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The spanish tax system


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This presentation explains the basics of the Spanish Tax system in force in 2014.

Published in: Law
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The spanish tax system

  1. 1. The Spanish Tax system AITC September 6, 2014 Emilio Alvarez Tax Partner
  2. 2. General overview • Direct taxes: – Personal Income Tax (“PIT”) – Non Residents Income Tax – Corporation Income Tax (“CIT”) – Inheritance and Gifts Tax – Net Wealth Tax and Property Tax • Indirect Taxes – VAT – Transfer Tax
  3. 3. Personal Income Tax • The Spanish Personal Income Tax taxes all earnings of: – Individuals – Resident in Spain – Nonresident individuals are taxed under the Nonresidents Income Tax. • A tax payer is resident in Spain if: – 183 days rule – The center of his vital interest is located in Spain. • During one single fiscal year a tax payer cannot be resident and nonresident at the same time. – Tax planning oportunities
  4. 4. PIT Overview • The sources of earnings are classified in two categories: • General taxable base (“GTB”): – Employment income – Self-employment income (similar to CIT) • Unearned income: – Savings and other investment income, such interest, dividends and capital gains. – Short term capital gains and rental income are included in the GTB • Both baskets are completely isolated: no compensations allowed between both
  5. 5. PIT tax rates • Tax rates applicable to the GTB : From To Tax rate - 17.707,20 24,75% 17.707,20 33.007,20 30,00% 33.007,20 53.407,20 40,00% 53.407,20 120.000,20 47,00% 120.000,20 175.000,20 49,00% 175.000,20 300.000,20 51,00% Tax rates applicable to unearned income: From To Tax rate 0 6000 21 % 6.000 24,000 24 % 24,000 onwards 27 %
  6. 6. Employment income • Wages, salaries and perks received as compensation under a labor contract regardless they are paid in cash or as non-cash payments. • All replacement earnings payments are taxable as employment related income, such as sick pay, maternity and paternity pays and the like • Deferred salaries , i.e, earnings arising from a former job which are cashed upon reaching the pensionable age, such as Social Security retirement pensions, state pensions, widow’s pensions and benefits from pension funds schemes and some life insurance contracts. • Miscellaneus: Such as Director’s fees, maintenance payments received from an ex-spouse and jobseeker’s allowance
  7. 7. Deductions and allowances • Employee Social security contribution • Contribution to Pension Funds: The tax relief for contributions to registered pension funds schemes is limited to: – EUR 10.000 ( 12,500) or 30 % (50 %) of the tax payer’s earnings (salaries and self-employed income), the lower. • Maintenance payments to spouses under Court decision • Some payments in kind are not taxable: Health insurance, Employers payments to educational centers and mileage and fuel relief: 0, 19 EUR per Km • Personal and child allowance: 5,600 € + 2,000 per child
  8. 8. Deductions and allowances (2) • Foreign tax relief: exemption for – Employees working fully or partially abroad – Working for nonresident companies – The salaries are taxed in the country of source. This requirement is deemed to be fulfilled if a DTT exists. – Limit of EUR 60.000 – The excess on EUR 60.000 would be taxable, but could enjoy the foreign tax credit relief • Long term compensation schemes relief: 40 % exemption on: – performance driven bonuses paid to high management. – layoff or severance payments in case of unfair dismissal.
