Businesses are generally developed by way of corporate entities, most commonly in the form of joint-stock companies (Sociedades Anónimas or SA) requiring a minimum share capital of EUR60,000 or limited liability companies (Sociedades Limitadas or SL) requiring a minimum share capital of EUR3,000. The responsibility of the shareholders is limited in both cases.

From the tax viewpoint, corporations, generally speaking, including not only SA and SL, but also other types of commercial companies, are subject to corporate income tax (CIT) regulations, which are levied on all legal entities resident in Spain.

Certain entities, mainly public entities and certain income from non-profit organisations, can be exempt from CIT.

CIT rules are also applicable to non-corporations, such as partnerships or lying heritages, provided that they have a business purpose. Otherwise, in the event that they do not have a business purpose, their income will be allocated (transparent) to their partners or co-proprietors. This is also the case regarding economic interest groupings, where profits or losses are taxed at the level of their co-proprietors.

Increasingly, individuals carrying out business activities – although taxed under personal income tax (PIT) – will apply, under certain cases, CIT rules when determining their business taxable income.

The most common transparent entities that are taxed under the income allocation regime (regimen de atribución de rentas) are civil partnerships without legal status or without commercial object.

The income allocation regimen applies to the following entities:

• communities of property;
• lying heritages;
• civil partnerships. Since 1 January 2016, the system only applies to:

a) civil partnerships without legal status;

b) civil partnerships with legal status, which do not have a commercial object, ie, those engaged in agricultural activities, livestock activities, forestry activities, mining activities, and those of a professional nature subject to the law on professional societies;

• any entity which, not having legal status, constitutes an economic unit or separate assets liable to taxation;
• entities constituted abroad whose legal nature is identical or similar to that of entities attached to the income allocation regime constituted in accordance with Spanish law.

Moreover, the Spanish CIT Act provides other special fiscal transparency regimes commonly adopted in particular business sectors:

Temporary Business Association (Unión Temporal de Empresas, or UTE)

Under Spanish law, UTEs are a system of collaboration between companies, for a specified or unspecified period of time, for the purpose of carrying out a specific project or service.

Their purpose is business collaboration to achieve a result which, due to its importance or volume, would be difficult to achieve by just one of the companies separately. In practice, they are very common for the execution of public works (roads, recycling, etc) in which each company member of the UTE is specialised in a specific piece of machinery or special technology.

This form of association is very common for engineering and construction projects but can be used in other sectors as well.

Economic Interest Grouping (Agrupación de Interés Económico, or AIE)

The aim of AIEs is to allow companies to join forces where they have common interests, always preserving their total independence.

The Economic Interest Grouping is a trading company whose sole purpose is to carry out an economic activity ancillary to that carried out by its members, who may be natural or legal persons engaged in business, agricultural or craft activities, non-profit entities engaged in research or those exercising liberal professions.

It enables certain companies to carry out commercial activities that would be impossible to carry out on their own, such as market research, centralised purchasing, sales, information management or administrative services, etc.

The Economic Interest Grouping does have its own legal personality and commercial character, but it may not hold shares in companies that are members of the Economic Interest Grouping, nor may it directly or indirectly manage or control the activities of its members or of third parties.

There are three tests for determining whether a company is resident for tax purposes in Spain:

• it has been constituted under Spanish law;
• the registered office is located in the Spanish territory;
• the effective management (direction and control of the activity) is located in the Spanish territory.

If any of the foregoing requirements is met, the company can be considered as resident in Spain.

Under certain conditions, Spanish tax authorities can assume that an entity located in a tax haven, or a country with no-taxation, is a tax resident in Spain. In order for this assumption to be applicable, the main assets and rights of the entity must be, directly or indirectly, located in Spain, or its main activity must be carried out in Spain.

Regarding transparent entities, such as partnerships, the taxation would depend on the partner’s residency. Spanish-resident partners are liable to pay tax in Spain on their share of the worldwide profits of the partnership. Non-resident partners are only liable to pay tax on profits that arise in Spain.

The standard CIT tax rate is 25% and it applies to most companies, although there are other specific rates.

Special tax rates apply to certain activities, such as banking, mining, oil and gas, that are subject to a 30% tax rate, non-profit entities are subject to a 10% tax rate, and investment funds and undertakings for collective investment in transferable securities (UCITS) are taxed at 1%.

Apart from those, there is a special 15% rate for newly created companies, applicable to the first tax period in which profit is obtained and the following period.

However, partnerships are transparent for corporate tax purposes, so that profits and losses are taxed at the partners’ level in proportion to their partnership interests.

The taxation of the income of individuals (who own a business or are partners in a transparent partnership carrying out a business), generated either by themselves or through the partnership, could be taxed at a maximum tax rate ranging from 45.5% to 50%, depending on the Autonomous Community of residence.

The taxable profit is the company’s gross income for the tax period, less certain deductions. Its determination comes from the annual financial statements prepared under Spanish generally accepted accounting principles (SGAAP), as adjusted under certain statutory tax provisions.

The tax authorities are legally authorised to modify accounting results to determine taxable profit if they consider that the accounting results have not been calculated according to the SGAAP.

