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segun legislación española

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THE SPANISH TAX  HAVENS’ “BLACK LIST”

A TREASURY OF ANTI AVOIDANCE RULES

 

by Gabriel Pretus

I. INTRODUCTION

Prior to the mid eighties the Spanish economy albeit well on its way to a modern market in the formal sense, was to a great extent a semi-closed one, with relatively low levels of foreign trade and investment. Entry into the EEC in 1986 meant an abrupt change, in few years levels of intracommunity trade skyrocketted and cross borders transactions became common place for many Spanish companies. This change posed new challenges to the Spanish Revenue, which hitherto had not been geared to dealing with foreign based tax planning or tax avoidance structures. Spanish tax rules had many loopholes as regard the taxation of Spanish source foreign income, an aspect which in some cases had barely been considered. The main issues then identified as threats to the Spanish income and corporate tax bases were:

1) Offshore entities being used to invoice grossly inflated or non existence service fees to Spanish companies, thus reducing their taxable profits.

2) Offshore entities being used to obtain capital gains free of tax on both movable and immovable assets, in many cases by the simple expedient of selling and failing to declare.

3) Spanish companies investing in offshore subsidiaries and taking charges as a result of alleged losses suffered by them.

4) Spanish nationals moving residence to offshore locations (mainly Gibraltar and Andorra) to escape  wealth tax and Death duties as well as to reduce taxation on savings and income.

5) Spanish entities and individuals investing in offshore passive subsidiaries or investment funds, thus accumulating untaxed income.

6) Generally the use of offshore companies to avoid disclosure of beneficial ownership of assets.

This matters were further exacerbated by the relaxation of Foreign Exchange Controls, which started in 1986 and gathered speed from 1990 onwards and made it much easier both for foreigners to invest in Spain and for Spaniards to invest abroad. This problems were further compounded by the fears about Spanish untaxed funds being stashed away in offshore financial centres and re-invested in Spain through foreign companies, thus perpetuating the existence of a huge “unofficial” economy.

The Spanish government took its first measures in July 1991 when a Royal Decree (RD 1080/91) was published containing a list of 48 countries and territories (ANNEX I) which from then on were classed as being “tax havens”. The idea was to use this clasification to discriminate against investments made through such territories as well as commercial transactions involving entities or individuals resident in them, thus discouraging their use. This started taking shape with Law 18/1991 which approved a new Income Tax Law replacing the one dating back to 1978 and has moved forward (or backwards, depending on your view) remorselessly since then, through several important milestones, the main ones being:

• Law 29/1991 implements EU Parent-Subsidiary Directive and Merger Directives which introduces several anti abuse clauses.
• Law 42/1994 introduced CFC legislation.
• Law 43/1995 Introduced disallowance of expenses rules, taxation of deemed tax haven investment fund gains, reforms foreign owned property tax.
• Law 40/1998 introduces anti expatriation rules and further fine tunes existing rules.
• Law 41/1998 Sets out the taxation regime of non resident income in Spain.

As a result Spain now has a well developed  and coherent set of rules designed and being effectively used to counter real or perceived base erosion threats posed by the use of offshore entities for cross border transactions. These rules  may become serious pitfalls for the unwary foreign investor or trader, the aim of this article is to summarize those rules and explain how they operate.

In order to give a coherent view of the subject I have classed Spanish anti tax-haven rules in 5 categories:

A)  Disallowance of Expenses

B)  Transfer Pricing Rules

C)  Exceptions to favourable non-resident taxation rules

D)  Deemed incomes rules

E)  Expatriation anti-avoidance rules

II. DISALLOWANCE OF EXPENSES

Under art. 12 of the Spanish Corporate Tax Law companies are allowed to take a deductible charge to cover the reduced value of any shares held in foreign companies, as long as it reflects a year on year fall in their net book value. This deduction cannot be claimed for shares held in companies resident in Tax Havens, unless such companies consolidate their accounts with their Spanish parent.

The same article also allows Spanish companies to take a charge due to the lower value of any quoted bonds and debentures held by the company. Again such a charge shall not be tax deductible when the relevant bonds and debentures are quoted in a tax haven.

A)Note that a share or bond issue may be quoted simultaneously in several stock Exchanges but just being quoted in a Tax Haven one shall be enough to disqualify the charge as tax deductible.

