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Spain Information · Joined: 21 Oct 2006 Posts: 19 Home Country: spain

DOING BUSINESS IN SPAIN

FORMS OF BUSINESS ORGANISATION

Principal forms of doing business

The most common form for foreign investment in Spain is the sociedad anónima (SA; comparable to a US corporation or British Plc). Spanish law also provides for the sociedad de responsabilidad limitada (SRL), or limited-liability company (Law 2/95 on Private Limited Liability Companies). Small businesses prefer the SRL form because of its lower capital requirements (€3,005, which must be fully paid in). More than half of Spanish-registered companies are SRLs.

Requirements of a corporation (sociedad anónima—SA)
Capital. Minimum €60,100. Authorised capital must be fully subscribed and at least 25% paid in at the time of inscription in the Mercantile Register, with the remaining 75% to be paid up within the period specified in company byelaws (five years is the maximum term for full payment of contributions in kind). Contributions to capital may be in cash or in kind, but contributions in kind must be submitted to one or several independent experts to ensure that its appraisal matches the corresponding shares issued. When a public share issue is made, the value of non-monetary contributions must be approved by the first general meeting, and the contributors may not vote.

Founders, shareholders. No minimum number of shareholders is required for an SA, although there is a special reporting and registration system for single-shareholder companies. Shareholders can be physical persons or companies of any nationality and residence.

Board of directors. A minimum of three directors is required, but there is no maximum limit. There are no nationality requirements for directors, except in special cases (such as strategic companies). Even so, many foreign-controlled companies prefer to appoint a Spanish national to serve as president of the board of directors. A director need not be a shareholder unless the byelaws stipulated otherwise. The term of office may not exceed five years.

Management. There are no nationality requirements for managers, except in special cases (for example, for companies in sectors defined as strategic).

Disclosure. The law requires all SAs to undergo external audits by a registered auditor. Companies with total assets of less than €2,373,997.81, annual sales of less than €4,747,995.62 and a workforce of less than 50 during two consecutive years may submit abbreviated annual accounts that need not be reviewed by an auditor. For others, an auditor will be unanimously chosen at the annual shareholders’ meeting for a minimum of three years of service and a maximum of nine years. A dissenting minority of at least 5% may name an additional outside auditor.

Annual accounts must be signed by all the administrators and auditors involved and deposited at the Mercantile Register one month after approval at the shareholders’ meeting. Companies must also submit a management report and a detailed profit-distribution report. Any party may have access to these documents in the Mercantile Register.

Corporate groups must publish consolidated accounts.

Taxes and fees. Fees for the notary public handling the incorporation are charged on a sliding scale based on the capital amount, with the amount freely agreed for capital in excess of €6,010,121. Royal Decree Law 6/2000 allows a 10% discount on notary fees. The fees for registering the company in the local Mercantile Register are also on a sliding scale of officially approved charges, which range from 0.2% to 0.005% for capital amounts exceeding €6,010,121. A transfer tax of 1% applies to the capital amount and also applies to subsequent capital increases. Companies must also pay a business activities tax at inception and annually thereafter (except companies with annual turnover under €1m), a small one-time municipal levy called an opening licence tax, and other fees such as for lawyers and for the engineers who help prepare the application for an industrial permit.

Types of shares. Shares may be either registered or bearer. The law allows preferred, non-voting and multiple-vote shares. Non-voting shares may not exceed half of the paid-in capital and are entitled to a minimum preferential dividend set by the byelaws, which is to be proportional to the amount of paid-in capital corresponding to each non-voting share. Non-voting shareholders have preferential rights in the event of liquidation. Company statutes may limit the transferability of shares.

Control. For general control of a company, more than 50% of equity is sufficient. Yet control is absolute only with 95.1% of equity, since a 5% minority can demand an extraordinary meeting or appoint an outside auditor. Two-thirds support is required for the following: to approve an issue of debentures; an increase or decrease in capital; a transformation, fusion or dissolution of the company; or to modify statutes. Any shareholder may challenge a decision in court within 40 days, but the court may issue a restraining injunction only if the plaintiffs represent at least 20% of capital.

