Spain: Law 11/2021 implementing ATAD and introducing other measures against tax fraud

Introduction

The Spanish Parliament has finally approved Law 11/2021, of 9 July, on measures to prevent and fight against tax fraud (“Law 11/2021”) which implements several aspects of Council Directive (EU) 2016/1164 of 12 July 2016 (so-called “ATAD”) and also includes other relevant amendments to Spanish tax legislation to prevent tax fraud and strengthen tax control.

Law 11/2021 was published in the Spanish Official Gazette on 10 July 2021, and has come into force as of 11 July 2021, unless otherwise stated for certain specific measures.

In this note we summarize the main tax changes that, in our view, should be taken into account by foreign investors with existing investments in Spain or planning to invest in Spain, but this is not an exhaustive review of all the changes introduced by Law 11/2021.

CIT: Implementation of ATAD measures

Law 11/2021 implements two aspects of ATAD, the “Controlled Foreign Company (CFC) rule” and the so-called “Exit Tax”. Other aspects of ATAD such us the “interest limitation rule”¹ and the “hybrid mismatches” will be implemented at a later stage, and the “general anti-abuse rule” does not need to be implemented because Spanish tax legislation already has anti-abuse tax rules.

Controlled foreign company (“CFC”) rule

Spanish Corporate Income Tax (“CIT”) Law already has a CFC regime, but Law 11/2021 introduces several amendments as of 1 January 2021, as required by ATAD:

• Dividends and capital gains obtained by foreign holding companies are now subject to the “passive income” imputation rule

Until Law 11/2021, the Spanish CFC regime expressly excluded dividends and capital gains obtained by foreign holding companies from ≥5% shareholdings in second-tier subsidiaries from the “passive income” imputation rule if the (first-tier) foreign holding company met certain requirements.

Law 11/2021 removes this exception as of 1 January 2021, and if we put this together with the recent amendment to the Spanish participation exemption as of 1 January 2021 (i.e. exemption has been reduced from 100% to 95% of the dividends and capital gains, this implying a 1.25% effective tax in Spain) this will imply that Spanish companies may be obliged to recognise under CFC rules an amount of 5% of the dividends and gains obtained by foreign holding companies if these dividends or gains have been fully exempt in that jurisdiction (or not subject to tax under a territorial tax system) and thus have been subject to tax at a rate lower than 75% of the Spanish CIT (1.25%) that would have corresponded to this income² (which the threshold for the CFC rules to apply).

Therefore Spanish companies owning foreign holding companies should analyse whether they are affected by this change or if they can benefit from any of the CFC exceptions.

• New categories of “passive income”

Law 11/2021 includes in the Spanish CFC regime additional categories of “passive income” as stated in ATAD, such as income from financial leasing and from insurance, banking and other financial activities, except when this income is obtained by the foreign subsidiary in the context of a business activity, as well as income from sales of goods and services purchased from and sold to related parties (as defined in Article 18 of the Spanish CIT Law) when the foreign subsidiary adds no or little economic value.

• Scope of CFC rules extended to permanent establishments

Permanent establishments (“PEs”) outside Spain will now fall within the scope of Spanish CFC rules, and therefore Spanish companies will have to include the passive income obtained by its PEs (without possibility to apply the participation exemption available to income from PEs) when the PE obtains “passive income” and it is subject to tax in its jurisdiction at a rate lower than 75% of the Spanish CIT that would have corresponded to this income. 

• Escape clause from CFC rules is relaxed

Until now, Spanish CFC rules do not apply when the foreign company is tax resident in other EU Member State and the taxpayer gives evidence that this EU company has been set up for good business reasons and that it carries out a business activity.

Law 11/2021 extends the scope of this escape clause to PEs located in other EU Member State and to entities/PEs of the European Economic Area (EEA), and now the taxpayer shall only give evidence that the foreign company/PE carries out a business activity (i.e. the “good business reasons” requirement is no longer needed). 

Exit Tax

Spanish CIT Law already includes an Exit Tax when a Spanish company transfers its tax residency to another Member State or to a third country, except for those assets which remain effectively connected to a PE in Spain. Currently the Spanish CIT Law allows to defer the payment of the exit tax when the tax residency is transferred to another EU or EEA jurisdiction, until the assets are transferred to a third party.

Law 11/2021 replaces, with effects as of 1 January 2021, the above mentioned tax deferral with the tax deferral rule provided in ATAD, which allows to defer the payment of the exit tax by paying it in instalments over five years, with the full tax debt becoming payable in certain cases (i.e. transfer of the assets to a third party or to a third country, etc.).

