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Main highlights of 2021 Spanish tax reforms

Shortly after the approval of the new Financial Transaction Tax and Digital Services Tax, the Spanish Government has submitted to Parliament two draft bills that contain significant measures affecting several taxes and resulting, generally, in increased taxation and compliance complexity. They are the 2021 General State Budget Bill (Proyecto de Ley de Presupuestos Generales del Estado para el año 2021) and the Bill for a Law on Measures to Prevent and Combat Tax Evasion (Proyecto de Ley de Medidas de Prevención y Lucha contra el Fraude Fiscal). 

Even though these draft bills are not guaranteed to make it through Parliament unchanged, the Government does seem to be in a position to gather the necessary political support to have the bills approved with effect as from 1 January 2021.

The following are the measures likely to have the greatest impact on foreign investors and individuals (the draft bills also contain other measures that will have an impact at a domestic or local level).

  • Limitation on the domestic participation exemption regime for dividends and capital gains obtained by Spanish Corporate Income Tax (CIT) taxpayers. The 100% CIT exemption currently applicable, under certain conditions (i.e. holding a direct or indirect participation of at least 5% of the company’s share capital or holding shares with an acquisition cost exceeding EUR 20 million; a minimum holding period of one year; and, for foreign subsidiaries, having been subject and not exempt to a similar tax in the country of residence at a minimum nominal rate of 10%), to dividends and capital gains arising from the sale of shares of Spanish resident and non-resident companies, will be reduced to 95%, in line with the terms of the Parent-Subsidiary Directive. Given the very limited exceptions to this provision, it will generally result in dividends and capital gains from the disposal of shares being effectively taxed at 1.25%, which might lead taxpayers to consider simplifying their corporate structures in order to avoid this cost every time a dividend is distributed. This measure will also have an impact on CIT groups if the draft bill is passed as worded, as it establishes that the CIT group will not be allowed to eliminate intra-group dividends for tax consolidation purposes.
    Additionally, the participation exemption regime, which remains applicable when the parent company holds a direct or indirect participation of at least 5% in the subsidiary’s share capital, will no longer apply to holdings of less than 5%, even when the acquisition value of the shares exceeded EUR 20 million (although the draft bill does provide for a five-year transition period to introduce this measure).
  • Changes in the CFC regime. In line with Article 7 of the Anti-Tax Avoidance Directive (ATAD), the ‘controlled foreign company’ (CFC) rule, both for Personal Income Tax (PIT) and CIT purposes, will be extended to foreign holding companies, which are currently excluded from this regime. This measure will need to be analysed together with the amendments to the domestic participation exemption regime. In principle, Spanish resident companies and individuals that control foreign holding companies which pay little or no tax in their jurisdiction of residence will be taxed on the income obtained by such holding entities if certain conditions are met. Additionally, new types of passive income are included within the scope of the CFC rule.
  • Changes in the CIT ‘exit tax’ regime. In line with Article 5 of the ATAD, the current deferral rule that applies to Spanish companies that move themselves or their assets to other jurisdictions in the EU or EEA (the Spanish ‘exit tax’ is only paid if the company subsequently moves itself or its assets outside of the EU o EEA within the next ten years) will be replaced by payment in instalments over five years (with an obligation, in some cases, to provide a guarantee of such payment to the Spanish tax authorities). 
  • Non-Resident Income Tax (NRIT) exemption on dividends paid to EU/EEA resident entities. Similarly to the proposed CIT reform, for participations of less than 5%, the exemption will no longer be applicable even in those cases where the acquisition cost of the shares exceeded EUR 20 million. As a result, the exemption will only be applicable if the EU/EEA parent company holds a direct or indirect participation of at least 5% in the Spanish subsidiary’s share capital.
  • NRIT exemption on interest and capital gains obtained by EU residents is extended to EEA residents. This exemption, which currently only applies to interest and capital gains from movable assets obtained by EU residents, will be extended to EEA residents.
  • Increase in the PIT rate applicable to high-earners who are Spanish resident individuals. The marginal tax rate applicable to income from, inter alia, employment, economic activity or real estate rentals will be increased by two percentage points for income exceeding EUR 300,000 (for instance, for Madrid residents the marginal rate will increase from 43.5% to 45.5% and in Catalonia from 48% to 50%). The marginal tax rate applicable to interest, dividends and capital gains will be increased by three percentage points for income exceeding EUR 200,000 (from 23% to 26%).
    The tax rates on Spanish source income earned by individuals taxed under the special tax regime for inpatriates (the "Beckham Regime") will be subject to similar increases. The Beckham Regime allows individuals who become Spanish tax resident as a consequence of moving to Spain for work reasons to be taxed under a regime similar to that applicable to non-residents in Spain (i.e. they are only taxed on their Spanish source income).
  • Increase in the Net Wealth Tax (NWT) rate applicable to net worth in excess of EUR 10 million. The national marginal tax rate applicable to net worth with a value exceeding EUR 10,695,996.06 will be increased by one percentage point, from 2.5% to 3.5%. Although this measure should have a limited impact for Spanish tax resident individuals (given that the national tax rates only apply if the regional authorities have not enacted their own tax rates), it will generally affect non-Spanish residents that are subject to Spanish NWT on their Spanish-based assets.
  • New rule to determine the value of real estate assets for tax purposes. In order to reduce legal disputes regarding the appraisal of real estate assets for Transfer Tax, Inheritance and Gift Tax and NWT purposes, such assets will be valued at their ‘reference value’ (for NWT, the value will be the higher of: (i) the cadastral value, (ii) the acquisition value, (iii) the value determined by the tax authorities for the purposes of other taxes, and (iv) this ‘reference value’). This value will be determined by a the cadastral public agency (the Catastro Inmobiliario), on the basis of data gathered from public notaries from transactions involving equivalent assets. Reference values will be made available publicly. It is expected that the taxable amounts and the tax due will be increased as a result of this reform.
  • Restrictions on cash payments. The maximum permissible amount of cash payments in business transactions will be reduced from EUR 2,500 to EUR 1,000. Maximum cash payments made by non-Spanish resident individuals will be reduced from EUR 15,000 to EUR 10,000.

The above tax reforms may have significant implications for individuals and companies investing or operating in Spain and it is highly advisable to review existing investments and corporate structures in order to identify its increased tax costs and analyse the potential measures to be taken in response.

The tax reforms may have significant implications for individuals and companies investing or operating in Spain


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