Requirements of a limited-liability company (sociedad de responsabilidad limitada—SRL)
Capital. Minimum €3,005. Authorised capital must be fully subscribed and fully paid in at the time of execution of the incorporation public deed. Contributions to capital may be made in cash or in kind. Unlike the SA, the value assigned to the non-monetary contributions does not have to be appraised by independent experts. The law makes SRLs more rigid than SAs in terms of share transactions.

Founders, shareholders. Minimum one founder; unlimited number of shareholders; no restrictions on nationality or residence. Shareholder meetings may take place anywhere, even in a foreign country.

Board of directors. A minimum of three directors and a maximum of 12 directors are required.

Management. Same as SA.

Disclosure. Same as SA.

Taxes and fees. Same as SA.

Types of shares. Shares (known as participaciones, not acciones as for an SA) may not be listed on the stock exchange. Shares are transferable only with the consent of other controlling shareholders. SRLs may not issue corporate bonds.

Control. For general control of a company, 51% of equity is sufficient. Yet control is absolute only with 95.1% of equity, since a 5% minority can demand an extraordinary meeting or appoint an outside auditor.

Establishing a branch

Foreign companies may operate in Spain through branches, although this offers no local tax advantages. Branches are used primarily by oil companies (for prospecting) and by service enterprises, including banks, construction and engineering firms, insurance companies and shipping lines.

Branches are formed by a public deed, which must be registered at the Mercantile Register. The branch must have a legal representative, who is empowered by the home office to administer branch affairs, but no other formal administration or management bodies are required. Branches may invest in Spanish enterprises without prior permission, purchase securities quoted on the stock exchange and tap the local credit market. A branch may transfer Spanish earnings abroad and remit to its parent company an amount proportional to the parent’s general expenses. These are subject to the limits fixed in registration requirements.

The procedures and cost of establishing a branch are similar to those for a local corporation. Inscription in the Mercantile Register must include copies (all notarised by a Spanish consul) of the parent firm’s articles of incorporation, byelaws and resolution to establish a Spanish branch. The inscription must identify the Spanish managers, specify their powers and indicate the capital assigned to the local operation. If the branch is to engage in industrial activity, it is subject to the same rules that govern industrial clearances for Spanish companies. Capital must be registered with the Ministry of Economy and Finance.

Representative offices are subject to the same rules as branches, although the setting-up public deed should not be filed at the Mercantile Registry.

Setting up a company

The Law on Corporations, which adapted Spanish company law to European Union directives, incorporates EU norms on publicity, acts by company representatives and nullity, capital contribution, increase and maintenance, mergers, general accounting requirements, spin-offs, consolidated accounts and statutory audits.

A sociedad anónima (SA) acquires juridical existence from the moment its notarised articles of incorporation are inscribed in the Mercantile Register. If all authorised capital is to be subscribed by the founders (simultaneous foundation), the firm must register within two months of the document’s signature. If a public share offering is made (successive foundation), the promoters must first register and publish a notarised prospectus and call a meeting of subscribers within six months to approve the statutes. Only then are the articles of incorporation drawn up, and they must be registered within two months of the meeting. A public notary prepares the document for signature and sends it to the Mercantile Register. In the interim, applicable taxes must be deposited with the notary, who looks after details such as payment.

Sole proprietorships or single-owner companies are accepted under Law 2/95, either on incorporation or subsequently. SAs or sociedades de responsabilidad limitada (SRLs) with only one owner must register that person’s name in the Mercantile Register, and the company is subject to special reporting and registration requirements.

Details that must be included in the company by-laws include nominal share value and the number of shares into which the capital is divided. The minimum subscribed capital for an SA is €60,100, and at least 25% of the par value of all the shares must be paid in at the moment of incorporation. (The capital stock of corporations engaged in certain areas of business, such as banking and insurance, may be required to exceed this minimum amount.) A written resolution must be passed after a meeting, and general shareholders’ meetings can be called by at least 5% of shareholders.

Other forms of association include general partnerships (sociedades colectivas), limited partnerships (sociedades comanditarias), co-operative ownership (comunidad de bienes) and co-operative societies (sociedades cooperativas). Foreign companies rarely use these corporate forms.

