By means of Law 29/1991, of l6th December 1991, Spain adapted its internal fiscal legislation to the provisions of Directive 90/435/EEC, of 23rd July 1990, on the common fiscal policy applicable to the profit distribution of the parent companies and subsidiaries in the different member States.
Recently, these provisions have been partially amended by Law 43/1995, of December 27, on the Corporate Tax Income.
The objective and scope of this article lies in the comparative analysis of community and Spanish regulations mentioned previously, in particular the specific transfer to Spanish legislation of the rules established in the Directive.
As the Directive adequately points out in its provisions, the philosophy on which its articles are based, with regard to the profits distributed by a subsidiary to its parent company, rests, basically, on:
- the State in which the parent company has its Registered Office should, either stop taxing such profits,
- or tax them, although in this case the parent company should be authorized to deduct from its tax the subsidiary's share of the tax on the said profits.
This peculiar tax policy, applicable to parent companies and subsidiaries in the different member States, reflects the principle of tax neutrality, a principle which is considered essential for the establishment and smooth running of the common market, in such a way that companies can increase their productivity and enhance their competitive position on a global scale.
Lastly, and with the aim of guaranteeing the principle of fiscal neutrality, the Directive exonerates from withholding at source, except in certain cases1 the profits which a subsidiary may distribute to its parent company.
II. SPANISH LEGISLATION
1. Applicability
As regards the tax regime applicable to the profit distribution of the parent companies and subsidiaries, Law 43/1995 regulates the taxation of, among other issues, the following:
a) the distribution of profits received by companies resident in Spain from their subsidiaries resident in foreign countries.
b) the distribution of profits carried out by companies resident in Spain to their parent companies resident in other member States of the EU.
For the fiscal policy established in point b) above to become applicable the following requisites must be complied with:
- Both companies must be subject to and not exempt from some of the taxes which are levied on the profits of the legal entities of the member States of the EEC2.
- That the distribution of the profit is not a consequence of the liquidation of the subsidiary.
- That both companies are incorporated in one of the ways envisaged in the Annex of the Directive(3).
For the purposes of Law 43/1995, parent companies are considered to be those which comply with the following requisites:
- When they possess a direct stake in the capital of another company of at least 25%.
- This stake must have been maintained for one uninterrupted year prior to the day on which the profit that is distributed becomes payable.
On the other hand, the residence criterion should be determined in accordance with the legislation of the relevant member State, without prejudice to what is established in Double Taxation Treaties.
On comparing the Spanish Law with the Community Directive, it can be seen that the faculty granted in Article 3.2. of the Directive, which consists in substituting the criterion of the stake in capital by the holding of voting rights, has not been introduced into the Spanish Law.
2. Taxation of the parent company
The general principle adopted by Spanish legislation is that, on the one hand, the Spanish parent company that receives dividends from a subsidiary resident abroad (either in an EU member or not) will include, in the taxable base of its Corporate Tax return:
a) The net profits received from its subsidiary in its capacity as shareholder.
b) The tax on the profits actually paid by the subsidiary, on the part of the profits distributed to the parent company.
c) Where appropriate, the tax withheld within the limits envisaged in the actual Directive.
The parent company will deduct from the gross Corporate Tax payable in Spain the tax concepts pointed out in paragraphs b) and c) above, up to the limit which results from applying the tax rate of the Tax to that part of the taxable base which corresponds to the profits received. The amount which exceeds said limit will not be considered tax deductible under Spanish Corporate Tax.
The parent company must have at least a 5% direct or indirect participation in the subsidiary for the purposes of applying this deduction.
A specially important aspect is that related to the depreciation and losses arising from the distribution of the profits of the subsidiary. Indeed, making use of the faculty which the Directive grants in Article 4.2, the Spanish regulation stipulates that the depreciation of the stake of the parent company arising from the distribution of profits of the subsidiary (be this through a simple bookkeeping entry or through its disposal), will not be considered a deductible expense when determining the taxable base of Corporate Tax. When such a depreciation becomes apparent, the parent company is obliged to increase the amount of its taxable base.
3. Taxation of the profits distributed by the subsidiary
The fiscal policy applicable to the profits distributed by the Spanish subsidiary to its parent company is that of exemption from the real obligation to pay tax and not subject to withholding in Spain.
4. Other matters
Lastly, reference must be made to the anti-fraud clause contained in Article 1.2 of the Directive. It establishes the compatibility of the application of the community regulation with national or conventional provisions which are necessary to avoid fraud and abuses.
To this effect, Law 43/1995 has incorporated this general clause in Article 46, excluding from its applicability the following cases:
1. When the majority of the votes of the parent company are held, directly or indirectly, by physical individuals or legal entities that are not resident in any of the EU member States. This notwithstanding, the fiscal policy described will be applicable in the event that the parent company actually carries on a business activity directly related to that carried on by the subsidiary, or aims to manage and run the subsidiary through the adequate arrangement of material and human resources, and proves that it has been incorporated for valid financial reasons and not to illegally enjoy the system provided for in the Law.
By taking this action, it is the intention of the Spanish legislator to avoid the artificial intervention of groups of companies that, although they have established their residence in different member States of the EU, their only purpose is to enjoy the above-mentioned advantageous tax policy, without their structure reflecting any real financial objectives.
2. When the parent company or the subsidiary has its residence in territories considered, for tax purposes, as tax havens(4).
(1) In this sense, the Community Directive authorizes Germany and Greece (due to the peculiarity of their corporate tax systems) and Portugal (for budget reasons) to continue receiving temporarily tax witlheld at source.
(2) In Spain, the so-called "Impuesto sobre Sociedades" (Corporate Tax).
(3) As far as Spain is concerned, these are companies which under Spanish law are called Public Limited Companies (sociedades an¢nimas), Limited Partnerships (sociedades en comandita por acciones), Private Limited Companies (sociedades de responsabilidad limitada), and the public sector companies which operate as private sector companies.
(4) RoyaL Decree 1080 of JuLy 5, 1991, stiputates that the following territories are defined as tax havens: Andorra; Netherlands Antilles; Aruba; Gibraltar; Panama; Monaco; Hong Kong; Isle of Man; Guernsey and Jersey (The Channel Islands); Caiman Islands; British Virgin Islands; Virgin Islands (U.S.A.); Liechtenstein; Liberia; The Lebanon; Singapore; Macao; San Marino; Malta; Jamaica; Cyprus; United Arab Emirates; The Bahamas; Barbados; Bermuda; Antigua and Barbuda; Fiji; Trinidad and Tobago; Jordan; The Seychelles; Mauritius; Anguilla; The Mariana lslands; The Falklands Islands; Turks and Caicos Islands; Cook Islands; Grenada; Montserrat; Saint Vincent and the Grenadines; Saint Lucia; Solomon lslands; Dominica; The Emirate of Bahrain; The Sultanate of Brunei; The Sultanate of Oman; Vanuatu; Nauru; and finally, The Grand Duchy of Luxembourg; in this last case, strictly when income is involved which is received by companies subject to the special holding companies status.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
For further information contact Mr Jorge Angell, L.C. Rodrigo Abogados, Madrid (Spain), fax: 00 341 576 6717, or enter text search "L.C. Rodrigo Abogados" and "Business Monitor".