Law 11/2021 also clarifies, following ATAD, that in case of transfers into Spain of the tax residency of companies, assets, or the business carried out by a PE that are subject to Exit Tax in the other Member State of origin, Spain shall accept the value established by this Member State as the starting value of the assets for Spanish CIT purposes (unless this does not reflect their market value).

CIT: Special Tax Regimes

SOCIMI (Spanish REITs): 15% tax on undistributed profits

One of the SOCIMI requirements is the mandatory distribution, on an annual basis, of at least 80% of the distributable accounting profits generated by the SOCIMI (with certain exceptions).

Law 11/2021 has included the following amendments to the SOCIMI Law, which are effective for tax periods starting as of 1 January 2021:

• SOCIMIs will be subject to a special 15% CIT on the accounting profits that are not distributed. This 15% CIT does not apply to the portion of accounting profit that is subject to 25% CIT (i.e. profits that do not comply with the SOCIMI tax requirements) or to accounting profit that is subject to reinvestment pursuant to the SOCIMI tax regime (i.e. accounting profit derived from the sale of a qualifying asset or shareholding can be distributed only 50% of its amount, provided that the remaining 50% is reinvested in qualifying asset/shares within a 3-year period);
• This 15% CIT shall be paid within the 2-month period after the shareholders’ meeting approving the allocation of the accounting result.  As this new provision enters into force for tax periods starting as of 1 January 2021, it will affect the distributions to be made in 2022 out of the profits of 2021; and
• Additional information requirements to be included in the annual accounts of the SOCIMI in order to track the profits of the SOCIMI.

This amendment shall be taken into account when deciding the amount of dividend to be distributed in June 2022 out of FY2021’s profit. If the SOCIMI has not generated accounting profit in 2021, or it generates accounting profit but it distributes 100% of the distributable accounting profit, then this new 15% CIT would not apply.

SICAVs

SICAVs regulated by Law 35/2003 of collective investment schemes, which implements UCITs Directive, can benefit from a 1% CIT rate as long as they have at least 100 shareholders.

• Stricter requirements to benefit from the 1% CIT rate

Law 11/2021 amends Spanish CIT Law and makes this requirement stricter with effects as of tax periods starting as of 1 January 2022, by stating that³ :

• Only shareholders owning shares in a SICAV with a value ≥ €2,500 shall be taken into account for the minimum shareholder requirement (which shall be increased up to €12,500 in case of a SICAV by compartments);
• The minimum shareholder requirement, as defined in the previous paragraph, shall be met at least during 3/4 of the tax period; and
• This minimum shareholder requirement can be controlled by the Spanish Tax Authorities (so far this requirement was controlled only by the Spanish CNMV).
• Transitory regime to liquidate (not complying) SICAVs

Law 11/2021 includes a transitory tax regime to facilitate the dissolution and liquidation of SICAVs (not complying with the new requirement) during 2022 without adverse tax implications. Specifically:

• These SICAVs will continue to be subject to 1% CIT until their liquidation;
• Liquidation of the SICAV will be exempt from 1% Capital Tax;
• Shareholders of the liquidated SICAV will benefit from a rollover relief on any capital gains derived from the liquidation of the SICAV if they reinvest all the liquidation quota in other collective investment schemes. This implies that shares/units received by the shareholder in the reinvested SICAV/Fund will inherit the tax base cost and acquisition date of the shares in the liquidated SICAV; and
• Transfer of listed shares owned by the liquidated SICAV will be exempt from financial transactions tax, subject to the reinvestment above explained.   

Non-Resident’s Income Tax (with or without PE in Spain)

Tax representative

With effects as of 1 January 2021, residents of a EU country or an EEA country with exchange of tax information are no longer obliged to appoint a tax representative in Spain.

Exit Tax

Spanish Non-Residents’ Income Tax (“NRIT”) Law already includes an Exit Tax when a PE of a foreign entity ceases its activity or transfers its assets outside Spain.

Law 11/2021 adds that the Exit Tax will also apply to the assets allocated to a PE which transfers its activity outside Spain, and includes in the NRIT the tax deferral rules provided in ATAD mentioned above for Spanish CIT:

• Exit Tax can be paid in instalments over five years when the assets or PE are transferred to another EU Member State or EEA jurisdiction; and
• Spain shall accept the value established by the Member State of origin as the starting value of the assets for Spanish CIT purposes (unless this does not reflect their market value).

