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Investing in Spain – the tax system
A corporate entity is the main vehicle for structuring an investment in Spain. Limited liability companies and joint stock companies have their own legal and tax status. Taxation and the applicable regime are determined by the existence of a tax residence in Spain.
For tax residents, either as individuals or business entities, worldwide income is taken into account whilst, for non-residents, taxation is determined by income earned, operations performed or assets owned and disposed of in Spain alone.
Business income tax rates are more favourable for new businesses in Spain than for established businesses. Three rates of VAT are applicable, depending on the product, with staple goods charged at the lowest rate. Transfer tax is also applicable to property, movable goods, and pensions, loans and deposits, each at their own rate which may be subject to regional variation.
Stamp duty is subject to a general rate which, again, may have regional variations and an increased rate may apply to some VAT chargeable operations.
Capital tax is also charged at a general rate and is mainly applicable to company liquidation or capital reduction operations. Incorporation, capital increase and other corporate restructuring operations, such as mergers and acquisitions, are not taxable.
Taxation on dividends and gains realised in Spain by a non-resident depends on whether a double taxation treaty exists between Spain and the country of residence of the transferor or shareholder. Spanish law provides exemption, at source, for income gained through the distribution of dividends and the payment of interest and royalties, if the relevant requirements are met.
A number of tax incentives and schemes exist to encourage inward investment into Spain. The expatriates tax regime permits workers who take up Spanish residency under an employment contract to choose to be taxed under the rules applicable to non-residents for a period of five years. The advantages of this option is that only Spanish source income is taxed as opposed to worldwide income, and slightly lower tax rates on ordinary and investment income.
A special tax regime exists for Spanish holding companies which is particularly attractive to foreign investors. This exempts income obtained from foreign shares, dividends and capital gains from tax, subject to conditions.
Under the ‘carry forward losses’ regime, losses registered in previous tax years can be used to compensate taxable bases of future periods with no time limit. This is confined to 60% taxable income prior to compensation, with a minimum amount of 1 million Euros and eligibility subject to conditions.
The ‘patent box’ incentive provides a reduction of 60% on net income deriving from the grant of use and transfer of intangibles, subject to eligibility.
The Corporate Income Tax Law allows an advantageous regime for listed entities whose business is the acquisition and development of real estate assets for rental purposes. The main advantage is that the entity is taxed at 0% and tax on its profits is levied at the shareholders’ level on the effective distribution of dividends, providing that a minimum yearly distribution is made.
Newly created companies can apply for a reduced tax rate of 15% for the first year in which they obtain taxable profits and the following year, subject to conditions.
Exemption from double taxation on dividends and capital gains can be granted if a parent company holds at least 5% equity in the subsidiary company for at least one year and the subsidiary company was subject to a minimum tax rate of 10%.