Executive summary

On 10 July 2021, Spain’s Anti-Tax Fraud Law (Law 11/2021, dated 9 July 2021) (the Law) was published in the State Official Gazette.

The first draft of this Law was first published for public consultation on 23 October 2018 and the Bill was presented to the Parliament for approval on 13 October 2020 (see EY Global Tax Alert, Spain sends anti-tax evasion Bill to Parliament for approval, dated 28 October 2020).

This Law includes, among other measures, certain amendments to the existing Spanish exit tax and controlled foreign companies (CFC) rules, to align the Spanish rules with the European Union (EU) Anti-Tax Avoidance Directive (ATAD I)¹ on all topics, apart from the anti-hybrid rules, that had not been implemented yet.

The Anti-Tax Fraud Law entered into force on 11 July 2021 and, as explained below, most of its provisions are applicable as from that same day.

Detailed discussion

The following is a detailed description of the measures included in the Law which would be relevant for multinational structures and cross-border transactions with Spain.

The approved final text partially differs from the draft Bill published in 2018, after the public consultation, as a result of the negotiation and approval process by the Spanish Congress and Senate.

EU ATAD I implementation

The EU ATAD I requires that Member States implement in their respective domestic legislation a number of tax measures aimed at preventing tax evasion and erosion of taxable base, including CFC rules, exit tax and general anti-abuse rules (GAAR).

While the Spanish domestic rules already included most of the measures required by the ATAD, some adjustments to the CFC regime and exit tax were required to fully align the Spanish provisions with the Directive.

In respect of interest tax deductibility, the Spanish rules allow dividend income to be taken into consideration as part of the operating profit (similar to EBITDA – earnings before interest, taxes, depreciation and amortization) for the calculation of the earning-stripping limitation, but Spain has been allowed to maintain this exception until 2024.

Amendments to the CFC regime

The Law includes the following amendments to the Spanish CFC regime included in the Corporate Income Tax (CIT) Law:

• The scope of the Spanish CFC rules is broadened to include income obtained by a foreign permanent establishment (PE) and not only subsidiaries. The Law clarifies that the application of CFC rules in the scenario of a PE entails that the Spanish branch participation exemption does not apply – a foreign tax credit may still be applicable, should the branch be subject to any taxation.
• Further, the safe harbor condition for EU (and now EEA) resident subsidiaries is amended to require “the existence of an economic activity,” rather than “valid business reasons for the incorporation and operative of the subsidiary” as was previously required.
• The Law abolishes the currently applicable safe-harbor clause for holding companies as per which companies owning more than 5% in foreign subsidiaries during more than one year were not subject to CFC rules if: (i) they had human and material resources to manage the participation; and (ii) did not qualify as “companies merely passively holding assets” under the Spanish CIT rules.

Since income from subsidiaries (i.e., dividends and capital gains arising from the transfer of shares) is among the list of CFC income, foreign holding companies could fall under the scope of the new CFC rules if all the other relevant requirements are met. When combined with the amendment to the Spanish participation exemption regime which limited the exemption (for fiscal years starting on or after 1 January 2021) to 95% of the qualifying income, resulting in an effective tax of 1.25% (1.50% in the case of certain financial entities), this could lead to a CFC inclusion of dividends received by intermediate holding companies by their Spanish parent entities.

• The Law includes new sources of CFC income such as:
  • Sales and services provided to a related party (as defined for transfer pricing purposes) and in which the foreign entity or PE adds little or no economic value.
  • Insurance, leasing financial activities and other financial activities, regardless of whether the recipient is a Spanish tax resident or not, unless they qualify as business activities.
• CFC rules included a safe harbor for EU tax resident subsidiaries where the taxpayer may evidence valid business reasons for the incorporation and operative of the subsidiary and for UCITS² funds not located in a tax haven.

This safe harbor is broadened to include companies and PEs not only resident in the EU but also in the European Economic Area (EEA).

Exit taxation

With effects for tax periods starting on or after 1 January 2021, the Law amends the current wording of the Spanish provisions on exit tax to align it with ATAD I.

While the current Spanish exit tax rules allow for an indefinite deferral when the migration takes place to another EU Member State (taxation being triggered when the relevant assets and/or the company is sold), the Law introduces a maximum five-year deferral with equal annual installments.

The Law also details the circumstances which terminate the deferral before the five-year period elapses (namely, the transfer of the relevant assets to a third-party, transfer of the tax residence or of the assets to a non-EU Member State, liquidation or bankruptcy proceeding of the entity, or failure to meet payment of the deferral installments).

The constitution of guarantees in these installment payments will only be required exceptionally, when it is justified by the existence of rational indications that the collection of the debt could be frustrated or seriously hindered.

In addition to this, the transfer of the activity of a PE in the Spanish territory to another State has been introduced as a new exit tax scenario for Nonresidents’ Income Tax (NRIT) purposes, in line with ATAD I.

In the event of a change of residence or transfer to Spain of assets or activities that have been subject to exit taxation in an EU Member State, the value determined by that EU State will be considered as the tax value in Spain (unless it does not reflect the market value).

Amendments to the Spanish tax haven list

The Law introduces very significant changes to the Spanish list of tax haven jurisdictions.

First, the rules are amended, effective 11 July 2021, to refer to “non-cooperative jurisdiction,” a concept which expands the previous notion of tax haven so as to include not only States and territories, but also preferential tax regimes.