“Tax havens” concept replaced by “non-cooperative jurisdictions”

Spanish tax legislation currently includes several specific “tax haven” anti-avoidance tax rules for, amongst other cases, payments made to entities based in jurisdictions included in the Spanish list of “tax havens” jurisdictions and for foreign investors investing in Spain through jurisdictions included in this tax havens list (e.g., in the ETVE regime and in the special tax regime for venture capital entities).

Law 11/2021 states that the references included in Spanish tax legislation to “tax haven” jurisdictions (and also to jurisdictions without effective exchange of information and to jurisdictions with nil or low taxation) shall now be deemed to be made to the concept of “non-cooperative jurisdictions”.

The Ministry of Finance shall approve the list of “non-cooperative jurisdictions”, which shall include jurisdictions, territories and preferential tax regimes based on the following criteria: (i) tax transparency and effective exchange of information, (ii) existence of beneficial tax regimes for off-shore entities or instruments to facilitate the allocation of profits which do not reflect actual economic activity in such jurisdictions, and (iii) the existence of low or nil taxation.

This list of “non-cooperative jurisdictions” shall be updated attending to the criteria of the EU Code of Conduct on Business Taxation or the OECD Forum on Harmful Tax Practices, which in practice implies a transition to the concept used by the OECD and the EU aligning the criteria used to classify these jurisdictions.

Law 11/2021 clarifies that, if a jurisdiction with a tax treaty with Spain is included in the list of “non-cooperative jurisdictions”, the tax rules related to non-cooperative jurisdictions will also apply to such jurisdiction to the extent they are not contrary to the tax treaty provisions.

Accordingly, references in Spanish tax law to “tax havens”, such as in the special ETVE tax regime (Entidades de Tenencia de Valores Extranjeros) or in the special tax regime for venture capital entities (entidades de capital riesgo), will be deemed to be made to “non-cooperative jurisdictions”.

The Spanish Tax Authorities have not released yet a list of “non-cooperative jurisdictions”, but it is expected that the current EU list of non-cooperative jurisdictions, which is updated at least twice a year, will be used as a reference. The EU list was updated in February 2021 and is expected to be reviewed in October 2021.

Transfer Tax / Stamp Duty: “Value of reference” in acquisitions of Real Estate

Until now the taxable base for Transfer Tax and Stamp Duty on the acquisition of real property assets has been the “real value” of such assets, which is the value agreed between the parties except when the Tax Authorities can prove that the market value is higher. This has generated significant tax litigation.

Law 11/2021, with the excuse to reduce this tax litigation, introduces the concept of “value of reference” to be used as taxable base for Transfer Tax and Stamp Duty in real estate transactions as of 1 January 2022, except when the price agreed between the parties is higher, in which case the latter will be used. 

This “value of reference” shall be determined by the Cadastral Office (“Catastro Inmobiliario”) on an annual basis with objective criteria, based on the prices reported by the notaries in real estate transactions, considering the geographical zones and the type of real estate asset, and cannot exceed the market value.

In the absence of a “value of reference”, the taxable base will be the higher of the value agreed by the parties or the market value.

Taxpayers can appeal against this “value of reference” if they consider that it is higher than market value, but in practice this new concept of “value of reference” will shift the burden of the proof, as now taxpayers will have to provide evidence supporting that the market value is lower than this value of reference, whereas until now it was the Tax Administration who had the burden to prove that the market value is higher than the price agreed by the parties.

VAT Grouping

In relation to the special VAT groping regime, Law 11/2021 clarifies that the parent entity of the VAT Group will be responsible for the payment of the VAT group debt and for the correctness of the compensations and refunds claimed by the VAT Group, and for other formal obligations of the VAT Group.

Taxation of Individuals

Unit-linked insurance products

Spanish Personal Income Tax (“PIT”) Law provides a tax deferral rule for income derived from unit-linked insurance contracts that comply with the requirements foreseen in Article 14.2.h), which shall only be taxed when the insurance benefit is collected upon termination of the contract or surrender of the policy (as opposed to on an annual basis).

Now Law 11/2021 adapts the requirements established in Article 14.2.h) of the PIT Law in order to apply the above-mentioned tax deferral, specifying that the unit-link products shall invest the premiums in assets that fulfil the requirements foreseen in the regulatory regulations applicable to insurance companies (i.e. Article 89 of Royal Decree 1060/2015, 20 November).

Exchange Traded Funds (“ETFs”)

Under current PIT Law, capital gains derived from the sale of units in Spanish ETFs and foreign ETFs harmonized and listed in the Spanish Stock Exchange are excluded from the  tax deferral foreseen for transfers between investment funds (“régimen de traspasos”).

Law 11/2021 states that, as of 1 January 2022, capital gains from any type of ETF,  regardless of the stock exchange in which it is listed, will be excluded from this tax deferral regime.

