the same amount.
  • The draft bill proposes to amend the rules applicable to the utilization of Net Operating Losses (NOLs), eliminating the current 18-year limitation and establishing a yearly quantitative limit of 60% of the positive taxable base (prior to the application of the capitalization reserve taxable reduction) for tax years starting on or after 1 January 2016 (the current limitations continue to apply in 2015). However a minimum €1 million threshold is set (i.e., NOLs up to €1 million may be used with no limits).

In addition the draft bill reinforces the change in control rules for entities with carry forward tax losses introducing new circumstances resulting in the loss of NOL carry-forwards. In particular under the new rule proposed included in the draft bills, the use of tax losses will be restricted when the entity being transferred engages in a different or additional activity within the two years after the change of ownership, provided that the net turnover of such years is higher than 50% of the average net turnover of the prior two years. The second draft bill clarifies the concept of different or additional activity for the purposes of the mentioned restriction.

  • In line with the decision issued on 12 June 2014 by the Court of Justice of the European Union whereby it concluded that the Dutch tax consolidation regime is not compatible with the EU freedom of establishment because it does not allow the so-called “horizontal tax consolidation,” the Spanish Government proposes to modify the Spanish tax consolidation rules, which are very similar to the Dutch provisions, to include those fact patterns where two Spanish companies have a direct or indirect, common nonresident shareholder, as long as the latter is not resident in a tax haven for Spanish tax purposes.
  • The draft bill also introduces certain amendments in the area of anti-abuse rules in line with OECD-BEPS project. In particular, amendments are included in relation to the tax treatment of hybrid instruments and the Spanish Controlled Foreign Companies (CFC) rules, including, for instance, additional substance requirements in the foreign CFC in order to avoid imputation of foreign low-taxed income.

Nonresidents' Income Tax

The following is a summary of the most relevant amendments to this tax included in the draft bill:

  • The temporarily increased domestic tax rates applicable to income obtained by non-Spanish tax residents acting in Spain without a permanent establishment (in the absence of applicable reduced tax treaty rates or other tax benefits) are reduced back to the original rates. In addition, the 24% general tax rate will be progressively lowered to 19% for income obtained by European Union (EU) or European Economic Area (EEA) tax residents:





General tax rate




Tax rate applicable to EU and EEA residents




Dividends, interest and capital gains general rate




  • In line with the CIT proposed amendments, the tax rate applicable to permanent establishments in Spain is reduced from 30% to 28% in FY 2015 and to 25% from FY 2016 onwards.
  • The Spanish NRIT rules provide for a 0% withholding tax on dividend and royalty payments made to EU resident recipients, where certain requirements are met. These provisions include anti-abuse clauses that seek to avoid the application of the exemptions in those cases where the ultimate shareholder of the EU recipient is not an EU resident entity and the EU intermediate company is utilized primarily to benefit from the exemption.

The interpretation of the anti-abuse rule applicable to intra-EU dividend payments has generated considerable conflict. With the proposed legislation, the Spanish Government's stated purpose is to clarify the requirements which must be met for the exemption on dividend and royalty payments to apply where the EU recipient is majority-controlled by a non-EU shareholder. This second draft bill modifies the wording previously proposed so that pure holding activities may now qualify for the exemption if it can be evidenced that the incorporation and operation of the EU entity responds to sound economic purposes and significant business reasons.

  • As a result of a proposed change in the Personal Income Tax Law, share premium distributions made to non-Spanish resident shareholders may be treated as dividend distributions, in lieu of a return of basis, and therefore be subject to withholding tax under the general rules.
  • Minority (less than 5%) non-Spanish residents' shareholders in listed SOCIMIs (Spanish REITs) will be exempt from Spanish capital gains on the gain derived from the transfer of the shares in the SOCIMI.

Potential effect on Spanish taxpayers and on international investment structures into Spain

These proposed base-broadening, deduction-limiting rules, and the inclusion of widened anti-abuse provisions will, if the rules are approved as currently proposed, affect current investment structures, both inbound and outbound. Inbound, for instance, in relation to the limitation to the deductibility of financial expenses in leveraged acquisitions, dividend withholding tax on dividends for non-EU investors using EU holding companies and on share premium distributions, or in respect of taxation upon exit, since now the proposed rules allow for an exemption on gains also within Spain.

Outbound structures, including ETVE structures, may need to be reviewed in order to assess compliance with the new conditions for the application of the international participation exemption rules, especially on multi-layer corporate structures. Among other parameters, substance, level of taxation and a new system of tracing of “bad income and gains” may be needed.

All of these items will of course need to be closely monitored as the legislative proposals evolve within the parliamentary discussions, but special attention should be paid to action that may be advisable to take before the new rules enter into force.


1. See EY Global Tax Alert, Spain releases draft bill of Spanish tax system reform, dated 25 June 2014.

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

Ernst & Young Abogados, Madrid
  • Laura Ezquerra
    +34 91 572 7570
Ernst & Young LLP (United Kingdom), London
  • José Antonio Bustos
    +44 20 7951 2488
Ernst & Young LLP, Spanish Tax Desk, New York
  • Cristina de la Haba
    +1 212 773 8692

EYG no. CM4645