  9. 9. Foreign tax relief in action Item Amouns in EUR Comments Spanish income 60,000 Foreign income ( Tax = 30 % ) 90,000 Tax paid: 27,000 Spanish taxable base 90,000 Exempt 60,000 Tax ( 50 %) 45,000 Foreign tax credit 9,000 30 % on 30,000 Spanish Tax liability 36,000 Total tax paid 63,000 Efective tax rate 42 %
  10. 10. “Phanton” income on property • The notional income is a % of the cadastral value (2 %) – Example: if the cadastral value of the property is EUR 100.000 notional income would be: 100,000 * 2 % = EUR 2,000 • On this amount no deduction for any expense is allowed. The notional income is not taxable for the following properties: – Rented properties – Properties used in a business venture – Rural land – Plots of land not covered by any construction – The permanent home of the tax payer • This tax is also payable by non resident tax payers
  11. 11. The “Beckam Law” • Expatriates coming to Spain can opt to be taxed: – On just their Spanish source income – At a flat tax rate of 24, 75 % (2014) • Not applicable to: – Pensioners and self-employed individuals – Employess earning foreign source employment income representing 15 % or more of the total income. • Maximun annual amount EUR 600,000 • Applicable for 5+1 years • In blue posible ammenments for 2015: Also football players excluded
  12. 12. Social Security Contributions • The contribution’s base is: – The monthly salary of the employee, either in money or in kind. – Non regular payments ( yearend bonus, Christmas pay…) should be taken into account and added to the standard monthly salary. • The rate is 36, 25 % (29, 9 % employer and employees pay the remaining 6.35 %) • The contribution is floored and capped. The monthly contributions base must be comprised between: – EUR 753 – EUR 3.426
  13. 13. Non residents Tax • Taxable items: – Profits obtained through a Permanent Establishment located in Spain – Income derived from immovable property located in Spain (rented or notional) – Capital gains derived from immovable property – Capital gains derived from the sale of movable property located in Spain – Interest, dividends and royalties paid by resident tax payers – Income from employment performed in Spain – Pensions
  14. 14. Non residents tax (2) • Taxable base: – Generally, the gross amount without deduction of any cost or expense – If the tax payer is resident in other EU are taxed on the net income • Tax rates: – PE profits: 30 % – Interest, dividends and royalties and capital gains : 21 % – Other: 24,75 %
  15. 15. Non residents (exemptions) • Capital gains obtained by residents in the EU state on the sale of shares unless: – Shares of real estate companies or – Shares representing a substantial shareholding (25 % of the share capital). • Sales of shares or other financial asset in any Spanish stock exchange are exempt. • Interest paid to recipients resident in other EU country • Interest derived from Spanish Public Debt. • Dividends, interest and royalties paid to EU parent company or other associated company following EU Directives.
  16. 16. Indirect sale of property Polska A Polska B 50% 50% Spain Co Sale The sale of Spain co is subject to Tax
  17. 17. Corporation Income Tax • Applicable to: – Legal persons – Resident in Spain • Taxable base arises from accounting result • Accounting result: IAS and NIIF • Numerous exceptions either in income and expenses: – Permanent exceptions (dividends, non deductible expenses…) – Timing adjustments (provisions, depreciation…)
  18. 18. Income • Certain income items are non taxable: – Dividends and capital gains (Participation exemtion regime) – Certain royaties (patent box) – Profits from a PE abroad • Other issues – Long term credit sales (cash basis) – Some transations are taxable although no accounting income is recorded (contributions in kind, non commercial swaps of assets…) – Contribution of a building valued 1,500 (NAV: 1,000) to a sub: Item Debit Credit Shares 1,000 Building 1,000
  19. 19. The participation exemption • dividends received from 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. – The subsidiary must be subject to a tax similar to the Spanish CIT or be resident in a country with ta DTT with Spain – In 2015 a nominal tax of at least 10 % at the subsidiary level would be required – The subsidiary must be engaged in business activities abroad (not in passive income).
  20. 20. Special Holding Co. (“ETVE”) • The ETVE’s are normal companies that: – Include in their business purpose, among others, the management of foreign subsidiaries and – Have the staff and material means to manage the latter. • Advantages: – The 5 % interest on the subsidiary can be overridden if the investment in the subsidiary is of at least, 6 Million Euro. – Dividends distributed by the ETVE to his nonresident shareholders are not taxable, unless the shareholder is located in a low tax jurisdiction. – Capital gains on the sale of the ETVE are not taxable if they can be attributed to foreign source profits. – Third party debt financing the acquisition of sub is deductible
  21. 21. Spanish patent box • There is an exemption of 60 % of the net income (ie, gross income minus expenses) and capital gains from certain IP intangible assets (patents, plan, know how... ) • Requirements: – The tax payer must have participated in the development of the IP in at least 25 % of the cost. – When R & D expenditure is not activated the net income shall be deemed to be 80% of the revenue of said assets. – The licensee must use the intangible asset to produce goods and services (not to sublicense the IP) and should not be located in a low tax jurisdiction
  22. 22. CFC rules • Undistributed profits of controlled (> 50 %) foreign subsidiaries may be taxable at the Spanish parent company level under the Controlled Foreign Companies rules (“CFC”). • These rules target foreign subsidiaries resident in low tax jurisdictions (tax lower than the 75 % of the Spanish CIT) • Getting passive income :rents, interest, dividends, royalties or capital gains • CFC rules also apply to individuals in their PIT
  23. 23. Expenses • General principle: all expenses which are charged to the profit and loss account under the Code of Commerce, the General Accounting Plan, and other accounting rules are deductible. • In practice, the following principles must be met: – Necessity: only expenses that are connected to the normal course of business of the company can be deducted. – Justified: it has complete invoices, lists, receipts, etc. – Registered in the books – The expense must pertain the same tax period in which the tax payer claim its deduction or not deferred for more than four years (current statute of limitations period).