All necessary expenses and costs connected to producing income may be deducted from gross income to arrive at a taxable income determination.

Additionally, the Spanish CIT Law provides for certain items that are never deductible (permanent differences, eg, penalties, participation exemption, etc) or are deductible in a different year (timing differences, eg, provisions, differences between accounting depreciation and tax depreciation).

There is currently a patent box system in Spain. In this respect, a partial exemption can be applied to the income obtained by entities from the transfer of the right to use or exploit certain assets (patents, utility models, registered advanced software, and complementary certificates for the protection of medicines, phytosanitary products and designs legally protected), that have been generated by its research, development and technological innovation activities (R&D+i activities). This partial exemption can amount to a maximum of 60% of the income.

This partial exemption can also be applied to capital gains generated from the transfer of the above-mentioned assets to third parties. In the event that the transaction is carried out between related parties, the partial exemption will not apply.

Furthermore, a tax credit is available for research and development and technological innovation activities.

The tax credit for carrying out R&D activities will be 25% of the R&D expenses incurred in the tax year and, if these expenses are higher than those incurred for the same concept in the two previous tax years, the deduction will be up to 42% of these expenses. In addition, the companies may apply a tax credit of 17% of the amount of the personnel costs for qualified researchers assigned exclusively to R&D activities. There is also a tax credit of 8% on investments in fixed assets used exclusively for these activities.

However, the tax credit for technological innovation activities will be 12% of the expenses incurred in the tax year related to this concept.

Spain has several tax incentives for the production of movies that are totally or partially shot in Spain. The incentive could amount to EUR10 million.

The tax credit provided for these activities will be 40% of the total cost of production, as well as the costs of obtaining copies and the costs of advertising and promotion to be borne by the producer of the movie, provided that more than 50% of the cost of production corresponds to expenses incurred on Spanish territory.

Tax losses may be carried forward indefinitely, although any deduction is limited to 70% of the positive taxable income before the application of the tax benefit for the capitalisation reserve and other specific items. Tax losses of at least EUR1 million can always be offset without limitation.

There are additional limitations for large companies and tax groups. When their turnover in the 12 months prior to the commencement of the taxable period reaches:

• EUR20 million – the offsetting of tax losses cannot exceed 50% of the yearly taxable income before the capitalisation reserve and tax losses are offset; and
• EUR60 million – the offsetting of tax losses cannot exceed 25% of the yearly taxable income before the capitalisation reserve and tax losses are offset.

The CIT Law provides anti-avoidance rules to prevent tax losses being utilised when there is a change in control.

As a general anti-avoidance rule, interest paid to a group entity incurred to acquire shares (when the seller is another group entity) or to increase equity interests in other group members is wholly non-deductible (tainted financial expenses), unless the operation might pass a business-purpose test.

The remaining net finance cost (this is the net amount of financial income and cost, excluding the above-mentioned tainted financial expenses) is deductible up to an amount equal to 30% of the operating profit, defined as the accounting operating profit eliminating the effect of (usually increasing):

• the amortisation of fixed assets;
• the subsidies for non-financial fixed assets and others; and
• the depreciation for impairment of fixed assets as well as the gains or losses derived from the transfer of fixed assets.

The resulting amount should be increased with dividends derived from entities when the stake represents at least 5% of their share capital. This rule will not apply to dividends from subsidiaries that have been acquired from other companies of the group with group debts generating tainted non-deductible financial expenses referred to previously.

A net financial cost above 30% of operating profit could be carried forward and deducted in the following tax years (with no term limitation) within the same limit of 30% of the annual operating profit.

Conversely, if the net financial cost is below 30% of operating profit (eg, capacity excess) that excess of capacity may be carried forward to deduct more financial cost in the following five years.

The aforementioned limitation (30% of the operating profit) does not apply when:

• the net financial cost does not exceed EUR1 million;
• the borrower is either an insurance or financial entity; or
• in the case of entities belonging to a tax unit or tax consolidation group, all these calculations (net financial cost, operating profit, etc) would be referred to the whole tax group.

The Spanish CIT Law allows Spanish tax-resident companies and Spanish permanent establishments (PEs) belonging to a Spanish or multi-national group to be taxed as a single group and, therefore, apply a special tax-consolidation regime for CIT purposes.

To apply this regime, the main requirements are as follows:

• the Spanish companies should be owned (directly or indirectly) by the same parent company (either resident or non-resident);
• the parent company (either resident or non-resident) of the tax group must hold a direct or indirect minimum holding of 75% (70% for quoted companies) and the majority of voting rights in the Spanish companies must belong to the group;
• the above participation should be maintained during the whole taxable period; and
• the parent company cannot be tax-resident in a tax haven.

The main characteristics of the tax consolidation regime are described as follows:

• the taxable income results from the sum of all the taxable incomes of each Spanish tax-resident company of the tax group, corrected as established in the following points;
• current tax losses of any of the companies of the tax group can be offset against any company's current tax profits;
• tax profits generated from intra-group transactions are deferred and are only included in the consolidated taxable income when:

a) they are carried out with third parties;

b) one of the intra-group companies that is part of the transaction ceases to form part of the group; and

c) the consolidation regime is no longer applied;

• specific limitations apply concerning the offsetting of tax losses or the application of tax credits generated by the group companies before they formed part of the tax group or join the Group; and
• no withholding applies on payments made at intra-group level.

