SPAIN Law and Practice Contributed by: Raúl Salas and Elena Ferrer-Sama, RocaJunyent
6.3 Dividends From Foreign Subsidiaries In accordance with the provisions of Article 21 of the CIT Law, dividends obtained by Spanish entities from foreign subsidiaries may be 95% exempt from taxa - tion under the current participation exemption regime. Foreign subsidiaries’ dividends will generally be 95% exempt when either of the following conditions are met: • the recipient owns at least 5% of the distributing entity; or • that stake has at least one year’s seniority (the one- year seniority could be fulfilled afterwards). For a foreign subsidiary, an additional condition is required. In order for the exemption to apply, the for - eign subsidiary should be effectively subject to (and not exempt from) a tax similar to CIT at a nominal rate of at least 10%. This requirement is understood to be met when a tax treaty is applicable and includes an exchange-of-information clause. Furthermore, capital gains resulting from the sale of shares – in both Spanish and foreign entities – would generally be 95% exempt from taxation when require - ments for participation exemptions are fulfilled. In the case of the sale of foreign subsidiaries, the minimum taxation requirement must be met during all the years in which the participation has been held. Specific requirements apply in the case of indirect participa - tion through a holding entity. If the sold company was subject to controlled foreign company (CFC) rules and/or if it was a passive income entity, the participation exemption would be limited. 6.4 Taxation of Intangibles Developed by Local Corporations Transactions between related parties are subject to the arm’s length principle. This principle requires that transactions be valued at fair value and satisfy the obligations under transfer pricing rules. Consequently, the local corporation must recognise income arising from the transfer of intangibles that is taxable accord - ing to the local corporation’s CIT regime. However, any such income from the use of intangibles may benefit from the regime described in 2.2 Technology Investments .
Once the proportion has been calculated based on the aforementioned criteria, there are no specific rules regarding the deductibility. Therefore, the man - agement and administrative expenses incurred by a non-local affiliate will be deductible if they are ordinary costs of the local affiliates’ productive activity and if they have been calculated in accordance with arm’s length principles. 5.7 Restraints on Related-Party Borrowing There are no specific rules applicable to related-party borrowing. However, as with any other related-party transaction, it is necessary to obey the arm’s length principle. For that reason, local affiliates are not allowed to grant interest-free loans or a loan at below- market interest rates. In addition, the deductibility of interest expenses is subject to the interest limitation rules, as explained in 2.5 Deduction of Interest . 6. Taxation of Foreign Income of Local Corporations 6.1 Foreign Income Exemptions The CIT regulations subject resident companies to taxation on all their worldwide income, regardless of the country of source. However, profits obtained abroad through a PE located outside Spanish terri - tory will be 95% exempt from taxation when it has been subject to (and is not exempt from) a tax similar to CIT at a nominal rate of at least 10% under the terms of Article 21 of the CIT Law (see 6.3 Dividends From Foreign Subsidiaries ). Losses incurred by a PE abroad will immediately cease to be tax-deductible, unless they are due to the PE finally ceasing activity and under certain circumstances. 6.2 Non-Deductible Local Expenses The profits exempted by application of the process described in 6.1 Foreign Income Exemptions are cal - culated by attributing to the PE all the income and expenses associated with it, together with the part of the common expenses that is allocated to it. Conse - quently, local expenses attributable to the PE would hardly be deductible in Spain if they do not comply with the general deductibility requirements.
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