Interest on related party debt disallowed for tax purposes


Interest on related – party debt would be disallowed for tax purposes when the funds borrowed are used to finance investments in other group companies (contributions to capital) or to internal acquisitions (i.e. acquire shares of a group company from other group company). This anti-fraud measure aims to tackle the recent abuses of multinational groups using leveraged Spanish Holding Companies to channelize investments in nonresident subsidiaries; Under Spanish the participation exemption system, dividends from qualifying foreign subs are tax exempt, but (until the legal change) interest used to finance the equity of such subs was tax deductible, even if it was related – party debt.  The combination of these rules led to an erosion of the Spanish taxable base, which has been corrected now.