  24. 24. Non deductible expenses (1) • Corporation Tax. • Dividends and other payments to the shareholders, • Sanctions and fines of any nature. • Gifts, donations and free grants. – Payments to suppliers, customers and employees are deductible if the amount is reasonable and related to the business of the company. – As from January 2015, a limit of 1 % of the turnover for the deduction of these expenses is likely to be introduced. • Contributions to Internal funds of pensions. • Payments to LTJ: a reverse charge proving mechanism.
  25. 25. Non deductible expenses (2) • Layoff payments to company employees: – In excess of the amounts awarded by the law if – they exceed one million Euros per person. • Bad debts allowance. – receivables with related parties, public entities and secured credits cannot are not allowed to be deducted for tax purposes. – Receivables can only be deducted if they are overdue for six months – SME bad debt allowance: 1 % of receivables at the year end • Impairment loss of investments in subsidiaries • Losses on internal reorganizations are deferred
  26. 26. Interest • Interest payable can only be deducted up to: – 30 % of the company operating profit or 1 million Euros (the lower). – The nondeductible amount can be deducted, with the same limits, in the following 18 years. • Interest on related party loans used to finance intra group reorganizations is disallowed for tax purposes: A 100 % 100 % A sales C to B B C A B C 100 % 100 % Interest payable
  27. 27. Depreciation • The law allows the following methods: – The straight line method. – The reducing balance method, in its two versions applying a constant percentage on the net asset value or the number of digits. – The effective depreciation method, which normally involves depreciating an asset according to its usage. – Tax payers can submit to the Tax Office a special plan of depreciation if none of the above methods duly reflect the actual usage of an asset. – SME can apply to the new acquired assets an accelerated depreciation scheme of 3 times the standard depreciation rate. • Some assets, such those used in Research & Development activities (except buildings) can be freely depreciated
  28. 28. Provisions • Most provisions are not tax deductible except: – Provision for restructuring cost, except if they relate to legal or contractual obligations and not merely implied. – Provision for environmental activities will be deductible only if approved by the Tax Authorities – Product warranties: the estimated cost for the repair or replacement of defective products can be deducted as long as it does not exceed the average cost of the current year and previous two ones.
  29. 29. Previous year’s tax losses • Tax losses can be carried forward for 18 years. • No carryback is allowed • In case of a substantial change of ownership in an inactive company, the offsetable tax losses are reduced by the amount of the losses suffered by previous shareholders on the disposal of the shares of said company (see example). • As from 2015: – Only 60 % of previous year’s losses could be offset against the current tax year taxable profit. – The 18 years carry forward period would be cancelled, so that no time limit would exist to offset the previous year’s losses.
  30. 30. Example • A set up a Spanish Co investing 1,000 • Spanish Co losses 800 in the first years (NAV: 200) • A decides to sell the company to B for 300 • A has a capital loss of 700 (1,000 – 300) • Offsetable tax losses of Spanish Co. after the change of ownership: – Previous year’s tax losses: 800 – Capital loss of the original shareholder: (700) – Offsetable losses after the sale: 100
  31. 31. 2015 new rules • The expenses derived from transactions with related parties could only be deducted if the foreign party is subject to a nominal tax of, at least, 10 %. • Impairment losses from fixed assets, intangible assets and goodwill will not be allowed. • In case of leveraged acquisitions, interest paid on the loans to acquire the target company will not be deductible if such interest is offset against the profits of the target company, either directly (through a merger) or indirectly (group taxation). • Hybrid financial instruments would be treated as equity; therefore, interest paid on such instruments will not be deductible.
  32. 32. Leveraged acquisitions Buyer Holding Co Target Bank Equity Equity Loan Interest Dividens Tax Group
  33. 33. Arm’s length rules • To determine the fair market value the following methods are admissible: – Method of the comparable uncontrolled price. – Method of the cost-plus – Resale price method – Profit split – Net margin profit margin method • The Law requires that related party transactions are properly documented. The main advantage of documentation is that it helps to avoid penalties.
