Our office advises companies regarding the full exemption applicable to dividends and capital gains obtained by ETVEs from their shareholding in non-resident companies, reducing the amounts payable and increasing the tax efficacy of our clients.
Companies under the ETVE Scheme are Spanish companies that operate abroad and obtain income from abroad. The main purpose is to avoid double taxation on income received abroad, which is taxed at origin and destination because the Corporate Income Tax applies to the worldwide tax on taxpayers. Therefore, although the Corporate Income Tax rules already contain specific regulations to avoid double international taxation, this special regime applies to companies that hold equity in non-Spanish resident companies.
Under the scheme, the 95% of the income obtained from holdings in foreign companies is exempt, provided that the legally stipulated requirements are fulfilled regarding how they are collected, in other words: (i) as dividends distributed by investee companies, from their profits; or (ii) as income generated on transfers of shares from non-resident companies.
On the other hand, this scheme provides the same tax advantages as the general scheme for the application of the exemption to avoid double taxation on dividends and the income derived from the transfer of securities representing the equity of resident and non-resident entities in Spanish territory. In addition, however, it has its regulation as a special scheme in Corporate income tax law.
The corporate purpose of these entities must consist of the management and administration of securities representing the equity of non-resident entities in Spanish territory, using the corresponding organisation of material and personal resources, without it being necessary for this to be the exclusive or main corporate purpose. Likewise, the entity may also hold shares in entities resident in Spanish territory together with shares in non-resident entities, just as it may also hold shares in non-resident entities that meet the requirements for the application of this regime, together with others that do not meet these requirements and, therefore, cannot confer the right to apply this special regime.
Companies that intend to apply this special regime for entities holding foreign securities -ETVE-, must have their own organisation of personal and material resources to manage and administer the shares, allowing it to perform the tasks inherent to the status of shareholders and to make the necessary decisions and actions aimed at achieving the highest profitability of the shares. However, this is achieved through the sole dedication of the entity’s management.
On the other hand, this requirement is not fulfilled if the management and administration activity is transferred to a third party and latter provides this service for the foreign securities holding company with its own personal and material resources in exchange for financial consideration. However, suppose the entity that intends to apply this special scheme is part of a business group. In that case, an organisation of material and personal resources must be calculated considering all the entities that make up the group or groups so that the transfer of management to another entity that forms part of the commercial group is acceptable.
These entities may apply the exemption of income originating in non-resident entities in the following circumstances: (i) the direct or indirect holding in the capital or equity of the non-resident entity must be at least 5%; (ii) the holding must have been held uninterruptedly during the year before the day on which the profit to be distributed becomes receivable or the day on which the transfer takes place, or must be held after that for the time necessary to complete that period if the exempt income consists of dividends; (iii) the investee has been subject to and is not exempt from the payment of a foreign tax of the same or similar nature to corporation tax at a nominal rate of at least 10% in the year in which the profits being distributed or in which the interest is held were earned or, in the case of a transfer, in every year in which the interest is held.
Application of the special scheme can be extremely beneficial for companies, and it is subject to extensive regulation and many causes. Because of this, a detailed study of the situation will be necessary to provide companies with the advice they need. Special schemes offer taxpayers solutions that suit their business projects that sometimes, due to lack of knowledge, are not applied, reducing tax efficiency. Our practice will advise and offer you a solution tailored to your circumstances and needs so this does not happen.