SPANISH TAX UPDATE – APRIL 2012

On 30th March the recently elected Spanish Government issued Royal Decree 12/2012 with the purpose of reducing the public deficit by drastically cutting expenditure and increasing tax receipts. 

A summary of the main taxation measures is as follows:

1. Amnesty

The Government has introduced a measure which they were strongly against whilst in opposition – a tax amnesty in respect of Income Tax, Corporation Tax and Non-Resident Tax for resident individuals, resident entities and non-residents.

The thrust of the amnesty is that undeclared assets are reported on a particular return (yet to be issued) to a Special Unit within the Spanish Tax Authorities, together with payment of the tax. The reason that a Special Unit is being created is to ensure confidentiality.

Points to consider are:

1. The tax rate is 10% on the value of acquisition of the undeclared assets.
2. Taxpayers who take advantage of this special procedure will not face imprisonment if their tax debts meet the definition of being a criminal offence (basically tax liability for any one tax exceeding €120,000 in one tax year).
3. No fines, interest or surcharges will be applied.
4. The final date for declaration and payment of tax is 30th November 2012.
5. Full details of the assets must be declared.
6. This special procedure is not applicable to those persons or entities who beforehand have received notification from the Spanish Tax Authorities that their affairs are going to be investigated.
7. Neither does this amnesty cover taxes such as Wealth Tax (to 2007), Inheritance and Gifts Tax or VAT. Hence before making a voluntary disclosure any effect on these taxes must be considered.
8. If a taxpayer is contemplating using this amnesty, before filing due consideration should be given to the normal regularization process which has always existed and still continues alongside the special procedure. Under the normal procedure the taxpayer files complementary tax returns to regularize their tax affairs for the years which are not prescribed (4 years normally but 5 years if the amount of one tax exceeds €120,000 in a given year). The cost, apart from the tax, is in general a 20% surcharge on the tax itself (which falls to 15% if paid promptly) plus interest. With low interest rates and dividend yields over the last few years utilizing the normal regularization facilities may be cheaper.

Apart from this general amnesty above, the Government has also introduced a camouflaged amnesty for resident companies holding shares in overseas subsidiaries, in particular subsidiaries based in tax havens or low-tax jurisdictions.

If the subsidiary pays a dividend, the resident company has the option to pay a Special Tax of 8% of the gross amount of the dividend (as opposed to including the dividend in taxable income and paying 30% Corporation Tax).

Similarly, if the resident company sells the shares in the subsidiary at a profit, it has the option to pay a Special Tax of 8% of the gain (as opposed to inclusion in taxable income and paying 30% Corporation Tax).

It should be noted that the Special Tax is only applicable in circumstances where the resident company holds a minimum 5% shareholding in the foreign subsidiary and held this stake for an uninterrupted period of at least 1 year before the dividend is paid or shares sold, plus at least 85% of the profits of the subsidiary must have arisen from economic activities.

As with the general amnesty, the Special Tax has to be reported and paid before 30th November 2012.

It should be noted that any overseas withholding taxes cannot be offset against the Special Tax and the Special Tax is not a taxdeductible expense for the resident company.

Finally, it should be mentioned that the Socialist Party have challenged the legality of the Fiscal Amnesty and the outcome is awaited.

There are many questions unanswered by the law and, in the end, will be resolved by the Special Unit. It is strongly recommended that taxpayers considering making any declaration referred to above take tax and legal advice beforehand; the Spanish office at STM Nummos S.L. is perfectly equipped to give impartial advice on this and any other Spanish tax issue.

2. Resident Income Tax

For an individual trading in their own name it is possible, for tax purposes, to accelerate the depreciation on new fixed assets. This tax advantage has been modified and effectively reduced.

3. Non-Resident Income Tax

No changes.

4. Corporation Tax

A. Changes which apply for accounting periods starting in 2012 and 2013 only

4.1. Goodwill: the tax-deductible amortization rate falls from 5% to 1%.

4.2. Tax deductions to incentivize certain activities (e.g research and development, exports etc): currently deductions allowable in a given tax year are capped at 35% or 60% - depending on the activity - of taxable profits. This cap is now reduced to 25% or 50%. However unused amounts can now be carried forward for 15 years instead of the current period of 10 years (18 years instead of 15 years in the case of research and development).

4.3. Companies with a turnover of more than €20 million in the previous year are subject to minimum interim Corporation Tax payments, being generally 8% of taxable profits (4% in limited circumstances).

