On 23 June, the Government disclosed the draft tax package that will be discussed in Parliament after the summer and that will amount to a large tax reform. The proposed tax changes will be effective in general terms as of 1 January 2015, with certain transitional measures.
It is expected that the Government will agree on the version of the draft bills that will be passed on to the Parliament by the end of July and that this version will be published shortly thereafter.
It is very uncertain yet which of these proposed reforms will be finally introduced, but it is likely that many of these will be introduced in their current or a similar format. It is also likely that other new measures will be introduced in the discussion process in the Parliament, and the Government is already announcing certain clarifications of the proposed measures.
We have summarized in this newsletter some of the proposed measures that we believe that will have an impact mainly on cross-border or on transactional tax matters.
Acquisition financing
The interest barrier rules currently applicable will be amended to capture certain leveraged acquisitions. Currently, net interest expense is deductible, broadly, with the limit of 30 per cent of the operating profit of the company. It is proposed now that an additional 30 per cent limitation will be applicable in those cases where the acquisition financing is used to acquire the shares of a company which is subsequently merged or integrated in the same tax group of the purchaser. The additional 30 per cent limitation is calculated on the operating profits of the acquirer, without including the profits of the acquired business. This in practice will prevent deductibility if the purchaser is an empty acquisition vehicle and will require further tax structuring to leverage the acquisition in a tax efficient way.
This rule will be applicable to mergers or incorporations within tax groups effected as from 20 June 2014.
Profit participating loans granted by shareholders or by other companies within the same group will be characterized as equity for tax purposes. Until now profit participating loans granted by the non-Spanish shareholders of the Spanish acquisition vehicles were used often to maximize debt leverage in acquisitions. Interest will no longer be tax deductible against taxable income of the Spanish borrower. This recharacterisation will only be applicable to loans that include a variable interest and there might be alternatives of renegotiation of existing participating loans to preserve, at least partially, the tax deductibility.
The first reaction from the Spanish tax authorities to this new provision is that the recharacterisation of these loans as equity will have effect for all tax purposes, including withholding tax purposes, requiring careful tax planning to avoid the withholding tax that would apply in the context of deemed dividend payments.
Use of other hybrid instruments. A new provision will prevent the deductibility of expenses accrued on instruments entered into with related parties which have not generated a corresponding income in the counterparty or when the corresponding income is exempt or subject to a tax rate below 10%.
Participation exemption
The acquisition tax structuring is generally aimed at allowing a future tax free disposal of the target. This has resulted in acquisitions from vehicles established in tax neutral jurisdictions.
The tax reform will introduce a profound change in the way capital gains on shares will be taxed which will result in Spanish acquisition vehicles being able to sell without triggering capital gains tax. The proposed system will regulate in substantially the same way domestic and cross-border capital gains, with a new broad capital gains exemption subject to the same requirements. Those requirements will also be applicable to domestic and non-Spanish dividends.
The new regime will exempt from taxation the capital gains arising from disposals of shares in Spanish and non-Spanish subsidiaries. The requirements will be (i) a minimum stake of 5 per cent or an acquisition value of at least euro 50,000,000; (ii) a holding period of at least one year; and (iii) in case of foreign subsidiaries, a nominal taxation of at least 10 per cent during the shareholding period.
The change in the taxation of domestic capital gains will be introduced progressively in 2015 and 2016, and will be accompanied with a change in the tax regime of goodwill amortization, since the capital gains tax exemption would already prevent the double taxation that the deductibility of goodwill amortization was aimed at preventing.
Taxation of holding companies
The repatriation of profits from Spanish companies is generally subject to a withholding tax, which can be reduced or prevented under Double Tax Treaties (DTTs). The Spanish implementation of the Parent-Subsidiary EC Directive provides for a withholding tax exemption on dividends paid to qualifying parent companies within the EU, subject to a number of requirements. The existing antiavoidance provisions have prevented in practice the use of the withholding tax exemption in many cases.
The proposed reform would eliminate the existing antiavoidance tests and will introduce a general antiavoidance provision. The holding company will have to be engaged in active business activities other than the holding of the shares in order to enjoy the withholding tax exemption. This may jeopardize some of the existing holding structures. The withholding tax exemptions included in certain DTTs may provide an alternative to the existing structures.
Corporate Income Taxation of Spanish companies
There are many substantial changes in the Corporate Income Tax regime. The following may be particularly relevant.
- Tax rates. Currently the general tax rate is 30 per cent and will be reduced to 28 per cent in tax year 2015; and to 25% thereafter.
- Carry forward losses currently have a statutory period of 18 years. With the proposed reform, there will be no statutory period but the use of the losses will be limited to 60 per cent of the taxable income of the year.
- Taxation of groups. In order to accommodate to EC legal principles the Spanish tax consolidation regime will include Spanish companies that are held indirectly through EU companies.
- Intercompany transactions. The losses derived in transactions entered into between companies of the same group will be reorganized only when the assets are transferred outside of the group.
- Tax allowances. There is a substantial reduction of the tax allowances. Many of the existing allowances are eliminated, including the tax reduction for reinvestment of proceeds. A new tax allowance is created to stimulate the capitalization of companies: companies will be able to reduce the taxable income in the amount of the retained earnings which are not distributed in five years, limited to 10 per cent of the taxable income.
- Mergers. The existing special tax regime for mergers and reorganizations will be amended to be the general tax regime for those transactions. As mentioned above, the goodwill realized in mergers will no longer be tax deductible. Carry forward losses will follow the business units that have generated them as a general rule.
Miguel Lorán, Partner. Spain
