With regard to the taxation of resident companies and other business entities, no segregation applies in the determination of the taxable income, except for some special regimes such as tonnage tax (see Sec. 10.4.).

The cases of exclusion of items of income from the tax base are also very few, the most important being the following.

Participation Exemption

Article 21 of the Corporate Income Tax Law (CITL) provides for the exemption of dividends and capital gains from foreign companies.

Foreign dividends are exempt to the extent of 95% (reduced from 100% effective 1 January 2021), of their gross amount if the following requirements are met:

The Spanish company owns a minimum percentage holding of 5%, which can be reached either directly or indirectly through other foreign holdings. Such holding must have been owned without interruption for at least one year prior to the dividend distribution. The minimum holding period need not necessarily have been met by the time of the dividend distribution and may be satisfied post-distribution ; and
The foreign subsidiary must have been subject in its home country, to a tax “of an identical or analogous nature” to the Spanish corporate tax, during the tax year when the relevant income was obtained, at a nominal rate of at least 10%. Such a tax will be deemed to exist in the foreign country whenever there is a double tax treaty including an exchange of information clause, in force between Spain and the country concerned. However, the exemption is denied when the foreign subsidiary is located in a non-cooperative jurisdiction (see Sec. 13.5. for the list), unless the foreign subsidiary is established in an EU Member State, and the taxpayer can prove that there are sound business reasons for its incorporation and that it effectively carries out business activities.

The exemption for capital gains derived from foreign subsidiaries is subject to the same requirement as dividends as follows:

The minimum participation (or investment) threshold must be met on the date of the disposal of the shares in the foreign company; and
The foreign subsidiary must have been subject to tax in its home country at a nominal rate of at least 10%in all the tax years when the participation is held.

Although the full participation exemption is reduced to 95% effective from 1 January 2021, companies with net turnover below EUR 40 million in the previous year can continue to apply the 100% exemption with respect to dividends received from subsidiaries incorporated after 1 January 2021. The 100% exemption is available for three years from the date the subsidiary is established.

Prior to 1 January 2021, the 5% holding condition was deemed to have been met if the acquisition value of the participation exceeded EUR 20 million. The alternative monetary threshold has been revoked effective from 1 January 2021. Nevertheless, transitional provisions provide that the participation exemption may continue to apply based on the EUR 20 million condition during tax periods that begin within the years 2021, 2022, 2023, 2024, and 2025, for participations acquired during tax periods that began prior to 1 January 2021.

In general, the exemption will not be available whenever the foreign subsidiaries carry out their activities abroad for the main purpose of enjoying this favorable tax regime. This will be deemed to be the case when the same activity carried out by the subsidiary, with regard to the same market, had been previously carried out by a Spanish resident company which is related to it unless a sound business reason is presented.

Likewise, pursuant to the anti-hybrid mismatch rules introduced in Spain in implementation of the EU ATAD and the OECD BEPS recommendations, the dividend exemption is disallowed in Spain if the dividends received where deductible to the foreign distributing subsidiary.

Further, the exemption is incompatible with the foreign tax credit on the same income (see Sec. 9.). Therefore, where the participation exemption applies, any foreign tax credits associated with the relevant income are forfeited.

Lastly, in case the exemption has been applied, the depreciation of the shares following the distribution of dividends is not available.

Income from Foreign Permanent Establishments

Ordinarily, Spanish companies are taxed on their worldwide income including that derived through a foreign branch or PE, with a credit for foreign tax. However, in line with the participation exemption regime for dividends from and capital gains on foreign subsidiaries, income derived through a foreign branch or PE is exempt in Spain subject to meeting specified tests. The main conditions for the exemption are that the foreign permanent establishment must carry out real business activities, must not be located in a non-cooperative jurisdiction (see Sec. 13.5.) and must be subject to income tax in the country where it is located.

Since the requirements must be met by every foreign PE, the exemption must be examined and applied separately for each of them, even if they are located in the same foreign country.Note that in application of the EU Anti-Tax Avoidance Directive (ATAD), the exemption is denied in Spain if the foreign branch or permanent establishment is disregarded (i.e. not considered as constitutive of a local permanent establishment) in the country where it is located.

In case the company had deducted losses from foreign PEs in the previous years, the exemption applies only after such losses have been fully recaptured.

Domestic Dividends

Unlike foreign dividends, domestic dividends are not exempt by exclusion from the tax base of the company. Economic double taxation is avoided by means of a tax credit (see Sec. 9.).

Powerful Tax Solutions

Tax Rules Engine

Collaboration Tools

Latest Tax News