In the Spanish tax framework, specifically under the Corporate Income Tax (CIT), the regulations establish a set of measures to prevent economic double taxation, thereby promoting the reinvestment of profits within national and international corporate groups. Among these measures, the tax exemptions for dividends received from qualified subsidiaries and capital gains arising from the transfer of shareholdings in subsidiary companies stand out, primarily regulated under Article 21 of Law 27/2014 on Corporate Income Tax (LIS).
Internationally, the EU Parent-Subsidiary Directive and Double Taxation Treaties (DTTs) signed with other countries offer similar measures to avoid economic double taxation.
Domestic Dividend Exemption (Article 21.1 of the LIS)
Under Article 21.1 of the LIS, a 95% exemption applies to dividends received by Spanish-resident entities from domestic and foreign subsidiaries, subject to the fulfilment of the following conditions:
- Minimum shareholding: The recipient must own at least 5% of the distributing company’s share capital.
- Holding period: The company must hold the shares for at least one year. This requirement can be fulfilled after the dividend distribution.
- Minimum taxation: The entity generating the income (and distributing it as dividends or capital gains) must be subject to a minimum 10% tax rate in its country of residence. It refers to the effective taxation on the profits obtained by the entity. The company fulfils the requirement if it is a tax resident in an EU member state or in a country with which Spain has a double taxation treaty that includes an information exchange clause.
Capital Gains Exemption for Share Transfers (Article 21.3 of the LIS)
Article 21.3 extends the scope of CIT exemptions to capital gains from share transfers, provided these conditions apply:
- Minimum shareholding: The seller must hold at least 5% of the share capital of the entity it transfers.
- Holding period: The shares must be held for a minimum of one year, completed on the date of the transfer of the shares.
- Activity requirement: The entity whose shares are transferred must not be principally engaged in managing assets and rights that can be considered unrelated to an economic activity.
When the company meets these conditions, gains obtained from the transfer of shares of Spanish and foreign companies are exempt at 95%.
EU Parent-Subsidiary Directive and Dividend Withholding Exemption
The EU Parent-Subsidiary Directive (Directive 2011/96/EU), incorporated into Spanish law via Article 14.h) of the Non-Resident Income Tax Act (), aims to eliminate double taxation on dividends between EU-based parent and subsidiary companies.
According to the Parent-Subsidiary Directive, dividends distributed by a subsidiary located in another EU member state may be exempt from withholding tax in the country of residence of the distributing company, provided that the parent company has a minimum participation of 10% in the subsidiary and said subsidiary meets the corporate structure requirements outlined in the Directive’s annexe. This provision encourages the establishment of subsidiaries within the EU without additional withholding taxes, promoting the free movement of capital in the single market, in line with the exemptions provided under Spanish legislation.
Double Taxation Treaties and Exemptions on Dividends and Capital Gains
DTTs signed by Spain significantly impact the withholding taxes on dividends and capital gains. These treaties can potentially reduce or eliminate source-country taxation on income, provided substantial ownership exists in the distributing entity.
In the context of DTTs, withholding tax on dividends from a foreign subsidiary can be reduced or eliminated, depending on the treaty. For example, if a Spanish company receives dividends from a subsidiary in a country with a DTT with Spain, the withholding tax rate in that country might be lower than the local rate. It could even be zero if the company meets several participation requirements.
Additionally, many DTTs provide that capital gains from the sale of shares in foreign subsidiaries are either exempt from withholding tax or subject to a reduced rate.
Therefore, DTTs also help avoid international and economic double taxation of dividends and capital gains derived from the transfer of shares in international transactions. Spain’s extensive DTT network makes it an attractive jurisdiction for international investments with reduced tax costs.
Conclusion
The tax exemption regime under Article 21 of the LIS is a cornerstone for avoiding economic double taxation on dividends and capital gains in Spain. Complemented by the EU Parent-Subsidiary Directive and DTTs, it provides a common framework to prevent double taxation in intra-community transactions between parent companies and subsidiaries. Furthermore, the DTTs signed by Spain sometimes allow for the limitation of taxation on dividends and capital gains at source, reducing withholding taxes and promoting the flow of capital within the global market.
These provisions create a more favourable environment for companies operating internationally, encouraging the reinvestment of profits within corporate groups and fostering greater integration of the European and global markets.
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