Capital gains are normally considered as ordinary income taxable at the standard CIT rate (generally, 25%) in the tax period they arise.

However, participation exemption currently applies to capital gains arising on the transfer of shares (either of resident of foreign entities) when at least a 5% participation is held for an interrupted period of at least one year, the transferred entity is an operating entity and certain other requirements are met.

In the case of a foreign subsidiary, an additional condition is required. In order for the exemption to apply, the foreign subsidiary should have been effectively subject to (and not exempt from) a tax similar to CIT at a nominal rate of at least 10% in each and every year of holding the stake; this requirement is understood to be met when a tax treaty is applicable, and it includes an exchange of information clause.

From tax year 2021, the exemption has been limited to 95% of the capital gain.

Capital losses from shares that could benefit from the participation exemption are not tax-allowed, unless they come from liquidation with certain requirements.

Depending on the nature of the operations carried out by the businesses, the following taxes may be payable by an incorporated business on a transaction.

Value-Added Tax (VAT)

Spanish VAT regulation implements the EU directives on VAT.

VAT is levied on the supply of goods and services provided by entrepreneurs and professionals, intra-community acquisitions and imports of goods into Spain.

The concept of entrepreneurs and professionals includes a large number of assumptions, but basically refers to those persons (physical or legal) who carry out business or professional activities, meaning those that involve the commissioning of material and human factors of production, or one of them, for their own account to intervene in the production or distribution of goods or services.

The territory of application of the tax is the Iberian Peninsula and the Balearic Islands. In the Canary Islands, Ceuta and Melilla, other indirect taxes are applied (Impuesto General Indirecto de Canarias - Canaries General Indirect Tax (IGIC) and Impuesto sobre la Producción, los Servicios y la Importación - Tax on Production, Services and Imports (IPSI), respectively). The operation of the IGIC is similar to that of VAT, with some differences with regard to exemptions. Conversely, the IPSI is a basic sales tax.

There are three different rates of VAT:

• 21% (general rate applied to regular deliveries of goods and services);
• 10% (reduced rate applied to basic needs); and
• 4% (super-reduced rate applied to basic needs other than those classified in the reduced rate).

The ordinary rate of the IGIC is 7%, and the other rates are 0%, 3%, 9.5-%, 15% and 20%.

Property Transfer Tax (TPO)

TPO applies to transfer of goods and rights when the transferor is a private individual. It also applies to real estate transfers and real estate leases when the seller is an entrepreneur, but the operation is exempt from VAT.

The transfer of shares is exempt from both VAT and TPO, but when the transfer is aimed at dissimulating the transfer of real estate owned by the company, the actual taxation of transfer of real estate is applied.

TPO tax rates are 6% for the transfer of real estate, as well as for the constitution and transfer of rights in rem over them, 4% in the case of the transfer of movable property and livestock, and 1% in the case of constitution of rights in rem of guarantee, pensions, bonds or loans.

The aforementioned rates may change from one region to another, as regional authorities have competence to increase those tax rates.

Tax on Certain Digital Services ("Google Tax")

The Tax on Certain Digital Services ("Google Tax") is an indirect tax which applies to the provision of certain digital services involving users located in Spain.

This tax applies to companies with worldwide turnover of over EUR750 million and to Spanish income subject to this tax of over EUR3 million.

The tax rate amounts to 3% of income resulting from rendering digital services as defined in the Law.

The taxable persons are the companies that provide digital services as defined in the Law and that exceed the above-mentioned thresholds.

Tax on Financial Transactions (TFT)

The Tax on Financial Transactions is an indirect tax that applies to the acquisition of shares in traded Spanish companies when they have a market capitalisation above EUR1 billion on December 1st of the year prior to the acquisition.

There are numerous cases of exemption, including:

• acquisition of shares issued in the primary market;
• acquisition of shares acquired as a result of the execution of a takeover bid;
• acquisition of shares derived from transactions between entities of the same group;
• acquisition of shares carried out within an operation to which the Special Regime for Mergers applies (Chapter VII of Title VII of the CIT Law);
• acquisitions in treasury stock; and
• acquisitions in execution of a stock option plan by employees.

The tax rate amounts to 0.2% of the consideration paid exclusively for the shares, not including the expenses related to the transaction.

The taxable person is the intermediary acting in the operation.

Stamp Tax

Stamp tax (document duties and registration fees) is levied on notarial instruments and records documenting transactions that need to be registered in public registries. The tax rates range from 0.5% to 1.5% of the operation value.

Tax on the Increase in the Value of Urban Land

The tax on the increase in value of urban land is a local tax applied on a voluntary basis (its application is not mandatory) by local councils.

This tax applies when urban real estate is transferred and there is a gain for the transferor.

Incorporated businesses are also subject to the following notable taxes.

