Specific considerations on the consequences resulting from Spanish income tax laws regarding transactions carried out with countries or territories that have recently been listed as ‘non-cooperative jurisdictions’

Jorge de Azcárraga Llobet

Uría Menéndez, Spain

jorge.deazcarraga@uria.com 

Spanish income tax law makes numerous anti-avoidance references to transactions carried out with or by persons resident for tax purposes in, or otherwise incorporated in, a non-cooperative jurisdiction (formerly, a ‘tax haven’). The corresponding language includes, for instance, special controlled foreign company (CFC) rules, the rejection of domestic exemptions and the application of anti-abuse rules.

Back in 1991, the Spanish Royal Decree 1080/1991 originally introduced a list of 48 countries and territories deemed to be ‘tax havens’ for Spanish tax purposes. The list was reduced in the following years, basically by means of the ratification by these jurisdictions and Spain of either income tax treaties with tax information exchange provisions or specific international tax information exchange agreements. Thus, historically, the way out for these countries and territories from such a list was the ratification of specific agreements or income tax treaties with a tax information exchange clause vis-à-vis Spain (eg, Panama, Barbados or Trinidad and Tobago). Furthermore, as this initial list followed a ‘static perspective’, no additional countries or territories were included in it.

However, the concept of ‘tax haven’ has been extensively reformed and, ultimately, replaced by the concept of ‘non-cooperative jurisdiction’ by virtue of Spanish Law 11/2021 of 9 July 2021. The amendment sought to introduce a ‘dynamic perspective’ pursuant to which the corresponding Spanish authorities could more easily determine those countries or territories that are regarded as non-cooperative jurisdictions based on, roughly speaking, the following criteria:

1. tax transparency: if the country or territory does not have an in-force tax information exchange agreement with Spain or if the country or territory does not fulfill an effective exchange of tax information with Spain;

2. the existence of mechanisms to erode the taxable base: for instance, if the domestic law of the country or territory permits offshore instruments or entities that may attract profits or revenues that do not reflect real economic activities; and

3. taxation threshold: if the domestic law of the country or territory does not establish analogous Spanish personal income tax, Spanish corporate income tax or Spanish non-resident income tax regulations that ensure minimum taxation.

Indeed, after almost two years from the ratification of Law 11/2021 and, curiously, a few days before the approval of the revised ‘EU list’ of non-cooperative jurisdictions for tax purposes by the Council of the European Union, on 9 February 2023 the Spanish Government finally published a regulation (in the form of a ministerial order) which, taking into consideration the above criteria, has replaced the original list with a new ‘catalogue’ of countries and territories (and harmful tax regimes) considered to be non-cooperative jurisdictions. The ministerial order entered into force on 11 February 2023 (or will enter into force on 11 August 2023 for certain countries or territories, as explained below). In particular, the new list (which differs from the revised ‘EU list’ subsequently approved by the Council of the European Union) is as follows:

For these purposes, this new list of non-cooperative jurisdictions will generally apply for tax periods starting on or after 11 February 2023 (ie, effectively entering into force on 1 January 2024, given that the vast majority of the financial years of Spanish companies follow the calendar tax year; however, for Spanish non-resident income tax and instant accrual taxes, it will apply from 11 February 2023). Nevertheless, regarding the countries or territories that were not included in the 1991 list (ie, American Samoa, Barbados, Guam, Palau, Samoa and Trinidad and Tobago), the ministerial order will enter into force six months after the date following its publication in the Spanish Official State Gazette, which is 11 August 2023.

Having said that, when carrying out transactions with, or by persons, resident for tax purposes in, or otherwise incorporated in the 24 non-cooperative jurisdictions listed, it will be important to bear in mind that, among others, the following implications under Spanish income tax laws could apply:

1. Spanish personal income tax (PIT)

• Change of tax residence - ‘fiscal quarantine’ for Spanish citizens

PIT taxpayers who are Spanish citizens who accredit their new tax residence in a non-cooperative jurisdiction will not forfeit their condition as taxpayers for PIT purposes in the tax period during which the residence change takes place and for the four subsequent tax periods.

• Employment income resulting from work performed abroad

In accordance with Article 7p of the PIT law, employment income received by PIT taxpayers corresponding to work performed abroad is subject to a foreign earned income exclusion of up to EUR 60,100 if specific requirements are met. However, this exemption would not apply if the country or territory in which the works are performed is deemed to be a non-cooperative jurisdiction that has not entered into a convention for the avoidance of double taxation with Spain that contains an exchange of information clause.

It is important to take into consideration that it is unclear whether the works performed in Barbados or Trinidad and Tobago could benefit from this exemption as, although these countries have entered into a tax treaty with Spain that contains an exchange of information clause, the two countries were recently included in the new list of non-cooperative jurisdictions; therefore, the Spanish authorities could conclude that, despite the indicated circumstances, they are not in fact ensuring an effective exchange of information with Spain.

• Investments in undertakings for collective investment (UCI) incorporated in non-cooperative jurisdictions

PIT taxpayers who participate in a UCI established in non-cooperative jurisdictions should be taxed every period in their general PIT tax base, on the positive difference between the net asset value of the stake as at the tax period's closing date and its acquisition value. The taxable difference will be 15 per cent  of the acquisition value of the stake (unless otherwise evidenced by the taxpayer or the tax authorities). The profits distributed by the UCIT will reduce the acquisition price.

