SPAIN Law and Practice Contributed by: Raúl Salas and Elena Ferrer-Sama, RocaJunyent
3. Corporations and Non-Corporate Businesses 3.1 Form of Closely Held Local Businesses Most closely held local businesses operate in corpo - rate form in order to be taxable by the CIT and to sep - arate liabilities between the company and its holders. 3.2 Individual and Corporate Rates In order to prevent individual professionals from car - rying out very personal activities through companies to avoid the application of personal income tax rates, the Spanish tax authorities use the rules for piercing the corporate veil and qualify transactions to ensure that they are actually carried out by individuals and not by the company. 3.3 Restrictions on Retention of Earnings by Closely Held Corporations There is no specific rule in Spain to prevent corpora - tions from accumulating earnings for investment pur - poses. In fact, to encourage entities to increase their own funds, Spanish CIT provides a tax incentive for the capitalisation reserve. This tax relief is aimed at companies increasing their own funds, which entails a lower distribution of dividends to shareholders in exchange for lower taxation. Entities that are taxed under the general tax rate can apply a special reduction to their positive taxable base in an amount equal to 10% of the increase in their net equity. The following conditions must be met in order to apply this reduction: • there must be an increase in the entity’s net equity that must be maintained during a five-year period; and • a reserve for the amount of the reduction must be booked separately in the account balance and should be recorded as a restricted reserve for at least a period of five years. However, this reduction cannot exceed 10% of the entity’s positive taxable base prior to certain adjust - ments. Excess over the aforementioned limit can be carried forward for application in the following two years.
3.4 Taxation of Individuals on Shares in Closely Held Corporations Dividends paid by closely held corporations are taxed as income from movable capital for Personal Income Tax (PIT) purposes. Conversely, the sale of shares may produce a capital gain for the individual. This capital gain is calculated as the difference between the trans - fer value and the acquisition value. The transfer value will be the higher of these two values: • the value of the net worth corresponding to the transferred securities resulting from the balance sheet corresponding to the last fiscal year closed prior to the date of accrual of the PIT; or • the result of capitalising at the rate of 20% the average of the results of the three fiscal years closed prior to the date of accrual of the PIT. Both dividends and capital gains form part of the sav - ings base of the PIT, which is taxed on the basis of a tax-rate scale of between 19% and 30%, depend - ing on the amount of the savings base (from EUR0 to more than EUR300,000). 3.5 Taxation of Individuals on Shares in Public Corporations Individuals are taxed on dividends and capital gains from the sale of shares in publicly traded corpora - tions on the same basis as that previously explained in 3.4 Taxation of Individuals on Shares in Closely Held Corporations . The only difference concerns the calculation of the capital gain. In the case of publicly traded corporations, this is determined by the differ - ence between the transfer value and the acquisition value – ie, the transfer value would be the list value at the time of the transfer. 4. Taxation of Inbound Investments 4.1 Application of Withholding Taxes If no double tax treaty applies, or a limit of taxation is not envisaged in the relevant double tax treaty, pay - ments made by a Spanish taxpayer to a non-resident entity will be subject to withholding tax in Spain at the following general rates: • 19% on dividends and interest; and
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