VOLUME 42, NUMBER 2 >>>

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1 VOLUME 42, NUMBER 2 >>>

2 Reproduced with permission from Tax Practice International Review, 42 TPIR 7, 2/28/15. Copyright 2015 by The Bureau of National Affairs, Inc. ( ) 02/15 Copyright 2015 byd2 The Bureau of National Affairs, Inc. TPIR ISSN

3 Spain Enacts Corporate Income, Personal Income Tax Reform José Manuel Sánchez Morán, Ekaitz Cascante Serrano Gómez-Acebo & Pombo Abogados New legislation enacted in Spain has introduced reforms to the corporate income tax and personal income tax regimes. The revised regulations affect multinational companies and include changes to tax rates, exit taxes and transfer pricing rules. José Manuel Sánchez Morán is Lawyer and Ekaitz Cascante Serrano is Lawyer at Gómez-Acebo & Pombo Abogados I. Introduction On November 27, 2014, the definitive wording of the broad-based tax reform originally proposed by the Spanish government in June 2014 was enacted. Under the reform, the following three new laws have been endorsed and published in the Spanish Official Gazette ( SOG ) dated November 28, 2014: (1) Law 26/2014, of November 27, 2014, amending Personal Income Tax Law ( PITL ) 35/2006, of November 28, 2006, the Revised Non-Resident Income Tax Law approved by Legislative Royal Decree 5/2004, of March 5, 2004, and other tax provisions. (2) Law 27/2014, of November 27, 2014, regulating the Corporate Income Tax Law ( CITL ), which replaces the former law on this tax approved by Legislative Royal Decree 4/2004, of March 5, Unlike what has occurred with other taxes, the much-discussed corporate income tax reform has not translated into the amendment of certain articles in the existing law but rather into the emergence of a completely new law repealing the former one. (3) Law 28/2014, of November 27, 2014, amending the Value Added Tax Law ( VATL ) 37/1992, of December 28, 1992, on value added tax. The scope of this article is to summarize, from a direct taxation perspective, the major changes introduced by the new laws, which may affect international businesses. Therefore, the report is divided into two distinct sections: (1) The first analyzing the main new features included under the PITL. (2) The second reviewing the principal modifications of the new CITL in comparison with the former regime. II. PITL The aim of the new PITL, according to its preamble, is to reduce the tax burden across the board and provide significant reductions for lower income recipients of salary income and for those with greater obligations concerning dependents, as well as to raise the tax threshold, to stimulate the generation of long-term savings and to eliminate tax relief for certain taxpayers. To these purposes, the main measures are outlined below. A. Employment Income Employment income and, in particular, severance payments for dismissal, will continue to be exempt from personal income tax, as has been the case up to now. In a new addition, however, a 180,000 euros ceiling has been placed on the exemption, which entered into force on November 29, 2014 the day after publication of the law in the SOG. 02/15 Tax Planning International Review Bloomberg BNA ISSN /15 Tax Planning International Review Bloomberg BNA ISSN

4 Under a transitional regime, this restriction will not apply to any severance for dismissals or terminations which took place before August 1, 2014, or for dismissals which take place after August 1, 2014 as a result of an approved collective dismissal procedure, or a collective dismissal in which the commencement of the consultation period was notified to the labor authority before that date. Additionally, the non-exempt severance payment for dismissal qualifies for the multi-year income regime if it was generated over a period of more than two years or it is obtained on a notably multi-year basis. In the first case, the law equates for the first time the number of years of service of the employee to the generation period. In this regard, for all multi-year salary income, the reduction rate has been lowered to the 30%. Nonetheless, in cases of severance payment for termination of an employment relationship, both ordinary and special, this reduction will be applicable even where the payment is received in installments. B. Income Obtained from Immovable Property In relation to reductions regarding income obtained from immovable property, the general 60% tax reduction will be maintained but the 100% reduction for leases of property to people under 30 years of age has been eliminated. C. Real Estate Concerning presumed income from real estate, the reduced rate equal to the 1.1% of the cadastral value is restricted to properties located in municipalities where the cadastral values have been reviewed, modified or determined using a general collective valuation procedure, which entered into force during the preceding 10 tax periods. D. Income from Movable Property In relation