The participation exemption amendments in Spain

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. Of course, some amendments were introduced in the first years mostly to prevent the use (or abuse) of naïf loopholes existing in the original wording. To qualify for the participation exemption regime the following requirements must be met:

  1. A participation of, at least, 5 % on the share capital or equity of the foreign subsidiary
  2. A subject to tax test, whereby the subsidiary must be subject to a Corporation Tax similar to the Spanish one.  This condition is deemed to be automatically fulfilled if the subsidiary is resident in a country with whom Spain has signed a Treaty to prevent Double Taxation .
  3. At least 85 % of foreign sub profits must come from the performance of an active business activity outside the Spanish territory.

In the expected tax overhaul to be introduced in 2015, the participation exemption system would remain basically unchanged. However, the second condition above (i.e. , the subject to tax clause) is going to be modified in line with the prevailing trends in international tax practice. In this respect, the idea is to require a minimum taxation threshold at the subsidiary level, regardless the country of residence. The group of experts designing the tax overhaul proposes a minimum tax of 10 % at the subsidiary level, in line with other EU countries.

An important issue to be clarified is how the minimum tax test is to be implemented. No clue is given in the experts report on this topic, but I expect that the 10 % minimum tax would be referring to the effective tax rate, which basically means that the taxable base would be determined according to the Spanish tax rules which can greatly differ from the ones of the place where the subsidiary is located. In other words, the fact that the nominal tax rate of the country of residence of the subsidiary is higher than the 10 % (or whatever tax rate is finally required), would not imply that the foreign sub fulfills the subject to tax test.