Under article 17 of The Spanish Corporate Tax Law any business services provided “directly or indirectly” by companies resident in a Tax Haven shall not be tax deductible in Spain nor shall a Spanish Company be allowed to deduct any payments for services made “through” any person a entity resident in a Tax Haven. This rules shall not apply when the Spanish company provides proof about such transactions having really taken place.

A) This rule would apply to services provided by non tax haven principals through tax haven nominees but not to payments made to non tax haven entities but paid into tax haven bank accounts.

B) This rule only applies to services transactions but not to those relating to goods. In this context commissions payments on the sale or purchase of goods are considered as payment for services.

All the above rules apply as well to Spanish individual businessmen or professionals.

 

III. TRANSFER PRICING RULES

In any transaction involving a Spanish company and a person or entity resident in a tax haven article 17 of the Spanish Corporate Tax Law entitles the tax authorities to raise upward or downward their declared prices by applying market ones, provided the transaction has resulted in a lower Spanish tax liability overall.

A) Under this rule any transaction with a tax haven is treated as if having been made with a related party and arm-length rules apply notwithstanding whether such links exist or not. This means, for example, that any loan made by a Tax Haven entity or individual to a Spanish company is subject to the thin capitalisation rules (a 3:1 debt/equity ratio applies), whereas in the case of other foreign lender such rules only operate when it is related to the borrower in the manner provided for in art. 16. of the Spanish Corporate Tax Law.

The Transfer Pricing procedure, which generally conforms to OECD rules, is detailed in Royal Decree 537/1997.

IV.   EXCEPTIONS TO FAVOURABLE RULES ON THE TAXATION OF NON RESIDENT INCOME

Law 41/1998 lays down comprehensive rules on the taxation of an Spanish income received by non residents. Generally speaking there are 2 types of rules, those pertaining to foreign Permanent Establishments, whose profit is determined and taxed under rules very similar to those applying to resident enterprises, and the rules on income not obtained through a PE. In this second area Spanish Law has long recognized a number of exemptions in favour of EU residents and Treaty Partners, but such Treatment is systematically denied to persons or companies residents in black listed Tax Havens:

A) Under article 13 b) interest collected and any capital gains made on the sale of movable assets by EU residents is exempt from Spanish Tax.

1) The capital gain exemption does not apply when made in connection with shareholdings over 25% or indirect property holdings.

B) Under article 13 d)  interest and other income arising from the holding and transfer of Spanish Public Debt issues are exempt from tax when received by non residents (whether EU or not).

C) Under article g) which implements Directive 435/90/CEE (Parent-Subsidiary) dividend payments on substantial holding made to EU companies are exempt, provided certain conditions are met.

D)Under art. 13 h) of Law 41/1998 capital gains on the transfer of quoted securities are exempt when  obtained  by residents of Treaty Partners (except Switzerland as its Treaty does not include a exchange of information clause). Such exception is obviously unavailable to Tax Haven entities.

All the above exemptions are expressly denied to Tax Haven entities or person inespective of whether they are subject to tax or not. Thus a Gibraltar holding company shall never be exempt from tax on its Spanish dividends or capital gains.

In 1991 Spain imposed a new annual tax on the catastral value of any Spanish property (unless managed as a business asset) owned by non resident entities. Previously it was possible for any foreign entity to obtain an exemption by disclosing beneficial ownership. From 1st January 1996 onwards only entities resident in Treaty partners whose Treaties with Spain include a exchange of information clause (all bar Switzerland) can be exempted provided the beneficial owner is also entitled to such a Treaty. Thus any Tax Haven entities are subject to the special tax in all cases, save for technical exemptions (quoted companies, charities, public bodies and business assets). This regime is now set out in article 32 a) Law 41/1998.

Also in 1991 Spain implemented the EU 434/90 Merger Directive and provided for a number of business reorganisation procedures such as mergers, improper mergers (where the absorbing company is the sole shareholder), demergers and spin-offs to take place in a tax neutral way, with any capital gains on transferred assets being exempt from tax. These regulations, now included in articles 97 to 110 of The Corporate Tax Law, specifically state that the mere intervention in such transactions of an individual or entity resident in a Tax Haven, in any capacity (shareholder, merged or absorbing company etc.) shall automatically excude such transaction from the exemption regime and any capital gain shall be taxed.

The Spanish Holding Company regime (Entidades de Tenencia de Valores Extranjeros o ETVE’s) allows such entities to collect exempt foreign dividends and capital gains provided a number of conditions are met. Distributions from such companies to their shareholders are exempt from tax in Spain, except if they are resident in a Tax Haven, in which case a 25% witholding tax shall apply.

