The Spanish Holding Company

A Spanish holding company is known as an ETVE - Entidad de Tenencia de Valores Extranjeros.

These have been very successful.

The formula is based on:

• Full exemption from Spanish tax for foreign source dividends and capital gains from qualifying foreign associated companies.
• Non-resident shareholders are not taxed when the above-mentioned income is distributed.
• There are almost no special restrictions on the deductibility of expenses, even if connected with exempt income.
• Full access to Spanish tax treaty network - very extensive with respect to Latin American countries.
• There is full application of EU directives.

An ETVE is a regular Spanish company subject to a 35% tax on its income, but exempt from taxation on qualified foreign-source dividends and capital gains. As such, the ETVE is protected by EU Directives such as the Parent-Subsidiary Directive and the Merger Directive and is regarded as a Spanish resident for tax purposes pursuant to Spain's 50 tax treaties. The broad tax treaty network with Latin America and the European character of the ETVE make it an interesting vehicle for channeling capital investments towards Latin America, as well as a tax-efficient exit route for EU capital investments by non-EU companies.

The EU appear to be happy with the ETVE, which is similar to a Dutch Holding Company or a SOFARPI in Luxembourg.

Advantages

Incoming Dividends: Incoming dividends remitted by the subsidiary to the holding company must either be exempted from or subject to low withholding tax rates in the subsidiary's jurisdiction.

No Corporation Tax on Dividend Income Received: Dividend income received by the holding company from the subsidiary must either be exempted from or subject to low corporate income tax rates in the holding company's jurisdiction.

Capital Gains Tax on Sale of Shares: Profits realized by the holding company on the sale of shares in the subsidiary must either be exempt from or subject to a low rate of capital gains tax in the holding company's jurisdiction.

No Withholding Tax on Outgoing Dividends: Outgoing dividends paid by the holding company to the ultimate parent corporation must either be exempt from or subject to low withholding tax rates in the holding company's jurisdiction.

By these criteria Spain is a moderately attractive jurisdiction in which to locate a holding company but without the advantages of Denmark.

Withholding Taxes on Incoming Dividends

As a member of the EU Spain is governed by the provisions of the EU's parent/subsidiary directive, whose effect is that where a Spanish holding company controls at least 25% of the shares of an EU subsidiary for a minimum period of 12 months any dividends remitted by the EU subsidiary to the Spanish holding company are free of withholding taxes.

Spanish holding company rules include a participation exemption at the 5% level for non-resident shareholdings, which can be direct or indirect. Shares must have been held for a minimum of 12 months.

A subsidiary must be a non-resident corporate entity with no business activities in Spain.

Where the provisions of the parent/subsidiary directive do not apply (or where anti-avoidance provisions are in place) Spanish holding companies can rely on a reasonably extensive network of double taxation treaties the effect of which is to obtain a reduction in withholding tax rates on dividends remitted to Spain from the subsidiary jurisdiction.

Spain has 50 double taxation treaties in place. The greater a country's network of double taxation treaties the greater its leverage to reduce withholding taxes on incoming dividends. An elaborate network of double taxation treaties is thus a key factor in the ability of a territory to develop as an attractive holding company jurisdiction.

The dividend income remitted by the foreign subsidiary to the ETVE holding company must have been taxed abroad at a rate that is analogous to the corporate income tax rates applicable in Spain - obviously this rules out many offshore jurisdictions, although those with 'designer' corporate forms may manage to wriggle through.

The income remitted to the ETVE must relate to profits earned from core corporate activities and must not include passive income.

Corporate Income Tax on Dividend Income Received

The mainstream Spanish corporate income tax rate is 35%. Income accruing to an ETVE holding company which falls under the previous paragraph is free of corporate tax in Spain. The ETVE must have an effective presence in Spain and must be an organisation with substance and personnel.

Capital Gains Tax on the Sale of Shares

Any capital gains made by the ETVE on the sale of shares in qualifying non-resident subsidiaries are free of capital gains tax in Spain in most circumstances, although there are some conditions. Capital gains tax in Spain currently stands at 35%.

Withholding Taxes on Outgoing Dividends

Under the EU's parent/subsidiary directive dividends paid by Spanish subsidiaries to EU parent corporations are exempt from Spanish withholding taxes provided the EU parent corporation has held 25% of the shares in the Spanish subsidiary for at least 12 months.

Outgoing dividends paid by an ETVE intermediate Spanish holding company to its non-resident parent corporation are free of withholding taxes in Spain (irrespective of the existence or non-existence of a double taxation treaty) unless the parent corporation is in a jurisdiction where it will not pay corporate taxes equivalent to those ruling in Spain. Evidently this rules out many offshore jurisdictions, although those with 'designer' corporate forms may qualify.

If the parent corporation is not an EU entity or if these conditions are not otherwise satisfied then a standard withholding tax rate of 25% applies on outgoing dividends unless that rate has been reduced usually to between 5% and 15% by the provisions of a double taxation treaty.