In the last years, scrip dividends had become a very popular equity remuneration scheme for Spanish listed companies, as it helped them reduce the cash payout while allowing shareholders to choose and pick the form of remuneration and, consequently, its tax effects (or no tax effects at all). However, the issuance of new accounting rules on scrip dividends have narrowed down the options and their favorable accounting and tax treatment.
In Spain, scrip dividends are typically structured as share capital issuances against equity (reserves) through the delivery of free issuance rights to the shareholders of the company. In these programs, shareholders may choose between three options:
- receive newly issued shares (in "exchange" for the free issuance rights)
- sell the free issuance rights in the market
- "sell-back" the free issuance rights to the issuer for a fixed price (or, alternatively, waive the free issuance rights received in exchange for a dividend). I will refer to this as the "Put Right"
Scrip Dividend tax treatment in Spain
The tax treatment of the scrip dividend varies depending on the characteristics of the shareholder, the way in which the scrip dividend is carried out (e.g. as a dividend distribution in kind or as an issuance of share capital) and the option chosen by the shareholder. The below table summarizes the general tax treatment that should apply to the different options (the tax treatment of the delivery of issuance rights is addressed in the next section).
| Option | Individuals resident in Spain and non-residents (legal or natural persons) not acting through a Spanish permanent establishment (PE) | Spanish Corporate Income Tax (CIT) payers and non-residents acting through a Spanish PE |
|---|---|---|
| Receive new shares | No taxation or withholding or payment on account of Personal Income Tax (PIT) or Non-Resident Income Tax (NRIT). The acquisition value for these shareholders of both the new shares received and the shares from which they derive will result from dividing the total acquisition cost among the applicable number of securities, including both existing securities and those issued as paid-up shares. The paid-up shares will be deemed to have been held for as long as the underlying shares have been held | Taxation pursuant to applicable accounting regulations (taking into account the 2019 regulations referred to in the next section), notwithstanding the rules on the determination of the tax basis (including the Spanish participation exemption). In any case, and according to the administrative criterion, no withholding or payment on account will be made in connection with the delivery of fully paid-up shares/free allocation rights or on the sale of free allocation rights |
| Transfer issuance rights in the market | Capital gain | |
| Put Right | Same tax treatment as a “standard” dividend and will therefore be subject to the applicable withholding and taxation | |
Tax (and accounting) treatment of the issuance of rights
And what about the delivery of free issuance rights that is the “first step” in every scrip dividend in Spain? Is it taxable? Once again, the tax treatment of the receipt of free issuance rights varies depending on the characteristics of the shareholder and the way in which the scrip dividend is carried out.
| Individuals resident in Spain and non-residents not acting through a Spanish PE | Spanish CIT payers and non-residents acting through a Spanish PE |
|---|---|
| No taxation or withholding or payment on account of PIT or NRIT. The delivery of the free issuance rights is not treated as a taxable event (nor as dividend) for these taxpayers. | The Spanish tax treatment should basically follow accounting rules explained below. The delivery of issuance rights is normally treated as a dividend and generates income that could be subject to taxation for shareholders who are CIT-payers or NRIT-payers (acting through a Spanish PE). But the delivery of issuance rights under scrip-dividend programs should not be subject to withholding taxes in Spain pursuant to specific administrative binding rulings issued in 2020. |
In 2019, the Spanish Chartered Accountants and Auditors Institute (ICAC), the authority in charge of accounting regulations and practices in Spain, issued specific regulations pursuant to which, among other items, the delivery of issuance rights under scrip dividends is treated as an equity distribution from an accounting standpoint, irrespective of the option chosen by the shareholder. Therefore, regarding CIT-payers and NRIT-payers (acting through a Spanish PE), this accounting (and tax) treatment is relatively new; it applies for tax years beginning as from 1 January 2020.
From a Spanish tax standpoint, the view that the new accounting treatment should affect the taxation applicable to Spanish CIT payers and NRIT payers (acting through a Spanish PE) was confirmed by several rulings issued by the Spanish tax authorities, which also confirmed that such income is not subject to withholding on account of CIT (or NRIT in respect of PEs).
Are there better alternative options to the traditional scrip dividend systems?
One may conclude that, following the new accounting treatment, traditional scrip dividend schemes cannot avoid triggering tax for CIT-payers or NRIT-payers (acting through a Spanish PE), also bearing in mind that the Spanish CIT participation exemption is only applicable to substantial shareholdings (e.g. of at least 5%).
But what might happen if the options under the traditional scrip dividend game change? In particular, in the case of non-transferrable free issuance rights (i.e. where there is no Put Right), no accounting (or tax) income is attributed to the shareholders. In a simple share capital increase against reserves (in which the shareholders have no Put Right), the specific regulations issued by ICAC take the view that no accounting income should be allocated to CIT-payers (or NRIT-payers acting through a Spanish PE), as the delivery of free issuance rights should not be treated as a dividend for accounting (or tax) purposes. In any case, the matter must be thoroughly reviewed by the accountants and auditors of the taxpayer/the issuer on a case-by-case basis (in light of the specific circumstances of the issuer).
/Passle/5cab65b0989b6e1650e15c51/MediaLibrary/Images/5bade02498fcca12902fe597/2019-04-25-16-21-24-834-5cc1de84abdfe90fa0ecd8d1.jpg)
/Passle/5cab65b0989b6e1650e15c51/MediaLibrary/Images/5dad74218cb623000828a1ec/2020-10-16-17-43-56-279-5f89dbdc8cb62a046c79fc71.jpg)