V.  DEEMED INCOME RULES

They are aimed at Spanish residents delaying or avoiding tax altogether by earning income in  nil or low taxation territories. The main rules are the Controlled Foreign Corporations Regime applicable both to Spanish individuals and Spanish  resident Companies and the rules on the deemed income of collective investment funds or similar entities established in Tax Havens.

A)  CFC legislation (art. 121 Corporate Tax Law and art. 76 Income Tax Law 41/1998).

This regime follows the lines of similar ones in other European countries but include some specialities regarding tax havens:

1)  One of the necessary conditions for and the CFC rules to apply is that the foreign subsidiary’s effective tax rate in its country of incorporation must be under 75% of the Spanish effective rate on the same income.

The law presumes that this condition is fulfilled if the CFC company is resident in a black listed Tax Haven unless proof to the contrary is provided by the tax payer.

2)  Another prerequisite for the application of CFC regime is that the foreign subsidiary’s income must derive from “passive sources” (dividends, interest, capital gains, rentals etc.).

The law presumes that all income accrued by a Tax Haven company derives  from passive sources, unless proof to the contrary is provided by the tax payer.

3)  Under CFC rules a charge can only arise if the foreign subsidiary makes profit, which is then attributed to the Spanish resident shareholder.

The law presumes that any subsidiary resident in a Tax Haven makes a profit equal to 15% of the foreign shareholding’s purchase price, unless proof to the contrary is provided by the tax payer.

B)  Foreign Collective Investment Schemes (art. 76 Income Tax Law and art. 74 Corporate Tax Law).

All the profits made by collective investment schemes incorporated in a Tax Haven (irrespective of their nature or whether they have separate legal entity) are attributed to the Spanish unit holder at the end of each year. The sum to be included is the positive difference between the participation’s purchase price and their book value on 31st December.

It is presumed that such schemes make a yearly profit of 15% on their purchase price, unless proof to the contrary is provided by the unit holder.

 

VI.   EXPATRIATION ANTI-AVOIDANCE RULES

The new Income Tax Law (Law 40/1998) has introduced a number of measures aimed at discouraging Spanish residents from claiming residence in Tax Havens in order to reduce their worldwide liability to Spanish taxation:

1) Any Spanish national which take up residence in a Tax Haven shall continue to be treated as Spanish resident for tax purposes during the year of migration and 4 more years. This means he or she shall still have to provide full details about his or her worldwide income and assets and suffer tax on them.

2) The Spanish Tax authorities shall not be bound by any claim of residence in a Tax Haven unless the tax payer, if so required, is able to provide proof of his spending more than 183 days there in a given tax year.

Obviously this condition is very difficult to meet as few if any authorities are in a position to provide a proof of physical presence and even the tax payer would be hard pressed to do so unless he lives in a country which exercises tight passport controls.

 

VII.  CONCLUSIONS

Spain has now in place  a comprehensive set of rules which effectively discourage either foreign investors or spanish residents from making use of Tax Havens at least in a direct way. Tax Havens may still have a part to play for foreign investors who either are willing to accept higher witholding rates or use them as part or more complex structures. That notwithstanding it should be noted that the said rules only apply to listed Tax Havens so that in many cases offshore entities can still be used to channel Spanish investments as a number of low or no tax territories are not included in the black list. In any case it is obvious that the age of the “cheap and cheerful” solutions has come to an end.

ANNEX I

 

SPANISH TAX HAVENS

BLACK LIST

 

Andorra	Netherlands Antilles
Aruba	Bahrein
Brunei	Cyprus
United Arab Emirates	Gibraltar
Hong-Kong	Anguilla
Antigua and Barbuda	Bahamas
Barbados	Bermuda
Cayman	Cook Islands
Dominica	Granada
Fiji	Guernsey and Jersey (Channel Islands)
Singapur
Jamaica	Malta
Fallkland Islands	Isle of Man
Marianas	Mauritius
Montserrat	Nauru
Salomon Island	Saint Vincent and the Granadines
Saint Lucia	Trinidad and Tobago
Turks and Caicos	Vanautu
British Virgins Islands	US Virgins Islands
Seychelles	Lebanon
Jordan	Lietchtenstein
Liberia	Monaco
Macao	Panama
Oman	Luxembourg
San Marino

 

 

   

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