Tax on Economic Activities (IAE)

The Tax on Economic Activities is a direct tax of a real nature, whose taxable event is constituted by the mere exercise, on Spanish territory, of business, professional or artistic activities, whether or not they are carried out in specific local premises and whether or not they are specified in the tax rates.

Local Property Tax (IBI)

This tax is a direct municipal tax, periodic, real, and mandatory in all councils, which taxes the value of real estate. The rate of taxation will vary depending on the city council, ranging from 0.3% to 1.1% of the cadastral value.

Most closely held local businesses operate in corporate form, in order to be taxable by the CIT and to separate liabilities between the company and its holders.

In order to prevent those individual professionals who carry out very personal activities from doing so through companies to avoid the application of personal income tax rates, the Spanish tax authorities use the rules of piercing the corporate veil and qualifying transactions to ensure that they are actually carried out by individuals and not by the company.

There is no specific rule in Spain to prevent corporations from accumulating earnings for investment purposes.

In fact, in order to encourage entities to increase their own funds, Spanish CIT provides for the capitalisation reserve. This tax relief implies companies increasing their own funds, which entails a lower distribution of dividends to shareholders, in exchange of lower taxation.

Entities that are taxed under the general tax rate can apply a special reduction to their positive taxable base in an amount equal to 10% of the increase in its net equity.

The following conditions must be met in order to apply this reduction:

• there must be an increase in the entity’s net equity that must be maintained during a five-year period;
• a reserve for the amount of the reduction will have to be booked separately in the account balance. This reserve should be recorded as restricted reserves for at least a period of five years.

However, this reduction cannot exceed 10% of the entity’s positive taxable base prior to certain adjustments. The excess over the aforementioned limit can be carried forward for application in the following two years.

Dividends paid by closely held corporations are taxed as income from movable capital for Personal Income Tax (PIT) purposes.

Conversely, the sale of shares may produce a capital gain for the individual. This capital gain is calculated as the difference between the transfer value and the acquisition value. Regarding the transfer value, this will be the higher of these two values:

• the value of the net worth corresponding to the transferred securities resulting from the balance sheet corresponding to the last fiscal year closed prior to the date of accrual of the PIT; or
• the result of capitalising at the rate of 20% the average of the results of the three fiscal years closed prior to the date of accrual of the PIT.

Both dividends and capital gains form part of the savings base of the PIT, which is taxed on the basis of a tax-rate scale of between 19% and 26%, depending on the amount of the savings base (from EUR0 to more than EUR200,000).

Individuals are taxed on dividends and capital gains from the sale of shares in publicly traded corporations on the same basis as that previously explained for closely held corporations.

The only difference concerns the calculation of the capital gain, which in the case of publicly traded corporations is determined by the difference between the transfer value and the acquisition value, that is, the transfer value of the list value at the time of the transfer.

In the case that there is no double-tax treaty applicable, or a limit of taxation is not envisaged in the relevant double-tax treaty, payments made by a Spanish taxpayer to a non-resident entity will be subject to withholding tax in Spain at the following general rates:

• 19% on dividends and interest;
• 19% on royalties paid to residents in the EU, Iceland and Norway, and 24% in the rest of the cases.

For the application of a reduced rate or one of the exemptions described below, the taxpayer must be in possession of a tax-residence certificate issued by the tax authorities of the country of the recipient.

Domestic Law Exclusions or Exemptions

Dividends

According to the domestic law, dividends paid by a subsidiary to its EU parent company are exempt from withholdings when:

• the parent company holds at least a minimum holding of 5% in the Spanish subsidiary and the interest in the Spanish subsidiary has been held for at least one year before the dividend distribution (or will be held, up to completing the one-year period);
• both the entity paying the dividends and the beneficial owner are subject to and not exempt from one of the corporate taxes mentioned in Article 2.c) of the Council Directive 2011/96/EU of 30 June 2011 on the common system of taxation applicable in the case of parent companies and subsidiaries of different member states;
• the payment is not the consequence of the liquidation of the subsidiary;
• both the entity paying the dividends and the beneficial owner have one of the legal forms, listed in the Annexes to the Council Directive 2011/96/EU of 30 June 2011, on the common system of taxation applicable in the case of parent companies and subsidiaries of different member states.

This exemption will not be applicable where the majority of voting rights of the receiving entity is directly or indirectly owned by non-residents in the EU, unless it is proven that the incorporation of the receiving entity is due to valid economic reasons and sound business reasons.

Interest

Interest paid to a resident in the EU will be exempt from withholding.

This exemption does not apply when the recipient is tax-resident in a tax haven.

Royalties

Royalties paid to an EU member state would be exempt from withholding when the following requirements are met:

• both the entity paying royalties and the beneficial owner have one of the legal forms, listed in the Annexes to the Council Directive 2003/49/EC of 3 June 2003;
• both the entity paying royalties and the beneficial owner are subject to and not exempt from one of the corporate taxes mentioned in Article 3.a).iii) to the Council Directive 2003/49/EC of 3 June 2003;
• both entities are resident in the EU and neither of them is resident in a third country in accordance with a double-taxation agreement (DTA);
• both entities are associated companies, that is:

1. one has a direct minimum holding of 25% in the capital of the other; or
2. a third company has a direct minimum holding of 25% in the capital of both entities. This holding should be held for a minimum holding period of one year, that could be completed after the payment; the entity that receives those royalties should receive them for its own benefit and not as an intermediary, such as an agent, trustee or authorised signatory, for some other person and, in the case that the recipient is a PE, the received royalties should effectively be connected with that PE activity, and it should be a taxable income for the PE.

