Corporate income tax subjects in Spain1
Félix Alberto Vega Borrego. Universidad Autónoma de Madrid
Today I will be providing you with an overview of some of the principal aspects of the Spanish
report on corporate income tax subjects which I wrote together with my colleague at the
Autonomous University of Madrid, Domingo Jiménez, for this year’s Congress of the European
Association of Tax Law Professors.
Since we have limited time, I will mainly focus on two topics. I will start with a brief
explanation of the entities established, incorporated or organized under Spanish laws which may
be subject to the Spanish Corporate Income Tax.
Secondly, I will move on to foreign entities, which may also be subject to Spanish Corporate
Income Tax in the event that they have their residence in Spain. However, in these cases a very
important question must previously be answered. Firstly, it is necessary to classify the foreign
entity in order to establish whether it is opaque or transparent. Only the entities classified as
opaque or, in other words, as non-transparent, may be subject to the Spanish CIT, as long as
they meet any of the criteria provided in Article 8 of our Corporate Income Tax Act, which is
shown here on the slide. As I will explain in the second part of my speech, the criterion
established under Spanish law to classify foreign entities as transparent or opaque is quite
controversial, especially because in practice the Spanish Tax Administration follows a tax
oriented approach rather than the similarity or resemblance test which seems to be required
under law.
First of all, I would like to begin by explaining the general criterion used by the Spanish CIT to
define which entities are subject to this tax relies on legal personality. According to this
criterion, all entities organized under Spanish laws with legal personality are subject to CIT.
However, there is one exception. Spanish civil law partnerships are not liable to Corporate Tax
even if they have legal personality. This means that the “sociedades civiles” are always
considered as look-through entities, their members being the ones who are liable to tax on
income arising from these partnerships.
Our Corporate Income Tax Law combines this general criterion with an exhaustive list of
entities subject to this tax, even though they do not have legal personality. This list is shown on
these slides and includes eleven different types of entities such as investment funds, temporary
grouping of companies, pensions funds, etc.
According to the latter, entities without legal personality, excluding the ones listed above, and
civil law partnerships, are not subject to Corporate Income Tax and, therefore, are considered
fully transparent under Spanish income tax law. The Spanish legislation provides a mandatory
full transparency regime which implies, in the first place, that entities cannot opt in or out for
the application of either the Corporate Tax or the transparency regime. This means that entities
subject to CIT are not allowed to opt out in order to be treated as transparent entities and, at the
same time, transparent entities cannot opt to be treated as opaque.
In our full transparency regime, look-through entities are fully disregarded. They are not totally
or partially subject to CIT and, therefore, the income of the entity is taxed at the hands of its
partners, regardless of whether the entity’s income has been effectively distributed or not.
1
This speech is based on the national report written together with Domingo Jiménez-Valladolid de
L´Hotellerie-Fallois (Lecturer at the Universidad Autónoma de Madrid) for the 2013 Congress of the
European Association of Tax Law Professors.
1
However, there are a few exceptions, which affect both the Spanish economic interest groupings
and the Spanish temporary groupings of companies. These entities are formally subject to the
Spanish Corporate Tax, but in practice are taxed under a partial transparency regime, which
affects only the taxable income attributable to the Spanish resident members of those entities.
This income is taxed at the hands of the Spanish resident members, regardless of whether or not
it has been distributed by those entities. On the contrary, the income attributable to non-resident
members is taxed at the entity level, which implies that the non-resident member will only be
taxed upon distribution.
Let’s move on to the second part of my presentation on the classification of foreign entities). In
Spain, as in almost any other country, the first question arising in relation to a foreign entity is
whether the taxpayer of the income obtained through that entity is the entity itself or its
members. To answer to this question the foreign entity is required to be classified as transparent
or opaque. It is clear that this important decision it is not only relevant to the entity itself, but
also to its partners and members. According to the latter, for example, if a person resident in
Spain is a partner of a Italian entity classified as transparent according to Spanish domestic law,
the income attributable to the Spanish partner will be taxed fully in Spain upon being earned,
regardless of whether the entity’s income has been effectively distributed or not. On the other
hand, if we classify the Italian partnership as a non-transparent entity, the taxation on the
Spanish partner will be postponed until the time at which its profit is distributed.
At this point, we have to keep in mind that the Spanish legislation did not provide any legal rule
on foreign entity classification until 2002. This year the Spanish government submitted a draft
bill to the Parliament which envisaged the concept of a foreign transparent entity, “entidad
extranjera en regimen de atribución de rentas”, using the Spanish terminology. The purpose of
this concept was to determine if the entity´s income should be taxed at the entity or at the
partners’ level.
The method provided in the draft was applicable to all foreign entities and followed a
straightforward tax oriented approach. As you already know, under this method, the
classification of foreign entities is based on how they are treated for tax purposes in their home
country. If the entity is considered to be opaque in that state, Spain would treat the entity in the
same way, and vice versa, i.e. if the entity is transparent according to tax law in the state of
origin, it would also be included under this regime in Spain.
I do not know whether you all agree or disagree on the advantages and inconveniences of this
method. The point here is that the wording of the draft bill was straightforward, and therefore
there were no doubts about how foreign entities should be classified. However, during the
discussion of the draft in the Parliament, the original version of the rule was replaced by the
following wording, which is shown on this slide:
“Foreign entities whose nature is similar or identical to the nature of Spanish
transparent entities will be treated as transparent entities for Spanish income tax
purposes”.
Well, what I want to explain now is what this rule establishes, at least in theory, and how it has
been interpreted by the Spanish tax authorities, since so far our courts have not issued any
judgment on how to interpret the aforementioned rule.
