Purchase of shares in Spanish resident company
Transfers of (or agreements to transfer) shares in a Spanish company are generally exempt from VAT and transfer tax (exceptions generally relate to shares in companies whose main asset is real estate located in Spain, which is not used for the purposes of a business).
Spanish tax residence
A company is treated as tax resident in Spain if it is incorporated in Spain and has its registered office in Spain or if it is "centrally managed and controlled" in Spain.
Under the Spain-China double tax treaty (DTT), if a company is a resident of both Spain and China, then it is deemed to be a resident only of the state in which its place of effective management is situated.
Corporate income tax rate
The current general rate of corporation tax in Spain is 25%.
Equity financing from Chinese resident parent company to Spanish resident subsidiary
The Spanish resident subsidiary is exempt from Spanish capital tax in respect of equity financing from the Chinese resident parent company.
Withholding tax on dividend payments to Chinese parent company
Generally, there is a 19% withholding tax (WHT) on dividend payments by a Spanish company.
However, the Spain-China DTT provides that WHT on dividends shall not exceed:
- 5% of the gross amount of the dividends if the beneficial owner is a company which holds directly at least 25% of the capital of the company paying the dividends, for a minimum holding period of a year; and
- 10% of the gross amount of the dividends in all other cases.
Debt financing from Chinese resident parent company to Spanish resident subsidiary – tax deductibility of interest payments
In general, the Spanish resident subsidiary can deduct net financial expenses of up to 30% of the operating profit (EBITDA) of the Spanish resident subsidiary, or EUR 1 million (whichever is greater).
Net financial expenses that exceed these thresholds may be deducted in subsequent tax periods (with no time limit), together with the net financial expenses relating to those tax periods (subject to the limits set out above).
However, the interest on the participating loan from the Chinese parent company to the Spanish subsidiary is not deductible for corporate income tax purposes. Under other anti-hybrid rules for related party loans, interest expenses are not deductible when they do not generate a taxable income for the lender.
Debt financing from Chinese resident parent company to Spanish resident subsidiary – withholding tax on interest payments
Payments of Spanish-source interest are generally subject to Spanish WHT at 19%.
Under the Spain-China DTT, WHT on interest shall not exceed 10% of the gross amount of the interest. Where applicable, the Chinese resident parent company must apply to the Spanish tax authorities for double taxation relief to reduce the WHT payable in respect of the interest payments.
Intellectual property – withholding tax on royalties paid to Chinese parent company
Spanish WHT at 24% applies to royalty and other payments in respect of intellectual property.
However, relief to reduce the WHT may be available under the Spain-China DTT, which provides that WHT on royalties shall not exceed 10% of the gross amount of the royalties.
Intellectual property – tax treatment of licence granted by Chinese parent company to Spanish resident company
Spanish Value Added Tax (VAT) may apply to an intellectual property licence granted to a Spanish licensee.
Intellectual property – tax incentives
Spanish tax credits may be available for research and development (R&D) activities.
The Spanish “Patent Box” applies, in general, to reduce a company's taxable profits by 60% of the net income deriving from the assignment of certain intangible assets under certain conditions.
Intra-group transactions – anti-avoidance rules including transfer pricing
Various Spanish anti-avoidance rules may be relevant to intra-group transactions. These include:
- the general anti-abuse rule (GAAR);
- the DAC 6 rules relating to the disclosure of certain reportable cross-border arrangements ; and
- the transfer pricing rules.
Sales tax/VAT
Spanish VAT may apply to goods and services provided and received by a business established in Spain, depending on the type of supply.
Typically, a business can offset the VAT it pays on received supplies (input tax) against the VAT it charges on its own supplies (output tax), paying or reclaiming the difference.
Certain supplies, such as some financial services and some supplies of real property, are exempt from VAT. Input tax is not deductible if the relevant supplies are used by the business to make exempt supplies.
The current standard rate of VAT in Spain is 21%. Depending on the nature of the supply, reduced rates of 10% or 4% may apply instead.