B. Changes of a permanent nature

3.4 Limitation of tax-deductible interest arising from debts with group companies: interest is not deductible on that part of the loan used for the following purposes

• the purchase of shares in any company (resident or non-resident) from another group company or
• increasing share capital in any other group company.

However there is a caveat that interest will be deductible if the purchase of shares or increase in share capital are bona-fide transactions.

3.5 The subcapitalisation rules have also been changed to reduce the amount of interest payable to another group company treated as tax deductible. In general the effect is to reduce tax deductible net interest to 30% of taxable income (after adjusting for certain items).

However, yet again the negative effects of this change are alleviated because

• net interest paid up to €1 million is 100% tax deductible
• tax-deductible interest in excess of the 30% cap in a given tax year can be deducted over the following 18 tax years.
• should net interest be lower than the 30% limit, any unused “tax credit” may be carried forward over the following 5 years thus effectively increasing the 30% limit during those years.
• in the case of companies in a consolidated group, the 30% limit applies to the group, not individual companies.
• the rules do not apply to a company outside a group unless the interest derives from loans with individuals or entities which, directly or indirectly, hold more than 20% of the shares in that company (or alternatively the interest derives from loans to companies in which the company has a shareholding which, directly or indirectly, exceeds 20%) and said interest exceeds 10% of total interest expense.
• neither do the rules apply to credit institutions.

3.6 Profit obtained on disposal of shares in a non-resident company: under current law this profit is not subject to Spanish Corporation Tax providing the following conditions are met:

1. The shareholding is at least 5% and held for an uninterrupted minimum period of 1 year up to the date of disposal.
2. The subsidiary is subject to a tax similar to that of Spanish Corporation Tax for all years the shares are held.
3. Profits of the subsidiary are derived from trading activities in all the years the shares are held. The new rules allow the company to treat a proportion of the profit as tax exempt if conditions (ii) and (iii) above are not met for the entire period of ownership.

3.7 Freedom of depreciation for large companies (those with a turnover in excess of €10 million in the previous year): basically with effect from 31st March 2012 this tax-advantageous incentive is repealed. However investments made prior to this date can still take advantage of the revoked law but the amount in excess of the “normal” depreciation which can be charged against taxable profits during 2012 and 2013 is limited.

For small and medium-sized companies, whilst the tax incentive has been repealed any outstanding depreciation from investments made prior to 31st March 2012 can be charged against profits with no limitation (note: small and medium-sized companies still have accelerated depreciation advantages which have not been amended by this law but are much less generous than the repealed incentive).

5. Draft Law of Measures to tackle Tax Fraud.

The draft law was approved by the Council of Ministers on 13th April and contains various measures, the most important of which are:

1. Of the total Tax Agency budget, 60% will be allocated to the fight against fraud.
2. In business transactions, the maximum payment permitted per operation in cash will be €2,500.
3. This does not apply to a transaction between individuals neither of which is acting in the course of business.
4. The limit is increased to €15,000 if the payer is a nonresident.
5. If the cash limit is breached both the payer and recipient are liable to a fine of 25% of the cash payment.
6. There will be the obligation on the taxpayers to inform the Tax Authorities about all bank accounts and investments situated outside Spain. A new form will be introduced for this specific purpose.
7. Undeclared income will not prescribe; once discovered it will be added to the income of the last tax year (and as General Income, subject to marginal Income Tax rates in excess of 50%). This treatment also increases the chance of the tax exceeding €120,000 and thus becoming a criminal offence.
8. By simplifying the existing law tax collection offices will be able to react quicker once a tax debt is known and take swifter preventive action (e.g. embargoes).
9. Tax retentions made by companies but not paid quarterly to the Tax Authorities will become the responsibility of the directors if it is shown the directors have no intention to pay.
10. The Tax Authorities will be empowered to stop the transmission of a property held within a company if a taxpayer with tax debts owns more than 50% of the shares.
11. In certain circumstances the purchaser of land or buildings subject to VAT will have to pay the VAT to the Tax Authorities and not the vendor.
12. Fines for being obstructive when a taxpayer is called for inspection will be increased. In the case of non-traders the fine ranges from €1,000 to €100,000; for traders it ranges from €3,000 to €600,000.

6. Tax Treaty with Hong Kong.

On 13th April 2012 a tax treaty between Spain and Hong Kong came into force.

With regards to dividends the withholding tax rate is zero provided the effective beneficiary is a company holding at least 25% of the company paying the dividend. In all other cases the withholding tax is 10%.

With regards to interest, the withholding tax rate is 5%.