This exemption over royalties will not apply if the majority of voting rights of the receiving entity is directly or indirectly owned by a non-resident in the EU unless it is proven that the incorporation of the receiving entity is due to valid economic reasons and sound business reasons.

Currently, Spain has entered into double-taxation treaties with more than 90 countries, the main aim of which is to eliminate double taxation and provide for reduced rates of withholding taxes of dividends, interests and royalties. Double-taxation treaties concluded by Spain are generally compliant with the provisions set forth by the OECD.

Due to the favourable taxation of EU corporations, most foreign investors invest via EU member states, the Netherlands and Luxembourg being the primary tax-treaty countries that foreign investors use to make investments.

The use of treaty-country entities by non-treaty country residents may be challenged by the Spanish tax authorities, based on the argument that the recipient is not the beneficial owner of the relevant income.

The General Guidelines of the 2022 Annual Tax and Customs Control Plan approved by the Spanish tax authorities establishes as a priority area of attention the verification of the correct declaration of the withholdings applied to dividends, interest and royalties paid to non-residents.

Likewise, it will be checked whether the recipient of this income is the beneficial owner in order to verify that there is no abuse of the European regulations that aim to facilitate the free movement of capital within the territory of the Union.

In line with the SGAPP, the CIT Act clearly specifies that controlled transactions carried out by related parties must be valued on an arm’s-length basis. In this sense, the burden of proof falls upon the taxpayer, who must provide documentation to prove to the tax authority that the values applied in the transactions with related parties meet the principle of valuation at fair market value or on an arm’s-length basis.

In recent years, the Tax Control Plan published by the tax authorities includes transfer pricing as one of the essential points for attention in the review of multi-national groups, especially operations carried out with high-value intangibles, intra-group services, corporate restructurings and intra-group financing operations.

In Spain, tax authorities usually check transfer pricing during the normal course of CIT tax audits, rather than conducting specific transfer-pricing audits. These CIT tax audits are mainly oriented towards understanding the role of the Spanish companies under scrutiny in the group’s value chain, to check the consistency of the transfer-pricing methods applied and the results of the benchmark analysis. These audits are also oriented to the detection and regularisation of permanent establishments of non-resident entities, which may arise in certain operating structures of multi-national groups, such as contracts for the provision of marketing, agencies, commissionaires, and similar services. Therefore, the review of transfer-pricing policies not only covers the quantification of operations, but also the structure of the operations, and their different tax effects.

Spanish authorities challenge the use of related-party limited risks distribution arrangements, especially when there has been a change to the transfer-pricing model, and as a consequence of which the Spanish entity has reduced its taxable base.

One significant point on which the Spanish transfer-pricing regulations differ from the OECD Guidelines is their broader parameters for related or associated parties; this requires the preparation of documentation and the application of transfer-pricing principles to operations that would not be regarded as related operations in other countries.

The use of mutual agreement procedures in Spain has increased in the past years.

International transfer-pricing disputes are, in some cases, resolved through a Mutual Agreement Procedure (MAP) process. According to the statistics published at the end of 2020 by the OECD, more than 530 MAPs had taken place since January 2016. Around 315 of these MAPs were transfer-pricing cases.

Generally, the Spanish tax authorities are open to MAPs and willing to co-operate in these procedures.

If a transfer-pricing adjustment is made by the tax authorities, they are obliged to execute the relevant bilateral adjustment in the counterparty of the transaction, provided that it is a Spanish company.

Whenever an MAP is filed, any transfer-pricing claim is suspended, up to its final resolution. If the solution offered at the end of the MAP procedure is accepted, the claim will be withdrawn. Otherwise, if the MAP resolution is not accepted, the premium tax credit (PTC) can be successfully continued up to its final resolution.

There are no significant differences between the taxation of local branches (PEs) and local subsidiaries of non-local corporations. However, the following items in the tax regime applicable to a local branch of a foreign corporation should be considered:

• application of the rules of related-parties' transactions for operations carried out by the PE with the head office;
• deductibility of the management and general administrative expenses charged by the head office to the PE if these are included in the accounting statements of the PE and charged on a regular and rational principles;
• payments made to the head office for royalties, interest, commissions, technical assistance services or for the use or transfer of goods or rights are generally not deductible.

Capital gains of non-residents on the sale of stock in local corporations are normally considered as ordinary income, taxable at the rate of 19% in the tax period in which they arise.

However, domestic law provides several exemptions, including the exemption applicable to capital gains obtained without a PE in Spain by a resident in another member state of the European Union (EU) or in the European Economic Space, if there is an effective exchange of tax information.