to income from movable property, the 1,500 euros exemption on dividends has been removed. Accordingly, a new instrument has been created, the so called Long-Term Saving Plans (a contract between the taxpayer and an insurer or credit institution that meets certain requirements), giving rise to an exemption on income generated by life insurance policies, deposits and financial contracts funding these saving plans, insofar that the taxpayer does not withdraw any of the resulting capital before the end of a period of five years from when it was opened. E. Capital Gains Regarding capital gains and abatement coefficients, the law has maintained the transitional regime but confined it to transfers carried out on or after January 1, 2015 for which the overall transfer price is below 400,000 euros. F. Tax Rates As for tax rates, the general component of the net taxable income will be taxed according to a central government scale and an autonomous community scale of rates which, in the absence of approval of the tax by the respective autonomous community, will be the following: Net Taxable Income (a) Rate Rate % 19% 12,450 25% 24% 20,200 31% 30% 35,200 39% 37% 60,000 47% 45% Accordingly, the savings component of net taxable income will be taxed according to the following scale: Net Taxable Income (a) Rate Rate Up to 6,000 20% 19% From 6,000 to 50,000 22% 21% 50,000 and above 24% 23% G. International Fiscal Transparency With respect to international fiscal transparency, the regime has undergone, among others, the following change: any income derived from the assignment or transfer of assets or rights must be attributed to the taxpayer, where the non-resident company does not have the relevant organization of human and material resources to perform the transactions in question, unless it is evidenced that the taxpayer has human and material resources at another non-resident entity in the same group, or that there are valid economic reasons for the formation and operations of the entity. However, the attribution regime will not apply where the non-spanish resident entity is resident in another EU Member State insofar as the taxpayer evidences that there are valid economic reasons for its formation and operations and that it engages in economic activities, or is a collective investment scheme. H. Non-Resident Income Tax With reference to non-resident income tax ( NRIT ), significant changes have been introduced within the requirements to apply the special inbound expatriates regime ( impatriates regime, which allows persons who become tax resident in Spain, as a result of their assignment to Spain, to elect to pay non-resident income tax in the year in which they change their residence, and the five years following. The points below should be noted: s Professional sportspersons and taxpayers who are assigned to Spain because they have become director of an entity in which they do not hold an interest in the capital do not qualify for this regime. s Currently the work may not necessarily be performed in Spain and may not be performed for an enterprise or entity resident in Spain. s The quantitative requirement establishing that the compensation must not exceed 600,000 euros per year has been eliminated. I. Exit Tax Lastly, in reference to capital gains due to change of residence ( exit tax ), a new regime has been established whereby, in the case of those who forfeit their personal income taxpayer status due to a change of 4 02/15 Copyright 2015 by The Bureau of National Affairs, Inc. TPIR ISSN

5 residence, any positive differences between the market value of the shares held by the taxpayer in any type of entity and their acquisition value will be treated as capital gains, provided that the taxpayer has had personal income taxpayer status for at least 10 of the 15 tax periods preceding the last tax period for which he must file a return for this tax, and either of the following circumstances are met: (i) the combined market value of the shares exceeds 4 million euros; or (ii) the interest in the entity is greater than 25% and the market value of such shares exceeds 1 million euros. Such capital gains will be attributed to the savings income component of the latest tax period for which a tax return has been filed. In this sense, a supplementary tax return will be filed if necessary, without triggering any penalty, surcharge or interest. Notwithstanding the above, the payment will be deferred in the following cases: s Where the change of residence occurs as a result of a temporary assignment for work reasons to a country not considered a tax haven, a five-tax period extension is granted. s Where assignments or relocations occur due to working reasons, the same extension is granted. s Where the change of residence is to another member state of the EU or the European Economic Area with which there is an effective exchange of tax information, the taxpayer will have to selfassess such