A new company form is the Societas Europaea, or SE (European Company), introduced in EU Regulation 2157/2001 of October 2001, but effective only from October 8th 2004. From that time, companies from two or more EU member states are permitted to merge in order to form an SE, or create an SE holding company or branch. A company can convert an existing firm to SE status without liquidating. One of the advantages of the SE is that it can move headquarters to another EU member country with a minimum of formalities.

BUSINESS TAXATION

Overview

The principles of corporate taxation in Spain are the same as in the rest of the European Union, although the 35% base rate is one of the lowest among member countries. The rate corresponding to small and medium-sized companies is 30% for the first €120,202.41 and 35% for the remaining taxable basis.

Recent governments have made substantial reforms to the Spanish corporate tax system. Corporate Tax Law 43/1995 replaced the 1978 law, and Royal Decree 537/1997 implemented certain aspects of the 1995 law. The guiding principles of the reform were tax neutrality, transparency, standardisation and increased competitiveness.

On March 5th 2004 the Royal Legislative Decree 5/2004 was approved in order to restructure corporate income-tax legislation, but no significant changes were made.

The government’s continuing efforts to reduce tax evasion have led to greater transparency in the financial transactions of both individuals and companies. Fiscal fraud is a penal offence with fines of up to six times the unpaid tax and sometimes imprisonment. Company officials may be penalised if they are proven to have been instrumental in the evasion. Law 6/95 on fiscal fraud increased the threshold to €90,000, above which proceeds from tax evasion are considered a penal offence.

Taxable income and rates

The basic rate of corporate tax (impuesto sobre sociedades) is 35%. It applies to the global profits of resident corporations.

The Corporate Income Tax rate corresponding to small and medium-sized companies is 30% for the first €120,202.41 and 35% for profits exceeding €120,202.41. Small and medium-sized companies can be defined as those whose turnover of the preceding business period did not exceed €8m.

The reduction is part of an effort to encourage small and medium-sized firms (pequeñas y medianas empresas—PYMEs), which form the backbone of the Spanish economy, to expand and create jobs.

Special corporate tax rates apply to certain companies, such as the following: listed collective investment institutions, including real estate investment funds (1% if they invest solely in residential rental buildings, 7% otherwise); certain co-operatives (20%); entities involved in hydrocarbons research and exploitation (40%); and since 2003, asset-holding companies (40%). Other special tax regimes exist for Spanish and European economic interest groupings, “temporary business associations”, venture-capital companies and funds, and industrial and regional development companies.

Non-resident corporations without permanent establishments in Spain are subject to a number of tax rates. They pay 35% on capital gains. They pay 25% on general payments (such as direct purchases, dividends and interest) or on profits made on services or technical assistance provided by a non-resident affiliate to a Spanish resident company, unless a tax treaty states otherwise. They pay 18% on transfers or reimbursements of shares and stakes in collective investment schemes. They pay 1.5% on income from reinsurance activities.

Interest and capital gains arising from movable assets owned by the residents of other EU member states (except tax havens) not obtained through a permanent establishment are deemed to be tax-exempt in Spain. By contrast, earnings are taxable on holdings in entities whose assets consist principally of real estate in Spain, or in which the seller has had, directly or indirectly, at least a 25% interest at some time during the 12 months prior to the sale.

There is no distinction between rates on distributed and reinvested profits. There are no excess profits or alternative minimum taxes.

Non-resident individuals or entities that obtain income through a permanent establishment in Spain are taxed on the total income attributable to that establishment. Permanent establishments are generally taxed on their net income at the same rate as Spanish companies (35%). There is a 25% branch profit tax on the remitted profits of non-residents doing business through a permanent establishment in Spain, although relief can be obtained under tax treaties.

Taxable income defined
A company’s taxable income in Spain is the difference between its revenues and its expenses. These figures are based on the income disclosed in the company’s financial statements adjusted in accordance with tax principles. The Corporate Income Tax Law establishes three methods for determining taxable income: the direct assessment method, the indirect assessment method and the objective assessment method. Business expenses are deductible if they are properly recorded and documented.

Allowable adjustments include the following:

* Depreciation, which qualifies as a deductible expense only if it is officially recognised and recorded on company accounts. Official depreciation rates range from a minimum-maximum band of 1–2% for commercial buildings to 16.7–33% for software (according to rate tables updated by Royal Decree 537/97).