The exemption does not apply to capital gains arising from the sale of stocks in the following cases:

• when the assets of that entity are mainly, directly or indirectly, real estate situated in Spanish territory; or
• in the case of individuals, when at any time during the 12 months prior to the sale they have held directly or indirectly at least 25% of the capital or assets of the entity;
• for non-resident entities, when the sale does not satisfy the requirements for the application of the exemption under Article 21 of the CIT Law (explained in 6.3 Taxation on Dividends from Foreign Subsidiaries). 

Nevertheless, according to the Double-Taxation Agreements (DTAs), taxation of these gains normally corresponds exclusively to the State of residence, and they are exempt in Spain. However, there are exceptions in many DTAs in the case of stocks or shares in real estate entities, which allow taxation in the State where the real estate is located.

Therefore, to determine the taxation of capital gains of non-residents on the sale of shares, it will be necessary to analyse the applicable DTAs.

The change of control resulting from the disposal of an indirect holding should not generate taxable income in the CIT. In this respect, Spanish law provides anti-abuse rules that seek to eliminate the tax impact of losses arising from the disposal of shareholdings in the event of a change of control of some companies.

See also 5.3 Capital Gains of Non-residents regarding capital gains of non-residents on the sale of stock in a Spanish entity.

In general terms, Spanish tax law follows the criteria set out in the OECD Guidelines. Therefore, no specific formulas are used to determine the income of foreign-owned local affiliates selling goods or providing services different from the arm’s-length principle.

There are no specific rules to determine the proportion of common expenses that a non-local affiliate must re-invoice to the local affiliates. As a consequence, the calculation of the expenses chargeable to the local affiliates must be made on arm's-length principles and according to a reasonable criterion.

Once the proportion has been calculated according to the aforementioned criteria, there are no specific rules regarding the deductibility. Therefore, the management and administrative expenses incurred by a non-local affiliate will be deductible if they are ordinary costs of the productive activity of the local affiliates and they have been calculated in accordance with arm's-length principles.

There are no special rules applicable to related-party borrowing. However, as with any other related-party transaction, it is required that the arm's-length principle be obeyed.

For that reason, it is not allowed for a local affiliate to grant an interest-free loan or a loan at below-market interest rates. In addition, the deductibility of interest expenses is subject to the interest limitation rule, as explained in 2.5 Imposed Limits on Deduction of Interest.

The CIT regulations subject resident companies to taxation on all their worldwide income, regardless of the country of source.

However, profits obtained abroad through a PE located outside Spanish territory will be exempt from taxation when it has been subject to (and is not exempt from) a tax similar to CIT at a nominal rate of at least 10% under the terms of Article 21 of the CIT Law (explained in 6.3 Taxation on Dividends from Foreign Subsidiaries).

Immediately, losses incurred by a PE abroad will not be tax-deductible, unless they are due to the final cease of the activity of the PE and under certain circumstances.

The profits exempted by application of the process described in 6.1 Foreign Income of Local Corporations are calculated by attributing to the PE all the income and expenses associated with it, together with the part of the common expenses that is allocated to it.

Consequently, local expenses attributable to the PE are deductible in Spain if they comply with the general deductibility requirements.

In accordance with the provisions of Article 21 of the CIT Law, dividends obtained by Spanish entities from foreign subsidiaries may be 95%-exempt from taxation under the current participation exemption regime. Foreign subsidiaries dividends will be generally 95-%-exempt when the following conditions are met; either (i) the recipient owns at least 5% of the distributing entity, or (ii) that stake has at least one year’s seniority (the one-year seniority could be fulfilled afterwards).

In the case of a foreign subsidiary, an additional condition is required. In order for the exemption to apply, the foreign subsidiary should be effectively subject to (and not exempt from) a tax similar to CIT at a nominal rate of at least 10%; this requirement is understood to be met when a tax treaty is applicable, and it includes an exchange-of-information clause.

Furthermore, capital gains resulting from the sale of shares, in both Spanish and foreign entities, would be generally 95%-exempt from taxation when requirements for participation exemptions are fulfilled. In the case of the sale of foreign subsidiaries, the minimum taxation requirement must be met during all the years in which the participation has been held.

Specific requirements are demanded in the case of indirect participation through a holding entity.

Transactions between related-parties are subject to the arm's-length principle. This principle requires that transactions should be valued at fair value and should satisfy the obligations under transfer-pricing rules. Consequently, the local corporation must recognise income arising from the transfer of intangibles that is taxable in the local corporation’s CIT.

However, any such income from the use of intangibles may benefit from the regime described in 2.2 Special Incentives for Technology Investments.

According to Spanish law, a foreign company is considered a Controlled Foreign Corporation (CFC) when 50% or more of its equity, capital, profits or voting rights is controlled directly or indirectly by Spanish shareholders. A foreign company is also considered a CFC if the CIT paid by that company is less than 75% of the CIT that would have been paid in Spain.

Under the Spanish CFC rules, the following income must be allocated to the Spanish companies:

• income obtained by foreign subsidiaries without material or personal resources (substance); or
• passive income (ie, property, shares, insurance, loans, etc) obtained by foreign subsidiaries.