The criteria to determine which States, territories or regimes shall be regarded as “non-cooperative jurisdictions” are established as follows:

• Tax opacity and lack of transparency, taking into account the absence of mutual assistance regulations and/or their application in practice.
• The incorporation or utilization of companies or instruments aimed at shifting profits to territories with no actual economic activity is allowed.
• A nil or low level of taxation. In this regard, and although the Law includes a definition of what “nil or low taxation” means, no clear threshold is established to determine which territories/tax regimes would fall under that scope (the wording refers to “low taxation” as “taxation significantly lower, including a 0% tax rate, than the one applicable in Spain”).

Further to the Law, the Ministry of Tax shall issue a new list (with the rank of Ministry Order) prepared considering the criteria above and where the territories deemed as “non-cooperative jurisdictions” will be included.

While the current list of tax haven territories is independent from the Organisation for Economic Co-operation and Development (OECD)/ EU so-called “blacklists,” the Law includes the possibility (but not a formal requirement) that the list is aligned with the result of the OECD and EU works. This being said, given the criteria above, deviations from the OECD/ EU lists cannot be discarded.

Unlike the current rules governing the tax haven list, the Law expressly foresees that territories having a tax treaty in force with Spain can be included in the new list, and the Spanish domestic provisions against “non-cooperative jurisdictions” will be applicable to them to the extent they do not contravene such Treaty.

Finally, the transitory regime provided in the Law until the Ministry Order with the new list of “non-cooperative jurisdictions” is published raises some significant uncertainties. In particular, the reference to the original Spanish tax haven list (issued in 1991) does not seem to take into consideration the rules (in force since 2006) under which a significant number of territories have exited the list. There is also no guidance on whether jurisdictions which currently have a tax treaty and/or an exchange of information agreement in place with Spain are “grandfathered” for these purposes and will be excluded from the list of “non-cooperative jurisdictions” once published.

Other measures

• The Law amends other Spanish tax rules generally aimed at targeting situations of potential tax evasion or base erosion.
• The General Tax Law is amended to include certain technical adjustments to the calculation of surcharges and delay interest. Surcharges for late payments (currently amounting to 5%, 10%, 15% or 20% plus interest in the case of delays up to 3, 6, 12 and more than 12 months) will amount to 1% per month during the first year, and a flat 15% surcharge plus interest when the delay is over 12 months. Also, the reductions applicable to penalties are increased in the case of assessment in agreement (from 50% to 65%) and prompt payment (from 25% to 40%). The General Tax Law is also amended to ban future tax amnesties, to introduce changes to penalty regime, including a new infringement for the manufacturing and commercialization of “dual use software,” among others.
• The Law also increased control of open-ended investment companies (SICAVs), introducing, with effects for fiscal years starting on or after 1 January 2022, stricter requirements for the application of the reduced 1% rate, while a transitory regime is provided for SICAVs affected by the new legislation which are dissolved in 2022.
• In addition to the above, amendments to the Personal Income Tax, Value Added Tax and Excise Duties, Business Activities Tax, Net Wealth Tax rules, cadastral regulations and rules governing gambling activities have been introduced by way of this Law.
• Also, the Spanish anti-tax evasion Law contains provisions to prevent Spanish tax resident individuals from benefiting from the Spanish deferral regime (the so-called traspasos regime) on gains/losses triggered upon the transfer to or from EU-exchange traded funds (ETFs) (See EY Global Tax Alert, Spain: EU ETFs no longer qualify for traspasos regime, dated 16 July 2021).
• Moreover, Spanish REITs (SOCIMIs) are now subject to tax on the retained profit of the year (i.e., profit that is not distributed) that has not been subject to the standard CIT rate and that is not used for reinvestment as per the relevant tax rules. The information obligations of the SOCIMI are amended to disclose the above and allow tracking of sources of income and retained earnings.
• Further to the above, the Spanish anti-tax evasion Law also amended the provisions related to the appointment of a representative in Spain for nonresident entities with the aim of releasing from such obligation entities with their tax residence in an EU Member State or in a State of the EEA having a rule of mutual assistance for information exchange purposes.

Finally, a significant difference with the draft Bill published in 2018 is that the Spanish regulations of the Mutual Agreement Procedure is not reviewed by virtue of this Law.

Entry into force

The Law entered into force on 11 July 2021, except for certain provisions that will apply to fiscal years beginning on, or after 1 January 2022; or for most amendments to the CIT and NRIT, which will generally apply to fiscal years beginning on, or after, 1 January 2021.

Implications

The measures introduced by the Spanish Anti-Tax Fraud Law may have a significant impact for multinational groups with a presence in Spain.

In particular, the impact of the new CFC provisions combined with the limitation to the Spanish participation exemption regime recently enacted must be carefully considered.

The release of the new list of “non-cooperative jurisdictions” also must be followed closely to identify any deviations not only from the current list, but also from the EU/ OECD lists.

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For additional information with respect to this Alert, please contact the following:

Ernst & Young Abogados, Madrid

• Araceli Sáenz de Navarrete | araceli.saenzdenavarretecrespo@es.ey.com
• Iñigo Alonso Salcedo | inigo.alonsosalcedo@es.ey.com
• Tatiana de Cubas Buenaventura | tatianade.cubasbuenaventura@es.ey.com

Ernst & Young LLP (United States), Spanish Tax Desk, New York

• Jose A. (Jano) Bustos | joseantonio.bustos@ey.com
• Isabel Hidalgo | isabel.hidalgo.galache1@ey.com
• Andres Carracedo | andres.carracedo.insua1@ey.com

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Endnotes

1. Council Directive (EU) 2016/1164 of 12 July 2016 laying down rules against tax avoidance practices that directly affect the functioning of the internal market.
2. Undertakings for the Collective Investment in Transferable Securities: A system to allow mutual funds and other investment vehicles to operate throughout the EU.