capital gain only where the shares are subject to an inter vivos transmission, the special disclosure obligations are breached or the status of residence in the new country is lost. III. CITL The main new measures introduced by the CITL lead to a new Corporate Income Tax ( CIT ) aligned with the recommendations from several international bodies (EU, IMF, OECD), which seek reactivation of the Spanish economy through the reduction of tax rates and the removal of certain tax credits and allowances, as discussed below. A. Definitions The new CIT includes, for the first time, the definition of an economic activity, and, specifically, modifies the activity of leasing land and buildings to require its organization to take the form of at least one person hired under a full-time employment contract, taking into account all the entities belonging to the same group of companies. Accordingly, the asset-holding entity will be any entity in which more than the half of its assets are formed by securities or are not used in an economic activity, which means to say entities whose primary activity consists of managing movable or immovable property. B. Determination of Taxable Base Regarding the determination of the taxable base, the reform emphasizes the expansion of the taxable bases of taxpayers, by modifying different elements that adjust the income per books as established by law. C. Amortizations As for amortizations, the new law basically retains the option to use more than one method of calculation and simplifies amortization tables. As a new feature, intangible assets with a useful life defined according to the actual term of the asset are now deductible. Moreover, the deduction for tax purposes of financial goodwill is eliminated, in spite of the transitional regime, which permits deductions in respect of investments made before January 1, D. Intra-Group Losses Losses incurred on intra-group transfers of shares, property, plant and equipment, investment property, intangible assets, debt securities and permanent establishments abroad will not be deductible until the period in which the assets are transferred to third parties outside the group, they are retired from the transferee s accounts, or the company s activity is terminated. E. Impairment Losses on Assets Impairment losses caused by the decline in value of property, plant and equipment, investment property and intangible assets, including goodwill, equity instruments and debt securities will not be deductible. Consequently, allowances for impairment losses on receivables and other assets as a result of bad debts, as well as those relating to employee welfare systems which have generated deferred tax assets, will only be deductible in certain cases and subject to conditions and limits. F. Deductibility of Financial Costs In relation to the deductibility of financial costs, the general deductibility of the net financial expenses established at 30% of the operating profit with a minimum threshold of 1 million euros is maintained. The net financial expenses that exceed such limit may be carried forward indefinitely. A new specific restriction has been introduced, which limits the deductibility of interest accrued on debt that is related to the acquisition of an entity which is to be included in a tax consolidated group or merged into another entity within the four years following the acquisition. In this regard, the 30% of the operating profits must be calculated using the buyer s accounts and not the acquired entity s. The limitation will not apply to the year of acquisition if such acquisition is not more than 70% debt-financed. Additionally, the limitation will not apply in subsequent years where the debt is reduced proportionately during the following eight years until the debt amounts to no more than 30% of the acquisition price. G. Intra-Goup Profit Participation Loans Intra-group profit participation loans will be characterized as equity instruments rather than debt, therefore interest payments on such loans will not be deductible for loans granted June 20, 2014, onwards. 02/15 Tax Planning International Review Bloomberg BNA ISSN

6 H. Anti-Hybrid Rule In response to the base erosion and profit shifting initiative ( BEPS ), a special anti-hybrid rule will disallow deductions for expenses incurred in transactions with related parties where, as a result of different tax characterizations, either no income will be generated, income will not be subject to tax, or income will be subject to a nominal tax rate of less than 10%. I. Transfer Pricing Regime The transfer pricing regime includes the following changes: s the definition of related parties is revised so that shareholders and entities will be deemed to be related parties where the shareholders participation is at least 25%; s the hierarchy of the valuation methods in order to determine the fair market value is abolished, and new methods are accepted as long as they