It should be noted that the CFC rules are not applicable to companies or PEs resident in the EU or in a state that is part of the European Economic Space Agreement if it can be proved that they carry on a business activity or they are Collective Investment Institutions (CIIs) regulated in EU Directive 2009/65/CE.

With effect from 2021, the scope of the CFC rules applies to dividends and capital gains obtained by foreign holding companies that have held at least a 5% stake in foreign operating subsidiaries for more than one year.

Although Spanish law does not hold any rules relating to the substance of non-local affiliates, the interpretative approach adopted by the Spanish tax authorities – following the approach of the Organisation for Economic Co-operation and Development (OECD) and European jurisprudence – is to require an examination of the economic substance.

Consequently, to determine the application of the tax advantages envisaged in a specific DTA, not only is the identity of the formal owner of the income ascertained, but also the identity of the person who actually receives the income, from an economic perspective. This means analysing both the form and the substance of the transaction, to determine whether the person applying for the DTA advantages is the beneficial owner of the income.

Accordingly, the criterion followed by the Spanish tax authorities requires that a structure in which a non-local affiliate is interposed be designed for commercial and economic purposes. Otherwise, the situation should be regularised.

It means that any tax advantage obtained should be eliminated and the DTA between Spain and the country of residence of the interposed non-local affiliate should be inapplicable.

Capital gains arising by the Spanish entity on the sale of shares in non-resident subsidiaries could apply the 95% exemption envisaged in Article 21 of the CIT Law (explained in 6.3 Taxation on Dividends from Foreign Subsidiaries).

Capital losses from shares that could benefit from the participation exemption are not tax-allowed unless they come from liquidation, with certain requirements.

The Spanish General Tax Law provides several General Anti-Avoidance Rules (GAAR) that would allow Spanish tax authorities to tackle situations where a taxpayer artificially avoids the payment of taxes:

• the substance over form or requalification rule;
• the rule for conflicts in the application of the law; and
• the rules for simulated schemes.

According to the Anti-Tax Avoidance Directive (ATAD), EU member states have to implement a GAAR. However, since Spain already had such a rule, meaning that there was no need to introduce a new rule, no modification was required.

Additionally, the Spanish legislation has numerous rules of Specific Anti Avoidance Rules (SAAR), of which the most frequently applied are the following:

• the transfer-pricing anti-avoidance rule;
• the limitation of financial interest paid to group entities' deductibility;
• the anti-abuse rule for mergers, spin-offs and the exchange of shares;
• the rule for preventing the transfer of companies with carry-forward tax losses; and
• the rules preventing hybrid mismatches.

The Spanish Tax Agency has long applied the GAAR to re-characterise transactions in accordance with the underlying substance or to disregard operations when it is considered they lack genuine commercial reasons other than tax reasons.

Spanish courts have also applied an “economic substance” or “business purpose” (qualification principle) doctrine to disregard transactions that have no appreciable effect on the taxpayer other than the reduction of income taxes.

The application of the GAAR is commonly litigated, since its application requires many subjective considerations, and the Spanish Tax Agency position is not always followed by courts.

When the GAAR is applied, no penalties can be imposed for taxpayers and the tax claim is limited to avoided taxes, plus late-payment interest.

Companies that are required to have their accounts audited must provide the auditors annually with all the information necessary to carry out the aforementioned audit.

An audit of accounts consists of an exhaustive review of the financial statements of a company, with the objective of accrediting the reasonableness of the veracity and reliability of its content to third parties.

The obligation to audit the accounts, according to the provisions of the Spanish Law on Corporations, refers only to companies that exceed, for two consecutive years at year-end, two of the following three parameters:

• the total amount of asset items exceeds EUR2,850,000;
• the total amount of its annual turnover exceeds EUR5,700,000; or
• the company has a workforce of more than 50 employees.

The main recommendations resulting from BEPS Actions, with only very few exceptions, have been already implemented where there has yet to be a consensus (ie, the digital economy).

In fact, Spain is one of those countries where OECD Conventions and Guidelines are directly applicable when compatible with domestic legislation, since Spanish Corporate Income Tax declares that it has to be interpreted based on OECD principles.

All the main principles resulting from BEPS work have been implemented.