• Carried interest

Carried interest arrangements obtained by managers, employees or directors of qualified specific closed-end alternative investment funds, their management entities or other group entities, could benefit from a 50 per cent tax allowance if the carried interest is, inter alia, conditional upon the investors reaching a minimum (guaranteed) rate of return and the owner of the shares or the rights retains ownership for at least five years (excluding specific exceptions). However, if the carried interest, directly or indirectly, derives from a non-cooperative jurisdiction the tax allowance will not apply.

2. Spanish Corporate Income Tax (CIT)

• The Spanish participation exemption regime

Under the Spanish participation exemption regime, dividends and capital gains obtained at the level of the Spanish resident shareholders from their interest in Spanish and non-Spanish resident entities will benefit from a 95 per cent exemption from CIT (1.25 per cent for CIT payers subject to a 25 per cent statutory rate) provided that specific requirements are met.

However, one of the requirements in order to apply the exemption is that the non-resident subsidiary must not be resident in a non-cooperative jurisdiction for Spanish tax law purposes.

• The ETVE regime

The tax regime applicable to Spanish foreign securities-holding companies investing in non-Spanish entities (Régimen Especial de Tenencia de Valores Extranjeros or ‘ETVE’) allows dividends distributed by the ETVE to its non-Spanish resident shareholders not to be deemed as Spanish-source income for tax purposes, provided that they are distributed out of income exempt from tax at the level of the ETVE, due to the application of the participation exemption regime. This implies that the income should not be taxed in Spain.

However, this exemption (and the equivalent for capital gains derived from the transfer of their interest in the ETVE) will not apply when the non-Spanish resident shareholder is resident or incorporated in a non-cooperative jurisdiction.

• The special tax regime on venture capital funds and entities

Income obtained in a non-cooperative jurisdiction cannot benefit from this special tax regime on venture capital funds and entities. Additionally, capital gains (that do not fulfil the requirements set forth in the Spanish participation exemption regime) realised by venture capital undertakings will not benefit from the specific 99 per cent exemption applicable to these entities if the acquirer of such equity is resident in a non-cooperative jurisdiction.

• Deductible expenses incurred in specific transactions

CIT taxpayers cannot deduct expenses for services related to transactions carried out with persons or companies residing in non-cooperative jurisdictions, except when the taxable person provides evidence that the accrued expense refers to a transaction that was actually carried out.

3. The CFC rules

Controlled foreign corporation rules are included in the Spanish regime known as the ‘international tax transparency’ rules (‘Spanish CFC’). The Spanish CFC involves the allocation of passive income of a subsidiary located in a territory with lower taxation to its shareholders (irrespective of whether they are PIT or CIT taxpayers) in specific cases. The following conditions must be met in order to apply the Spanish CFC regime:

1. shareholders must have a stake of at least 50 per cent in the foreign company; and

2. the amount of tax paid by the foreign company must be lower than 75 per cent of the amount resulting from the application of CIT to the foreign company’s profits.

Additionally, a qualified Spanish CFC regime exists if the foreign company lacks any material or personal means by virtue of which the total tax base of the company is allocated to the shareholders. If the non-resident entity does have material and personal means, only the positive income will be allocated (in the proportion corresponding to the investor's share) from certain sources of income classified as passive, and only when the total amount of this income is higher than 15 per cent of the total income earned by the non-resident entity.

Likewise, when the subsidiary entity is located in a non-cooperative jurisdiction, specific (rebuttable) assumptions exist:

1. the circumstance described in number two above applies;

2. all income received by the subsidiary entity is passive income, and

3. the amount of income obtained by the subsidiary entity is equal to 15 per cent of the acquisition value of its shares or stake.

In these cases, the taxpayer must rebut the assumptions.

4. Spanish Non-Resident Income Tax (NRIT)

• Dividends, interest and capital gains obtained by non-cooperative jurisdiction resident companies are not entitled to most of the Spanish NRIT domestic exemptions

In general, dividends, interest and capital gains obtained by companies’ resident in non-cooperative jurisdictions are not entitled to benefit from any NRIT internal exemption (other than interest derived from Spanish public debt, specific listed debt instruments or non-Spanish resident bank accounts). As such, in most cases, dividends, interest and capital gains will be subject to NRIT at the current rate of 19 per cent.

• Special tax on the real estate assets of non-resident entities

Entities resident in non-cooperative jurisdictions who own, or hold in Spain (through whatever title), real estate or rights in rem of enjoyment or use thereof, will be subject to this tax by means of a special levy. As a general rule, the tax base of this special tax is the cadastral value of the asset, and the applicable rate is three per cent.

Nevertheless, this special levy is not payable by foreign states, foreign public institutions and international organisations; or entities that continuously or habitually carry out economic activities in Spain, other than simple ownership or leasing of a building, or entities listed in the officially recognised secondary securities markets.

These implications are broad and restrictive as they only take into account the place of residence or incorporation, even if the taxpayer desires to act transparently before the Spanish tax authorities or has genuine business reasons for the former. Therefore, it could be appropriate for the Spanish authorities to implement certain mechanisms to avoid or water down these cumbersome implications in those cases.