Tax groupings for CIT purposes
Under Spanish tax law, companies can form a group and apply a special tax consolidation regime for CIT purposes. Companies forming a tax group must formally pass a resolution agreeing to do so before the beginning of the first tax year in which the tax consolidation regime will be applied.
To apply the tax consolidation regime, the controlling company of the tax group must hold a 75% or higher interest, either directly or indirectly, and the majority of the voting rights in the companies forming the tax group at the beginning of the first tax year in which the tax consolidation regime is applied, and this interest and the voting rights must be maintained during the year unless the companies are dissolved. The interest requirement is 70% for companies listed on a stock exchange.
A non-resident company can also be the controlling company of a tax consolidation group, provided that it has legal personality, is taxed by a foreign tax identical or analogous in nature to Spanish CIT, and is not resident in a tax haven. When the controlling company is a non-resident company, one of the resident companies of the group is required to be appointed as the group's representative of the group and will be responsible for complying with all of the group's obligations and formalities.
Resident companies that meet the minimum holding and voting rights requirements through non-resident companies are included in the tax consolidation group.
These rules allow for the possibility of horizontal consolidation.
The main characteristics of the tax consolidation regime are as follows:
- The taxable income of the tax group is the sum of the taxable incomes of each of the companies forming the group.
- The tax losses of any of the companies forming the group can be offset against the tax profits of any of the other group companies.
- For the calculation of consolidated taxable income, the tax profits (losses) generated from transactions carried out between group companies are eliminated and only included in consolidated taxable income when:
- the transactions are carried out with third parties
- a group company participating in the internal transaction ceases to form part of the tax group, and
- the tax consolidation regime is no longer applied by the group for whatever reason.
- As a special rule, 5% of the dividends excluded from the CIT holding exemption regime will not be eliminated, generating a potential cascade effect in the event of successive dividend distributions.
- Specific limitations apply regarding the offsetting of tax losses or the application of tax credits generated by the group companies before they formed part of the tax group. Tax credits may be applied by the tax group up to the limit that would have applied to the company that generated the tax credit under the general CIT regime, taking into account relevant eliminations and additions corresponding to the company. Tax losses generated by a group company before it joined the group may be offset up to the following limits:
- If net turnover during the 12 months prior to the start of the tax period is less than EUR 20 million, besides the general limits that apply at the group level, the offsetting of prior tax-loss carryforwards will be limited to 70% of the individual tax base, taking into account any eliminations and additions that correspond to the company.
- If net turnover is at least EUR 20 million but less than EUR 60 million, besides the general limits that apply at the group level, the offsetting of prior tax-loss carryforwards will be limited to 50% of the individual tax base, taking into account any eliminations and additions that correspond to the company.
- If net turnover is at least EUR 60 million, besides the general limits that apply at the group level, the offsetting of prior tax-loss carryforwards will be limited to 25% of the individual tax base, taking into account any eliminations and additions that correspond to the company.
- No WHT is chargeable on payments made between companies of the tax group (e.g. interest, dividends).
- For tax periods starting in 2023, the taxable income of tax groups for CIT purposes will not be the sum of the taxable incomes of each of the companies forming the group but the sum of all the positive taxable income and 50% of negative taxable income of such entities. The unused negative taxable income will be recovered in equal parts during the first ten tax years starting on or after 1 January 2024.
If the entity that generated the negative taxable income ceases to form part of the tax group, the group will be the one to continue recovering the unused negative taxable income.
If the tax consolidation regime no longer applies or the group ceases to exist, the unused negative taxable income will be fully recovered in the last return filed by the tax group.
Tax groupings for VAT purposes
Groups of companies may also choose to be taxed under a special tax consolidation regime for VAT purposes. This special regime is optional, but once it has been opted for, it must be applied for a minimum of three years, which is extendible unless it is expressly waived by the companies.
The VAT consolidation regime may only be applied by companies resident in Spanish VAT territory that do not form part of any other VAT grouping.
The controlling company of the group must be a legal entity or PE that is not dependent on any other entity established in Spanish VAT territory, and its interest in the capital or voting rights of the group's subsidiary companies should be over 50% for the entire calendar year. Group companies should be related in three different ways: economic, financial, and organisational.
With the application of the VAT consolidation regime, there are two different options for taxation:
- The aggregation system, where the balances of the VAT returns of the individual companies of the group are totalled. The right to a tax deduction is exercised by the individual companies.
- The consolidation system, where an individual company can opt to reduce VATable income for inter-company operations, which is limited to the ‘external’ cost.
The arm’s-length principle is the standard applicable to transactions between related parties under Spanish transfer pricing regulations. The Spanish tax authorities have powers to review the transfer prices applied in inter-company transactions and make adjustments should the transfer prices determined by the taxpayer not be in line with the arm’s-length principle.
Spanish domestic legislation adopts a very wide approach to the definition of related parties. The following list presents an overview of the entities and individuals that are considered related parties with respect to a Spanish taxpayer:
- A company and its partners or shareholders.
- A company and its directors or board members, although, exceptionally, they will not be considered as related parties as regards the remuneration received in the performance of their duties.
- A company and the spouses and immediate collateral, third-degree consanguinity or affinity relatives of the partners, shareholders, board members, or directors.
- Two companies that are part of a corporate group.
- A company and the directors or board members of another company, when both companies belong to the same corporate group.
- A company and the spouses and collateral, third-degree consanguinity or affinity relatives of the partners or shareholders of another company, when both companies belong to the same corporate group.
- Two companies when one of them indirectly holds at least 25% of the capital stock of the other.
