Dividends exemption in Spain, the so-called participation exemption regime, have experienced a substancial reform in the new Corporation Tax Law. Under the participation exemption regime, dividends and capital gains obtained from the disposal of shares in qualified foreign subsidiaries are exempt in the Corporation Income Tax in Spain.
The participation exemption method was introduced in 1996 in Spain and since then it has experienced little changes. Under the participation exemption rules, dividends received either from domestic or foreign subsidiaries, or capital gains from the sale of shares in these subsidiaries, are nontaxable provided:
- The parent company owns an interest of, at least, 5% of the share capital or, otherwise, the cost of acquisition of the latter is over 20 million Euros.
- The participation in the subsidiary must have been held for at least one year before the dividend is collected or the shares sold. This period of ownership can be completed after the dividend is collected.
- With regard to dividends and capital gains coming from foreign subsidiaries a further requirement must be met. The subsidiary must be subject to a tax similar to the Spanish Corporate Income Tax with a nominal tax rate of at least 10 %, or be resident in a country with tax treaty (“DTT”) with Spain.
- The subsidary must not be located in a tax haven, that is, not included in the black list of tax havens or low tax jurisdictions for Spain
Note that no effective taxation of the subsidiary is required, because the Law refers to the nominal tax rate and specifically ignores the application of any exemptions, reliefs or allowances that the subsidiary may be entitled to apply. Moreover, according to the new regime, the subsidiary need not be engaged in any business activities, although in this case some caution is needed to avoid the application of Controlled Foreign Corporation or CFC rules.
Likewise, profits from foreign permanent establishments are exempt a long as they are subject to a tax similar to the Spanish Corporate Income Tax with a nominal tax rate of at least 10 %, or be resident in a country with ta DTT with Spain.
It is noteworthy saying that losses on the sale of qualified subsidiaries are no longer admitted for tax purposes. But the losses on experience by an investor when liquidating a subsidiary or permanent establisment will always be deductible.