The wording of the rule seems to establish a similarity or resemblance approach in order to
classify foreign entities. As you all know, this method requires foreign entity to be compared
with national entities in order to determine which one it resembles the most. This comparison is
mainly made by examining the legal features of the entity taking into account the general law
2
(civil or commercial) governing that entity. In some countries the entity’s charter of
incorporation and the articles of association are also required to be assessed.
Once the features of the foreign entity have been determined, it will be compared with national
entities, in order to determine which it resembles the most. Finally, the foreign entity will be
treated as transparent or non-transparent, depending on the regime applicable to the comparable
national (Spanish) entity.
Let me set an example in order to clarify this method, even though I am sure you all know and
have understood what it implies. Imagine an Italian “Società in Nome Collettivo”. If we analyze
the features of this type of company, we will reach the conclusion that it is comparable to a
Spanish “sociedad colectiva”. This means that the “Società in Nome Collettivo” should be
treated as non-transparent in Spain, given that a Spanish “sociedad colectiva” is subject to the
Corporate Income Tax. Under this method, at least in theory, the foreign entity tax treatment in
its home country it is not a decisive factor for the purpose of classifying the entity. Therefore,
the fact that the Italian “Società in Nome Collettivo” is not subject to Italian Corporate Income
Tax should not prevent it from being able to be considered as non-transparent in Spain.
In practice, the application of this method can be quite complex, especially in countries like
Spain where the statutory rule does not establish which factors are of most importance for the
purposes of the resemblance test. At the same time, sometimes the aforementioned complexity
arises when it is impossible to determine which national entity is comparable to the foreign one.
In these cases, this classification should provide a residual criterion, for the purpose of deciding
which tax treatment should be given to foreign entities that are not comparable or similar to any
national entity. Well, believe me, this important point is not answered in the Spanish statutory
rule, which implies that the enigma about the transparency of the foreign entity remains
unresolved.
As I will now explain, these serious problems have not taken place in practice, since from the
very beginning some Spanish scholars and the tax authorities argued that when this comparison
takes place, in addition to the legal characteristics of the foreign entity, it was also possible to
take into account the tax treatment of the entity in its home country.
Well, if we review the rulings issued by the Spanish tax authorities since 2002 we can observe
the importance which the “tax treatment” applied by the home country to the entity has had.
It is relevant to highlight a few previous general aspects of those rulings. They are
administrative rulings handed down by the Spanish General Directorate of Taxation, a unit of
the Spanish Ministry of Finance, which also has the competence to prepare the government’s
draft bills on tax matters. The rulings are handed down taking into account only the information
provided by the taxpayer and at this stage the tax authorities do not make any inquiry to
ascertain the information provided.
Well, if you analyze the rulings issued regarding foreign entity classification, you will observe
that they all follow the same pattern. The rulings replicate the legal and fiscal features provided
by the taxpayer in its query and immediately state whether the entity should be considered
opaque or transparent in Spain, but without making any reference to which Spanish entity is
comparable to the foreign one, as in theory the resemblance test requires.
The General Directorate for Taxation avoids making this comparison in all its rulings, and as a
matter of fact the criterion that appears to be weighted the most is the entity’s tax treatment in
its home country. This explains why many foreign entities have been classified as transparent
despite the fact that the Spanish comparable entity is subject to Spanish Corporate Income Tax
Act.
3
This happened with certain Dutch entities like the “Closed Commanditaire Vennootschap”. This
entity, according to a similarity approach, should have been classified as opaque, since the
comparable Spanish entity is the “sociedad comanditaria” and these entities are subject to CIT.
However, the ruling stated that the Dutch entity should be treated as transparent, because that is
the applicable regime in the Netherlands according to Dutch law.
There are similar examples with some other foreign entities. Some of these are shown on the
slides and the rulings are carefully explained in our report.
In view of the above, the following conclusions can be drawn. As we saw before, in theory the
wording of the Spanish statutory rule establishes a resemblance test, where only the legal
features of the foreign entity are examined and the tax treatment applicable to the Spanish entity
resembling the foreign entity the most is applied.
However, it is crystal-clear that in practice, in addition to the legal features of the foreign entity,
the Spanish tax administration has considered the tax treatment of the entity in its home to be a
factor which should also be taken into account. In fact, this last feature is the one, and most
likely the only one, on which the most relevance has been placed in practice.
Therefore, the tax treatment of foreign entities does not really follow a similarity approach but
rather a tax-oriented approach, where the classification is mainly based on how the entity is
treated for tax purposes in its home country. To a certain extent, the Spanish tax administration
accepts the home country´s tax regime and, therefore, if the entity is transparent in its home
country it will also be treated as transparent in Spain and, on the contrary, if the entity is
opaque, it will also be classified as opaque in Spain.
I do not know if you are surprised or not by what it is happening in Spain at this point, because
the tax administration’s interpretation is debatable. One curious point is that the unit that issues
tax rulings, the General Directorate for Taxation, is the same one which prepared the draft bill in
2002, which was finally modified during its discussion in the Spanish parliament. I do not know
if I should say this, but in a certain way the General Directorate for Taxation has interpreted the
rule as they originally proposed it, and not how it was finally passed by the Parliament.
In any case, the truth is that the tax oriented approach is the one that seems to have prevailed in
practice. Therefore, whenever there is a doubt about whether a foreign entity should be treated
as transparent or opaque in Spain, it is advisable to submit a written query, especially due to the
fact that the ruling handed down has binding effects for the Spanish tax administration, which
also includes our Internal Revenue Service (“Agencia Estatal de Administración Tributaria”), a
different body than the General Directorate for Taxation.
4
0