respect the principle of fair competition; s for entities with turnover that does not exceed 45 million euros, the documentation requirements are considerably simplified; and s the penalty regime is less burdensome with regard to the failure to provide documentation and to the mismatches of the market value filed through documentation and tax returns. J. Participation Exemption The participation exemption requirements have been slightly amended. A taxpayer meets the ownership test if it owns, directly or indirectly, at least 5% of the subsidiary s capital or the investment value in the first-tier subsidiary exceeds 20 million euros. When more than 70% of the first-tier subsidiary s income consists of dividends or capital gains from other subsidiaries, the taxpayer must indirectly meet the 5% ownership test in the lower-tier subsidiaries, unless: (i) the first and lower-tier subsidiaries are part of the same corporate group and prepare consolidated financial statements; or (ii) the dividend or capital gain has not benefited from a participation exemption or foreign tax credit regime at the first or lower-tier subsidiaries. A subsidiary will now meet the subject-to-tax test if it is subject to a corporate income tax that is similar to the Spanish tax and its net taxable income is subject to a nominal rate of at least 10%. However, this requirement continues to be met where there is a tax treaty in force between Spain and the subsidiary s country of residence. Under the new rules and in line with the BEPS papers, dividends received by a Spanish company will not be entitled to the participation exemption where their distribution constitutes a deductible expense at the distributing company level. At the same time, the new tax rules eliminate the dividend received deduction for domestic dividends and subject the domestic dividends to the same rules as the participation exemption rules for foreignsource dividends. Likewise, while capital gains on the sale of shares in a Spanish company were subject to tax, under the new rules those gains are subject to a number of exceptions and generally subject to the same participation exemption rules as the sale of shares in non-resident entities. K. Capitalization Reserve A new capitalization reserve has replaced the traditional reinvestment tax credit. This new measure allows taxpayers subject to the new standard tax rate or to the 30% rate to reduce their taxable base by 10% of the increase in their equity, insofar as (i) this increase is maintained over a 5-year period; and (ii) a separate reserve is recorded at an amount equal to the reduction, which must be restricted over that 5-year period. L. Net Operating Losses According to the new law, net operating losses can be carried forward indefinitely but, for tax years starting in 2016, the annual offset is limited to the higher of the 70% of the company s net taxable income or 1 million euros. For 2015, the limitation continues at the 50% of the company s net taxable income if its turnover in the previous tax year exceeded 20 million euros. M. Tax Rates As for tax rates, the standard 30% rate will be reduced progressively, over two years, to 25% and a significant number of special rates will be maintained for various categories of entities, including the following: s newly-formed enterprises carrying on economic activities will be taxed at 15% for the first two tax periods (this will not apply to entities treated as assetholding companies); s the reduced rate for small enterprises will be eliminated, so that the tax rate is equated with the standard rate; and s credit institutions and entities engaging in the operation, prospecting and mining of underground oil deposits and gas fields will be taxed at a rate of 30%. N. Tax Credits In relation to tax credits as incentives for certain activities, the new law removes (i) the tax credit for environmental investments; (ii) the tax credit for reinvestment of extraordinary income; (iii) the tax credit for the investment of income; and (iv) the tax credit for expenses to familiarize employees with the use of new technologies. Thus, the only tax credits that have been retained are (i) tax credits for research, development and innovation activities; (ii) tax credits for investments in cinematographic productions, audiovisual series and live shows of performing arts and music; (iii) job creation tax credits; and (iv) job creation tax credit for workers with disabilities. IV. Conclusion In conclusion, the new regulations represent a further step towards achieving the goal of taxing multinational companies in the country where the income is effectively earned. Therefore, the legislation is pioneering compared to countries taking part in the OECD s Action Plan on BEPS. José Manuel Sánchez Morán is Lawyer and Ekaitz Cascante Serrano is Lawyer at Gómez-Acebo & Pombo Abogados. 6 02/15 Copyright 2015 by The Bureau of National Affairs, Inc. TPIR ISSN