* Financial lease contracts, where lease payments (interest plus the portion of principal relating to the cost of the asset) are deductible, except those for land and other non-depreciable assets.

* Assets leased with a purchase option, where the amount relating to the depreciation rates applicable to the asset is considered a deductible expense for the lessee institution, in line with the rule on tangible fixed assets.

* Diminution in value of assets, including provision for bad debts (where deductibility is subject to certain requirements) and provision for depreciation of marketable securities up to a certain limit.

* Financial goodwill, applicable to holdings made in fiscal years beginning after January 1st 2002, capped at 5% per year.

* Provisions for contingencies and expenses when they are meant to cover definite economic liabilities contracted or incurred by the company but whose amount has not been definitively established; or when they are meant to cover repair and inspection warranties up to certain limits.

* Income derived from asset transfers, under certain conditions.

* Loss carryforwards, which a resident institution may generally carry forward against taxable income for the following 15 years. (Loss carrybacks are not permitted.)

Non-deductible expenses include corporate income tax, criminal and administrative fines and penalties, or surcharges for the late payment of taxes, gifts, provisions for internal pension allowances, and expenses for services with individuals or institutions resident in tax havens.

Double taxation on dividends may be completely eliminated with a tax credit when the investor holds at least a 5%, direct or indirect, stake in the company paying the dividends and has held the stake for at least one year before the date of the dividend distribution or holds such stake for the necessary period to complete the one-year term. Any credit granted that is not taken up because of insufficient tax payable in the year may be applied over a seven-year period. This credit also applies in the following circumstances: company liquidation, acquisition of own shares to be redeemed, withdrawal of shareholders, dissolution of mergers, total spin-off, etc, and for dividends from profits in fiscal years prior to that in which interest is acquired. The credit does not apply where distribution of profits is made from non-resident entities or persons from related parties, unless there is proof the profits have been taxed in Spain through transfer of the holding. The credit also does not apply when a capital reduction has occurred prior to profit distribution to create reserves or offset losses, or where the share premium has been transferred to reserves. Since June 2000 the taxpayer may opt for this tax-credit system or a pure-exemption system, subject to compliance with certain requirements.

When a taxpayer earns income that is taxed abroad, the tax credit granted is the lower amount of either the actual tax paid outside Spain or the tax that would be payable in Spain if the income had been obtained there. The credit is applied by grouping revenues from the same country, except those from permanent establishments, which are computed separately.

The corporate tax base can be reduced for companies that acquire stakes giving them a majority of voting rights in companies not resident in Spain, as long as that company is not engaged in the following business activities abroad: real estate, financial or insurance activities, or providing services to related companies resident in Spain. These companies must not be resident in the EU or in countries classified as tax havens. Qualifying companies are permitted to deduct from the tax base the amount of the investments made in the year up to a maximum annual limit of €30,050,605, as long as it does not exceed 25% of the original tax base for the tax period. The deduction can be taken in equal parts over the following four tax periods. The incentive is incompatible with the tax credit for export promotion.

The following classes of income receive special treatment:

* Interest and capital gains realised from the transfer of movable goods owned by residents of other EU member states (except tax havens) that do not operate through a permanent establishment in Spain are exempted from taxation in Spain. But tax must be paid on the capital gains realised from the transfer of shares in entities whose assets are mainly real estate in Spain, or assets in which the seller has had at least a 25% interest, directly or indirectly, at some time during the 12 months preceding the sale.

* Income derived from public debt issued by the Spanish state is exempted, provided such income would not be obtained through a permanent establishment in Spain. This provision does not apply for investments originating in tax havens.

* Dividends may be exempt if they originate in subsidiaries of Spanish companies in other EU states, provided the parent company holds a stake of at least 25%. The ownership stake must have been held for a year prior to the date on which the dividend is paid.

The corporate income tax law also provided for rules on international tax transparency. According to such provisions, Spanish companies holding foreign subsidiary companies that are subject to tax rates that trigger a final tax due lower than 75% of the Spanish corporate income tax payable on the foreign profits must include in their tax base the income derived by the foreign subsidiaries, provided they have arisen from certain sources—that is, non-business income and income from credit, financial, insurance activities and from providing services to Spanish resident entities, if these services generate tax-deductible expenses in those resident entities. International tax transparency regime does not apply to Spanish companies whose subsidiary companies are located within the EU.