Pillar Two
Since January 2022, taxpayers whose net turnover is at least EUR 20 million during the 12 months prior to the date on which the tax period begins, or who pay taxes under the special consolidation regime (regardless of their net turnover), need to have tax payable of no less than the result of applying 15% to the taxable income (i.e. after “book to tax” adjustments).
In addition, following the recommendations of Pillar 2 of the OECD's Base Erosion and Profit Shifting (BEPS) program, a draft law has been approved in Spain that will establish an overall minimum tax rate of 15% for multinational groups or large national groups. Specifically, it will apply to those with a consolidated net turnover equal to or greater than EUR 750 million, according to the consolidated financial statements of the ultimate parent entity in at least two of the last four immediately preceding fiscal years.
Several types of entities are excluded from the application of this regulation, such as public entities, non-profit organizations and pension funds, among others.
This regulation establishes that when the effective tax rate of the constituent entities of large domestic groups or multinational groups in a given jurisdiction is less than 15%, a supplementary tax will be levied to achieve the overall minimum rate of 15%.
Use of trading losses
Trading losses generated by a Spanish resident company can be carried forward indefinitely in order to offset future taxable income.
Generally, the offsetting of trading losses is limited to 70% of the taxable income or EUR 1 million (whichever is greater).
Surrendering losses within group
If the Spanish resident subsidiary is part of a group, other group members may be able to surrender losses to it under the Spanish group relief rules. If other group members are Spanish resident companies or non-Spanish resident companies with Spanish permanent establishments, those group members may be able to receive losses from the Spanish resident subsidiary.
Payroll taxes relating to employing staff in Spain
In general, the employees of the Spanish resident company who work in Spain will be subject to Spanish Personal Income Tax (IRPF) on their employment income and benefits.
The Spanish resident company is responsible for deducting these amounts from the sums paid to its employees and paying the relevant withholdings to the Spanish tax authorities (through form 111/190).
Employees must contribute to Social Security through deductions made directly from their pay slips. These deductions cover various items, such as common contingencies, unemployment, vocational training, accidents at work, or overtime.
The contribution rates paid by employees vary according to the employees’ particular situation (including type of contract and professional category).
The employer is also obliged to pay social security contributions which are generally higher than those of the employees.
The company is responsible for withholding and paying both the employees’ contributions and its own contributions to the Social Security General Treasury through the use of the TC1 and TC2 models. This process is carried out monthly and must be made within the month following the month in which the salary is earned.
Social security contributions are calculated on the contribution base, which corresponds to the employees’ gross salary, including extra payments and any other benefits subject to contribution. There is a minimum and maximum limit for the contribution base, which is reviewed annually.
Tax issues relating to secondees sent from China to Spanish resident company
In general, remuneration paid to a Chinese resident individual in respect of an employment exercised in Spain may be taxed in Spain. However, the remuneration is instead generally taxable only in China if:
- the secondee is not present in Spain for more than 183 days in any 12 month period commencing or ending in the relevant fiscal year;
- the secondee’s remuneration is paid by, or on behalf of, a non-Spanish resident employer; and
- the remuneration is not borne by a permanent establishment or a fixed base which the employer has in Spain.
If a Chinese resident individual is seconded to the Spanish resident company, both the secondee and the Spanish resident company are obliged to pay Spanish social security contributions in the same way as any national employee. The Chinese secondee must register with the General Social Security Treasury in Spain. This is done at the beginning of the secondment relationship, and the secondee receives a Social Security affiliation number.
Evidence of having remained in the country for more than 90 days is required, as in the first 90 days the secondee is considered to be in a ‘temporary stay’ situation and is therefore obliged to have travel health insurance.
Tax on disposal of shares in Spanish resident company
In relation to the sale of shares in the Spanish second tier subsidiary by the Spanish subsidiary, there is generally a 95% exemption from tax on the capital gain provided that the shareholding exceeds 5% and has been held for at least one year.
In relation to the sale of shares in the Spanish subsidiary by Chinese parent company, the Spain-China DTT provides that the gain from the disposal of shares will generally be subject to taxation in China (there are exceptions that require case-by-case examination).
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