- Two companies in which the same partners, shareholders, or their spouses and collateral, third-degree consanguinity or affinity relatives hold, directly or indirectly, at least 25% of the capital stock.
- A company resident in Spanish territory and its foreign PEs.
- A company resident abroad and its Spanish PEs.
When the relationship is defined in accordance with the member-company relationship, the interest held must be equal to or greater than 25%. A group should be interpreted as defined in Article 42 of the Spanish Commercial Code.
Spanish transfer pricing regulations generally follow the OECD Guidelines. Both the traditional transactional methods and the transactional profit methods are accepted in Spain. When the previously defined valuation methods are not applicable, the use of other methods or generally accepted valuation techniques satisfying the arm’s-length principle may be applied.
Taxpayers should support the arm’s-length nature of their inter-company transactions in a transfer pricing documentation study that meets certain legal requirements that largely follow those contained in the OECD Guidelines. The documentation is made up of a Master file and a Local file. A simplified level documentation may apply to companies that are part of a group having a net turnover of less than EUR 45 million.
Penalties may be levied if taxpayers fail to provide their transfer pricing documentation study when it is requested by the tax authorities, generally in the context of a tax audit. Transfer pricing documentation that is deemed to be complete and accurate protects Spanish taxpayers from penalties if the tax authorities propose a transfer pricing adjustment.
Country-by-country (CbC) reporting
The Spanish-resident ultimate parent company or designated entities for groups with a consolidated turnover of more than EUR 750 million are required to file the CbC report within 12 months of the end of every tax period. Furthermore, and consistent with the OECD’s Action 13, this information must be filed for those entities that are tax residents in Spain but are not the 'ultimate parent entity' of a multinational enterprise (MNE) group if certain criteria are met.
The Spanish subsidiaries of a group that is subject to CbC reporting requirements are required to file a CbC disclosure form. In this form, the Spanish affiliates must identify the group company and the territory of residence of the entity required to file the CbC report.
Disclosure form 232
Spanish taxpayers are required to file a form that identifies their inter-company transactions and transactions with tax havens.
The tax return should be filed during the month following the ten-month period after the end of the fiscal year which the information to be provided refers to. In other worlds, for fiscal years ending 31 December, it should be filed between 1 November and 30 November.
Thin capitalisation rules have been repealed.
Controlled foreign companies (CFCs)
Spanish CFC rules seek to avoid the effects arising when Spanish tax resident companies or individuals place their capital in low-taxed foreign companies or PEs to avoid including passive income generated by such capital in their taxable bases. Under this regime, Spanish tax resident companies pay Spanish CIT on the income obtained by a non-resident subsidiary or PE upon meeting certain requirements, including, specifically, that the CIT payable by the non-resident subsidiary or PE must be under 75% of the tax that would be payable in Spain and, in the case of non-resident subsidiaries, that the Spanish parent company must own, individually or together with other related companies or individuals, over 50% of the non-resident subsidiary's share capital, equity, profits, or voting rights.
CFC rules are not applicable to companies or PEs resident for tax purposes in the European Union or in a state that is part of the European Economic Space Agreement if the taxpayer proves that they carry on a business activity or they are Collective Investment Institutions (CIIs) regulated in EU Directive 2009/65/CE other than those established in Section 54 of the Spanish CIT Act and domiciled in an EU member state. There are two types of CFC:
- Global inclusion: A global CFC regulation applies if the non-resident company does not have at its disposal an adequate structure of material and human resources unless it can justify that its operations are performed using material and human resources existing in a non-Spanish company of its same corporate group or that there are valid economic/business reasons for its incorporation and operations. With this regulation, all income obtained by the company not resident in Spanish territory should be included in the Spanish company's tax base.
- Specific type of income inclusion: When the conditions for applying the international tax transparency regime are met and the requirements for the application of the 'global CFC' are not met, the following income obtained by non-resident investees should be included in the Spanish company's tax base:
- Income generated from real estate assets not assigned to a business activity.
- Income generated from an interest held in the equity of any type of company and from the assignment of own capital to third parties. This includes dividends and capital gains.
- Capitalisation and insurance operations in which the beneficiary is the company itself.
- Income generated from industrial and intellectual property, technical assistance, real estate, image rights, and the leasing or sub-leasing of businesses and mines.
- Income generated from transfers of the aforementioned assets and rights.
- Income generated from lending, financial, and insurance activities and the provision of services if they generate a taxable expense in the Spanish resident company. The positive income obtained in this case will not be included if over 2/3 of the gross income obtained by the non-resident company due to these services comes from services provided to non-related companies.
- Income generated from derivative financial instruments.
- Income generated by insurance, credit, leasing, and other financial activities, unless obtained in the course of economic activities.
- Transactions involving goods and services carried out with related persons or entities, where the non-resident entity or PE adds little or no economic value.
The types of income indicated above should not be imputed when the sum of these amounts is less than 15% of the total income obtained by the non-resident company or PE abroad, unless the income is generated from derivative financial instruments, which should be imputed in its entirety.
The imputation will be carried out considering the principles and criteria established in the Spanish CIT Law (i.e. the calculation of the tax payable by the foreign subsidiary subject to CFC should be converted so as to reflect Spanish CIT law and principles). In any case, income in excess of the total income of the foreign subsidiary (calculated according to Spanish CIT Law provisions and principles) will not be imputed.
The dividend or profit-sharing income received by a Spanish company corresponding to income already imputed following the CFC rules will not be included in the Spanish tax resident company’s taxable base. The amount of such dividend or profit-sharing income will be reduced by 5% in respect of management expenses.