Parent subsidary directive when a GmbH & Co KG is involved

Posted on Posted in Publications, Tax

In a recent tax ruling, the Spanish tax office has analyzed the exemption of dividends paid by a Spanish subsidiary to her German parent entity which is a GmbH & Co KG (a pass-through entitiy). The relevant facts are the following:

A Dutch BV, is tax resident in the Netherlands, where it is subject to Dutch corporation tax. It is part of a multinational group of sales and distribution of certain products. The group has an operating subsidiary  in Spain (Spain-Co). Spain-co is 100% owned by a German entity in the form of GmbH & Co KG (hereinafter SG) whose 100% limited partner is the Dutch BV. SG’s unlimited partner is a German Limited Liability Company, a GmbH.

The characteristics of the GmbH & Co KG, according to the German Law are as follows: a) their capital is not divided into shares; B) has its own legal personality, with the capacity to sign contracts or appear before German courts; C) may own rights and obligations and carry out activity on its own behalf; D) has two types of partners: limited and unlimited. The latter partner has unlimited liability for the debts and obligations contracted by the entity, while the limited partner limits its liability to the amount of his investment. Only the unlimited partner is authorized to represent the entity; E) It is a fiscal transparent entity.

From a tax perspective, the Dutch BV would be taxable in Germany, as a non-resident entity with permanent establishment in Germany since SG is an operating entity that has been developing the Group’s own activity in Germany.

The question raised to the Spanish Tax Office were (i) if the GmbH & Co KG should be viewed as a commercial company or as a partnership and (ii) if the distribution of the dividend from the Spanish subsidiary to GmbH & Co KG would be exempt under the EU Parent Subsidiary directive.

Although the Spanish Tax Office did not mention it, in Spain we have a type of entities which have almost identical legal features than the GmbH & Co KG, the “Sociedad comanditaria por acciones”. However, unlike in Germany, our Sociedad comanditaria por acciones is fully taxable under the Spanish Corporation Tax. That is, they are not pass-through entities.

Surprisingly enough, the Tax Office takes the view that a German GmbH & Co KG should be viewed from the Spanish tax perspective like a partnership, rather than like a commercial company. This criterion has deep tax implications; for instance, the GmbH & Co KG could not claim the benefits of the Tax Treaty signed between Spain and Germany, or the Parent-Subsidiary Directive…The Tax Office criterion is therefore based on the tax treatment of the German entity, rather than in its legal features.

However, the Tax Office understands that the dividends paid by the Spanish Subsidiary to the GmbH & Co KG would be exempt in Spain from any Withholding Tax since this entity, in this particular case, is a Permanent Establishment of a UE company, the Dutch BV, that will qualify as a parent company under the Parent Subsidiary Directive.