The new Corporate Income Tax Act recently passed by the Spanish Parliament (Act 27/2014 dated 27 November 2014) introduces many amendments to the Corporate Income Tax, including a substantial modification of the tax grouping regime, which will enter into force for the fiscal year starting from 1 January 2015.
One of the purposes of the tax reform is to align the Spanish law with the European Court of Justice’s judgments on tax grouping. As a reminder, the Court considered that an entity should be allowed to consolidate for tax purposes with other entities indirectly controlled through other UE resident entities (C418/07 “Société Papillon” case and C41/13 “MSA” case) and with other entities resident in the same Member State if they are controlled by the same non-resident EU entity (joined cases C39/13 and C40/13).
The Spanish legislator has gone beyond the EU minimum requirements imposed by the ECJ and has extended the tax grouping regime not only to Spanish companies controlled by EU resident entities but also to all Spanish entities controlled directly or indirectly by the same non-resident entity.
For Spanix tax consolidation purposes, in this article we refer to ‘control’ as to a minimum capital participation of 75% plus the majority of the voting rights.
In a nutshell, the new tax grouping regime allows tax consolidation of any Spanish entities controlled by the same ultimate parent entity, even if the latter is a non-Spanish entity. Please find below a summary of the main characteristics of the new tax consolidation regime:
- The taxpayer is the tax group as a whole. The tax results of all the entities are aggregated, eliminating intra-group operations. Likewise, many tax requirements are calculated on a consolidated basis, such as the thresholds under the interest barrier rules.
- The parent entity should control, directly or indirectly, more than 75% of share capital (70% if the subsidiary is a listed company or controlled through a listed company) and more than 50% of the voting rights, during the whole FY. The parent could not be controlled by another parent entity, therefore leading to the parent being the ultimate parent entity (for the purposes of this regime). If it is a non-resident entity it would not be part of the tax group.
- The parent entity could not be resident in a black-listed tax haven.
- The parent entity should designate a representative entity among the Spanish entities (if the parent is a tax resident in Spain it would always be the representative), which will be in charge of the formal and material tax obligations of the tax group.
- Spanish Permanent Establishments would be treated, for tax consolidation purposes, as fully owned subsidiaries, being included within the tax group.
Please note that many special amendments have been included in order to regulate those cases where the parent is a non-Spanish entity. However, there are still some open points that would probably be solved in future rulings or in the new Corporate Income Tax Regulation to be passed later this year or in early 2015.
The new regime would offer many advantages to group companies that have not been able to consolidate in the past, as, for example, the possibility of offsetting negative tax results with positive results from other entities; mitigating withholding tax in intra-group payments; using the capacity to deduct interest of certain companies against taxable income of the whole group; or eliminating intra-group transactions for tax purposes.
On the other hand, if a single non-Spanish direct or indirect shareholder meets the requirements to be a parent company of a Spanish group, i.e. 75% capital plus 50% voting rights, all entities and permanent establishments in Spain would have to be included within that tax group if they chose to be taxed through the tax grouping regime, therefore becoming a single tax payer vis a vis the tax authorities and sharing the tax liabilities of all the companies within the group. This may be an adverse consequence in cases where there is a tax group currently in place excluding other Spanish companies or even separate tax groups.