The Budget Bill for year 2021 includes several significant tax measures, such as, for instance, the limitation of the corporate income tax exemption applicable to dividends and capital gains derived from the transfer of holdings in certain entities (Spanish participation exemption), the tax rate increase in Personal Income Tax or the decrease of reductions available to contributions to pension plans.
Corporate Income Tax
Very briefly, Spanish law currently provides for a full participation exemption for dividends and capital gains deriving from the transfer of a minimum 5% holding in entities. Such participation exemption would now be limited to 95% of the amount of such dividends or gains.
Additionally, the participation exemption would no longer be available to holdings with an acquisition price of more than 20 million euros (should the holding percentage be below 5%). Note, however, that this limitation, for holdings with an acquisition price of more than 20 million euros, will not only apply after 2025 for dividends and capital gains derived from holdings acquired before January 1 2021.
Moreover, the full participation exemption may still apply to those entities whose net turnover, in the preceding year, is below 40 million euros, provided the dividends or the capital gains derive from a direct 100% subsidiary incorporated as from 2021. Such 100% stake must have been held by the entity receiving the dividend since incorporation. Additional requirements would need to be fulfilled, such as
- The receiving entity must not be a passive Company, within the meaning of the Spanihs Corporate income Tax Act;
- The receiving entity must not have been part of a group and must not have a holding of at least 5% in another entity, prior to the incorporation of the entity from which the dividends or the gains derive; and
- Such dividends or gains must have been obtained within the 3 years following the incorporation of the distributing entity.
The Budget Bill also includes a number of additional amendments to ensure that other aspect of the Corporate Income Tax Act are consistent with the participation exemption limitation, for instance with regard to the amounts to take into account for interest barrier rule purposes; or with the double taxation credit or with controlled foreign corporation rules. Perhaps, the most relevant amendment to take into account in this context is that the 5% limitation to the full exemption will also apply in the case of dividends distributed within a tax group.
Personal Income Tax ("PIT")
The Bill provides for a 2 percentage point increase in the PIT tax rates, applicable to income over 300.000 euros (income above such amount would be taxed at a marginal rate of 45,5% in Madrid and 50% in Catalonia).
Following such trend, there would also be a 3 percentage point increase for " savings income" within the meaning of the PIT Act, applicable to income above 200.000 euros. As a result, income in excess of such amount would be taxed, as from 2021, at a 26% rate (the rate currently applicable would be 23%).
An increase in the rates applicable to taxpayers, applying the special impatriates regime (also known as the "Beckham amendment") is also proposed. The maximum tax rate would increase from 45% to 47% for general income (for income in excess of 600.000 euros) and from 23% to 26% for "savings income" (for income in excess of 200.000 euros).
Additionally, the tax base reduction limit applicable in the case of pension fund contributions would be reduced from 8.000 euros to 2.000 euros, although such limit may be up to 10.000 euros, in case of contributions from employers. In the same manner, the tax base reduction limit in case of pension fund contributions for the benefit of the spouse would be reduced from 2.000 euros to 1.000 euros.
The Bill also contemplates a one percentage point increase in the tax rate, which would now amount to 3.5% (as compared to the current 2.5%). Such rate would apply to the tax base in excess of 10.695.996,06 euros. This increased rate would apply in those Autonomous Regions with no wealth tax scale of their own.
Value Added Tax ("VAT")
The VAT rate applicable to sugary drinks would be increased from 10% to 21%.
The special "use and enjoyment rule" which applies to impose Spanish VAT on supplies of services located outside the EU will no longer apply where such services are located in the Canary Islands, Ceuta or Melilla.
Non-Resident Income Tax ("NRIT")
The exemption currently applicable to EU resident taxpayers for interest income or capital gains would extend to residents in the EEA.
Consistently with the participation exemption limitation for Corporate Income Tax purposes, the parent-subsidiary withholding exemption will no longer apply in the case of holding in subsidiaries with an acquisition cost in excess of 20 million euros and the 5% minimum holding threshold is not reached. However, the withholding exemption will still apply, on a transitory basis until 2025, to holdings acquired before 2021.