However Law 11/2021 provides a transitional regime to allow the application of the tax deferral to ETFs not listed in the Spanish Stock Exchange and purchased before 1 January 2022, provided that the sale proceeds are not reinvested in other similar ETFs.

CFC regime

Amendments made in Spanish CIT Law to the Spanish CFC regime are also included in Spanish PIT Law for Spanish resident individuals owning shares in foreign entities. See section for Spanish CIT above.

Crypto-currencies and tax form 720

Spanish tax resident individuals must report to the Spanish Tax Administration, on an annual basis, all their assets and rights located outside Spain through form 720, if certain requirements are met.

Law 11/2021 states that Spanish resident individuals owning crypto-currencies located outside Spain shall report the value of these crypto-currencies in the Spanish form 720 if the value of the crypto-currencies exceeds EUR 50,000.

Gift and Inheritance Tax

• “Value of reference” as taxable base for real estate

The “value of reference” determined by the Cadastral Office (as described in the Transfer Tax/Stamp Duty section) shall also be used as taxable base of the real estate properties to calculate the Gift and Inheritance Tax.

• All non-residents can benefit from Regional tax reliefs

Law 11/2021 amends the Gift and Inheritance Tax Law to clarify that all non-residents taxpayers (and not only those who are resident in the EU and EEA jurisdictions) are entitled to apply the tax reliefs approved by the Spanish Regions, following the case-law of the Spanish Supreme Court.

Wealth Tax

• “Value of reference” as taxable base for real estate

The “value of reference” determined by the Cadastral Office (as described in the Transfer Tax/Stamp Duty section) shall also be used as taxable base of the real estate properties to calculate the Wealth Tax.

• New valuation rule for life insurance contracts (unit-linked)

Until now, life insurance contracts were only included in the taxable base of Wealth Tax when they had a surrender value (valor de rescate) at the date of accrual of the tax. Therefore, those life insurance products that cannot be surrendered or that did not have a surrender value at the date of accrual were not subject to Wealth Tax (e.g. unit linked insurance products).

Law 11/2021 has introduced a new valuation rule applicable to life insurance contracts, whereby if the life insurance contract cannot be surrendered by the policyholder or does not have a surrender value at the date of accrual, the policyholder must include in the taxable base of the Wealth Tax the value of the mathematical provision at the date of accrual. Consequently, unit linked insurance products would be now taxed under Wealth Tax even if the policyholder cannot surrender the policy.

Tax Proceedings/Litigation

We include below a summary of the most relevant amendments in relation to tax proceedings or tax litigation.

Surcharges por (voluntary) late payment are reduced

Until now, the late payment of a tax liability once the voluntary period has elapsed, but before the Tax Authorities have claimed this tax debt, has a surcharge of 5%, 10% or 15% of the tax debt (without penalties) if the payment is made within the 3, 6 or 12 months respectively after the end of the voluntary period, and a surcharge of 20% if paid after 12 months.

Law 11/2021 reduces the above surcharges to 1% plus an additional 1% for each month of delay, and reduces to 15% the surcharge for payment after 12 months, in order to encourage the voluntary regularization by the taxpayer.

These reduced surcharges apply to tax proceedings initiated before Law 11/2021 and still open, when the surcharges regime is more favourable to the taxpayer.

Penalty proceedings

The payment of penalties in tax assessments with agreement (“actas en conformidad”) and in case of early payment can benefit from reduction percentages. Now Law 11/2021 increases these reduction percentages in order to incentive the early payment of penalties and reduce tax litigation: Reduction percentage in tax assessments with agreement is increased from 50% to 65%, and in early payment from 25% to 40%.

Law 11/2021 also extends the expiration period that the Tax Authorities have to initiate a penalty proceeding after the conclusion of a tax inspection proceeding, from three (3) to six (6) months.

Statute of limitation period

The 4-year statute of limitation period was suspended during the State of Alarm (almost 80 days) due to COVID-19, which implies that taxes that were not time-barred at the start of the State of Alarm have a statute of limitation period of 4 years + circa 80 days.

Now the Law 11/2021 clarifies that this extension in the limitation period will only apply to those taxes with a statute of limitation period that would have expired before 1 July 2021 in the absence of this extension, which means that those taxes with a limitation period ending after that date will again have the standard 4-year statute of limitation period.

Inspections in taxpayers’ domicile

Law 11/2021 includes relevant changes with regard to the Court authorization process that is required by the Spanish Tax Authorities to enter in the taxpayer’s domicile in the context of a tax inspection.