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).
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.
All transactions between associated parties must be valued at market price, following the arm’s-length principle (e.g. the value that would have been established between independent parties under normal market conditions).
For this purpose, associated parties are:
- A company and its shareholders or members.
- A company and its board members or directors, except insofar as concerns the remunerations of the latter.
- A company and the spouses of or persons related to its shareholders or members, board members, or directors, either in a direct line or collaterally, by consanguinity or affinity up to the third degree.
- Two companies of a group.
- A company and the board members or directors of another company, when both companies form part of a group.
- A company and the spouses of or persons related to the shareholders or members of another company, either in a direct line or collaterally, by consanguinity or affinity up to the third degree, when both companies form part of a group.
- A company and another company in which the former company has at least a 25% holding, held indirectly, in its share capital or equity.
- Two companies in which the same shareholders or members or their spouses, or persons related to them either in a direct line or collaterally, by consanguinity or affinity up to the third degree, have at least a 25% holding, whether directly or indirectly, in their share capital or equity.
- A company resident in Spanish territory and its PEs abroad.
- A company not resident in Spanish territory and its PEs in Spanish territory.
- Two companies forming part of a group taxed under the tax regime for groups of cooperative companies.
For cases where association exists as a result of a shareholder/member-company relationship, the interest must be 25% or more. The reference to directors includes de facto and de jure directors.
Taxpayers must determine market value by applying one of the following transfer pricing methods: comparable uncontrolled price (CUP) method, cost plus (CP) method, resale price method (RPM), profit split method (PSM), or transactional net margin method (TNMM). There is no longer an order of priority for the use of these valuation methods. When it is not possible to apply one of the methods established by law, other generally accepted valuation methods and techniques based on the arm's-length principle can be used.
Documentation is also a requirement. Taxpayers are required to produce group-level and taxpayer-specific documentation for each tax year and keep it available for the tax authorities from the end of the voluntary return or assessment period in question. Some exceptions are established for these documentation requirements.
Documentation is always required for transactions with companies, whether associated or otherwise, that are resident in tax havens.
Specific penalties may be imposed when documentation cannot be provided or when data are omitted, inaccurate, or false.
Country-by-country (CbC) reporting
Spanish resident parent companies of a commercial group that are not controlled by another company and Spanish resident subsidiaries controlled by a non-resident company that, at the same time, is not controlled by another company or by PEs of non-resident companies must submit information annually ‘country by country’ whenever the group’s turnover during the 12 months before the beginning of the tax period is at least EUR 750 million.
Spanish resident subsidiaries of a commercial group that submits the ‘country-by-country’ information in a country that has signed a bilateral automatic exchange of information agreement with Spain for CbC reporting obligations must submit the information regarding the group company and the country where this information would be submitted by the group annually.
Thin capitalisation rules have been repealed.
Controlled foreign companies (CFCs)
Spanish CFC rules seek to avoid the effects produced when Spanish tax resident companies or individuals place their capital in low-taxed foreign companies to avoid including passive income generated by such capital in their taxable bases or the effects produced when a subsidiary located in a low-taxed jurisdiction provides services to its Spanish resident parent company that reduces the latter's taxes.
Under this regime, Spanish tax resident companies pay Spanish CIT on the income obtained by a non-resident subsidiary upon meeting certain requirements, including, specifically, the requirement 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, and the CIT payable by the non-resident subsidiary must be under 75% of the tax that would be payable in Spain.
CFC rules are not applicable to EU resident companies if they are set up for economic reasons and carry on a business activity or to the 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:
- 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-resident 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. However, dividends, stakes in profits, or income arising from the transfer of an interest should not be included when the interest exceeds 5%, the minimum ownership period is one year, and the interest is held for the purpose of directing and managing the investee if the investee has an adequate structure of material and human resources and it is not an equity company.
- 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.
- 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 50% 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.
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, unless the income is generated from derivative financial instruments, which should be imputed in its entirety.
In addition, the ordinary level of CFC will not apply if the income indicated above corresponds to non-taxable expenses incurred by Spanish tax resident companies.