  34. 34. Main tax incentives • Research & Development Tax credit: – cost incurred in Research and Development (“R&D”) projects enjoy a tax credit of 25 % (42 % in some cases). – The tax credit is limited to the 60 % of the tax liability prior to the application of the tax credit. – The excess can be applied in the next 18 years. • Rollover relief: – Capital gains derived from the sale of tangible or non-tangible noncurrent assets and shareholdings in subsidiaries are taxed at the tax rate of 18 % if the proceeds of the disposal are reinvested in similar assets – The rollover relief is expected to be cancelled for the tax year 2015 onwards.
  35. 35. Tax rates • The general tax rate is 30 %. • SME are can apply the 25 % tax rate to a taxable base between 0 and 300,000 euros. The excess is taxed at the general tax rate of 30%. • The tax rates proposed by the Government would be 28 % in 2015 and 25 % as from 2016. • As a temporary measure for the year 2014, small business which create jobs, car reduce the applicable tax rate by 5 percentage points if: – turnover of less than 5 million Euros. – average of less than 25 workers.
  36. 36. Reorganization deals • Mergers, split ups, and similar transactions can be structured as tax deferred transactions. – Carry over basis (no step up in value) – All the rights and tax obligations of the transferor are passed to the beneficiary (for example, the right to offset previous years losses, tax credits…) • It is a voluntary scheme. • Not subject to any prior authorization; only requires that the transaction is communicated to the Tax Office. • The tax deferred transaction is not applicable when the primary purpose is fraud or tax evasion (tax motivated).
  37. 37. Tax Groups • Group of companies can elect to be taxed as a single entity. Then: – They can offset the positive and negative results obtained by the various Group companies. – Internal transactions among group companies are disregarded until they are realized to outside entities. – Transfer Pricing rules are not applicable • Companies must have legal form of corporations and be subject and not exempt from income tax. • Only subsidiaries resident in the Spanish territory are included in the tax group. • Only subsidiaries in which the parent has a direct or indirect shareholding of at least 75%
  38. 38. Tax Treaties • See list in the official site of the Spanish Tax Agency ( • Treaties for the exchange of tax Info : Andorra, Aruba, Bahamas, Curacao, St. Maarten and San Marino • In process: Bermuda, Guernsey, Cayman Islands, Cook Islands, Isle of Man, Jersey, Macau, Monaco, Saint Vincent and the Grenadines and St. Lucia.
  39. 39. Low tax jurisdictions • Spain follows the black list model (36 countries). • Main measures against LTJ: – Disallowance of expenses invoiced by residents in low tax jurisdictions, unless the tax payer can prove that the transaction is genuine. – Arm’s length rules are applicable to transactions with residents in these jurisdictions even with non-related parties. – The participation exemption regime is not applicable to subsidiaries located in low tax jurisdictions – The distribution of dividends by the Special Spanish Holding companies to their shareholders resident in low tax jurisdictions are subject to the standard withholding tax – The criteria to apply CFC rules are presumed in respect to companies located in low tax jurisdictions
  40. 40. Ceuta and Melilla • Belong to EU and Schengen agreement. Located in Africa • 50 % of exemption of income or earnings sourced in these Territories • No VAT and excises for goods and services imported, produced or rendered therein. • They have an indirect tax, very much similar to VAT, but with tax rates much lower (from 0,5 % to 10 %). • Very interesting for: – Trading companies – Fishing – Shipping and air transport
  41. 41. Inheritance Tax • The taxable base of the IHT is the net asset’s value of the estate of the deceased. • The net asset value is determined by subtracting from the fair market value of the assets located in Spain the debts linked to these assets (a mortgage, for instance). • Exempt threshold for each heir: EUR 15.956,87 (2014) • The tax rates range from 7,65 % to 34 %. • Multiplier: The tax liability may be incrased depending on: – The personal relationship between the deceased and the heir – The wealth of the heir – The multiplier ranges from 1 (close family) to 2,4
  42. 42. Value Added Tax • Spanish VAT rules follow the EU directives. • The tax rates are the following: – General tax rate: 21 % – Reduced tax rate: 10 % applicable to food, residences, hotels, restaurants, transport and leisure activities (museums, theaters…). – Super reduced tax rate: 4 % applicable to basic food (bread, fruit and vegetables, milk, eggs and the like), books and newspapers, software and medicines.