• Action 2: Spanish Corporate Income Tax has been amended during 2021, introducing ATAD II regulations that follow BEPS principles regarding hybrid mismatches.
• Action 3: Spanish CFC regime has been amended to implement BEPS resulting principles, during 2021.
• Action 4: Before BEPS Spain had already implemented interest stripping rules that limit allowed interests (exceeding 1 million) to 30% of EBITDA (1 million threshold).
• Action 5: Spain has strengthened mechanisms for exchanging APA(s), ATR(s) among all European countries and some OECD countries.
• Action 6: Spanish Courts have traditionally rejected the application of DTAs in the case of abusive structure aimed at "treaty shopping", that is, the attempt by a person to access indirectly the benefits of a tax agreement between two jurisdictions without being a resident of one of those jurisdictions. Furthermore, DTAs concluded after BEPS (eg, China, Japan) already included provisions to prevent the abusive use of DTAs. Finally, Spain accepting the Multilateral Convention to Implement Tax Treaty-Related Measures to Prevent Base Erosion and Profit Shifting - Multilateral Instrument (MLI) would affect already existing DTAs in this sense.
• Action 7: Spain's approach to PEs has been traditionally ahead of the more aggressive among the OECD and EU countries. Hence, the BEPS approach towards PEs has been applied in Spain, even before BEPS. Furthermore, as a result of the MLI, Spanish DTAs is even more aligned with BEPS principles.
• Actions 8 to 10: before the BEPS initiative, Spain had already declared directly applicable Transfer Pricing (TP) Guidelines and principles approved by the OECD.
• Action 12: as an EU member state, Spain implemented DAC 6 (Council Directive (EU) 2018/822) introducing aggressive tax planning reporting obligations affecting not only EU member states, but also third parties.
• Action 13: Spain very soon applied the Country by Country (CbC) reporting requirements.
• Action 14: Spain is committed to making Dispute Resolution Mechanisms more effective, not only because, as an EU Member, it is obliged to apply arbitration mechanisms within the EU territory, but also because, as a signatory of the MLI, an EU member state may find that most DTAs might end up having that alternative to correct double-taxation scenarios.
• Action 15: Spain has ratified the OECD MLI to Implement BEPS measures. The MLI will enter into force during 2022 and 2023 and it may affect 88 out of the almost 94 double-taxation agreements concluded by Spain.

Spain is also participating in the work resulting from the OECD inclusive framework, aimed to establish the Global Anti-Base Erosion (GloBE) and Undertaxed Payments Rule (UTPR) that would likely result in the implementation of a minimum taxation level for large multi-national enterprises (MNE) before the end of 2022.

Spanish tax authorities are extremely supportive of OECD tax-related works overall when there is a large consensus. It has been the case for the OECD-BEPS outcome but also for the Pillar 2 launch in the OECD inclusive framework. It is worth mentioning that, as a member state of the EU, Spain has a legal obligation to implement Directives issued by EU that are fully aligned with OECD initiatives.

Recent economic crises and the COVID-19 crisis resulted in a public deficit increase, which has given special relevance to MNE taxation and harmful profit-shifting practices. Spanish Authorities have become more committed to tackling tax avoidance. This situation is boosting the implementation of BEPS and similar international recommendations.

Spain's current administration is more focused on artificially fighting profit-shifting than attracting investments by means of tax competition. Spain relies on the premise that a common approach to taxation (across Europe and beyond) would determine a more accurate allocation of profits and taxes, based on economic factors other than taxes.

Legal uncertainty has usually been the Achilles heel of the Spanish Tax system, since, very often, special tax regimes have been frustrated due to aggressive interpretation from tax-inspector bodies. Thus, trying to gain legal certainty is a must when it comes to tax planning investment in Spain.

Spanish Corporate Income Tax has been amended during 2021 to implement the European Directive preventing hybrid mismatches (ATAD II). The Spanish new tax system is a perfect implementation of ATAD II European Directive (Council Directive (EU) 2017/952).

Spain does not have a territorial regime. Only Spanish branches of foreign companies are taxed exclusively for Spanish-sourced income. Interest-stripping rules would hardly promote investments in Spain.

As previously mentioned, Spain does not have a territorial tax system, but it does have CFC rules, as of 1995, that have been modified slightly to adapt them to OECD – BEPS outcomes and to the ATAD 2.

There is a high consensus in CFC rules resulting from the OECD.

However, in Spain, and on the basis of a recent cut to the participation exemption, CFC rules could create unwanted double taxation when a Spanish Company controls another foreign holding company whose participation exemption is more generous than the Spanish one.       

Spain approving the MLI determines a broad limitation of tax benefits resulting from DTAs when it is reasonable to conclude, with all facts and circumstances, that obtaining that benefit was the main purpose of the transactions. This limitation together with the existing GAAR would make artificial inbound or outbound tax structures easy to challenge for the Spanish Tax Inspectorate. Hence, it becomes critical to gather a defence file justifying the business grounds for any tax structure.

TP rules in Spain were already very detailed and broad; consequently, almost no changes have been introduced, other than the CbC report, after BEPS.

Spain supports all internationally accepted reporting requirements such as those resulting from the CbC report or aggressive tax planning from the EU Council Directive 2011/16 in relation to cross-border tax arrangements (DAC6). Spain will likely make a big effort to implement any new transparency requirements.

In 2021, Spain introduced a Digital Service Tax (often known as the GAFA tax) aimed to a 3% tax on the revenues of tech giants such as Google, Facebook, Apple and Amazon, on Spanish territory (see 2.8 Other Taxes Payable by an Incorporated Business). It only applies to companies belonging to a group with a total worldwide turnover above EUR750 and with Spanish operations above EUR3 million.

Spain will surely align its domestic legislation to international OECD digital economic taxation as soon as there is sufficient consensus on it. In the meantime, it is important to bear in mind that the Spanish approach to PEs is still one of the most aggressive approaches leading to the existence of a Spanish PE as soon as there is a virtual presence in Spain without the need for a clear physical presence.

Spain has not introduced specific provisions or benefits dealing with offshore taxation of intellectual property.