Royal Decree Law 7/96 allows companies to revise their assets in line with inflation. This procedure allows them to increase write-down charges in the profit-and-loss account and thus reduce their tax liability. They incur a one-off charge of 3% of the difference in asset value. The coefficients for revaluation reflect accumulated consumer price inflation over the period since acquisition of the asset.

All necessary business expenses are deductible. Payments of industrial tax, real estate taxes and local surcharges on these taxes may be treated as deductible expenses in determining the corporate tax base. Payments of interest and royalties are deductible; dividends paid to shareholders and recorded in the profit-and-loss account do not qualify as deductible cost for corporate income tax purposes.

A group of related corporations may be taxed on the basis of a consolidated balance sheet (subject to communication to the Ministry of Economy and Finance). Companies approved for consolidated tax returns need not pay withholding tax on intercompany dividends and interest transfers. Other dividends are subject to withholding tax, which are then credited against final tax payable. Controlling companies must present consolidated accounts to the Mercantile Register in the autonomous community where they are located. Subsidiaries should also present their own accounts to the register in their particular localities.

Operating losses may be carried forward for up to 15 years but not carried back. Capital losses and depreciation in excess of published rates accumulated in a loss year may subsequently be offset.

Determination of taxable income of a permanent establishment (PE) is based upon the provisions of the Spanish Corporate Income Tax Law, but the following restrictions and special provisions must be applied:

* Royalties, financial interest and commissions (paid in consideration for technical assistance services or the use or transfer of assets or rights) paid to the branch’s head office are not deductible.

* A reasonable part of the management and general administration expenses charged by the head office may be deducted by the PE, provided that the following requirements are met:

* reflection in the PE’s accounts;

* evidence, by way of an informative report filed along with the tax return, of the amounts, criteria and distribution of such expenses; and

* rationality and continuity of the allocation criteria adopted.

* Transactions performed between the PE and its head office must be valued at arm’s length to prevent the application of transfer-pricing provisions contemplated by Spanish legislation governing corporate income tax.

The 2003 tax law introduced the concept of passive-holding companies to replace what was formerly defined as the fiscal-transparency system. Passive-holding companies can be defined as those whose share capital is held by ten or fewer shareholders or by a family group and that hold securities representing, at least, 50% of their total assets or whose assets are not subject to any business activity. These circumstances must be met, at least, for 90 days consecutively within the same tax period.

These companies are taxed under the following system:

* Taxable income is divided into a general component, taxed at 40%, and a special component, taxed at 15%.

* The direct-assessment method is used to determine net income from economic activities.

* Certain advantages applicable to companies or individuals do not apply, such as the abatement coefficients used to reduce capital gains tax, or the 40% reduction provided in the personal income tax law for income generated over a period of more than two years.

Depreciation
Depreciation of fixed or movable assets is based on historical cost, using straight-line rates chosen by the company within limits set for each industry by the Ministry of Economy and Finance. A declining-balance method may be applied to industrial and agricultural machinery, and transport, communications, data-processing and hotel equipment if they are new when acquired and have maximum tax-depreciable lives exceeding three years. Costs associated with company set-up, research and a change in company status (such as from an SRL to an SA) also may be depreciated.

Depreciation is possible for tangible and intangible assets (including goodwill). To avoid disputes over depreciation allowances, companies can use official tables, which offer the following annual rates (updated by Royal Decree 537/97): commercial buildings, 1–2%; industrial buildings, 1.47–3%; office furniture, 5–10%; machinery, 5.55–12%; vehicles, 7.14–16%; computers, 12.5–25%; and software, 16.7–33%. Leased goods are subject to the same depreciation norms as other assets.

Small and medium-sized companies, defined as those with annual sales of less than €8m, are entitled to increase by a coefficient of 1.5 the maximum depreciation rates in the official tables for tangible fixed assets and intangible assets (such as goodwill, trademarks and leasehold assignment rights).

The depreciation process allows the declining-balance and the sum-of-the-years’-digits methods. The declining-balance method, which shifts depreciation to the early years of the useful life of the asset, is permitted for all assets except buildings and furniture. The sum-of-the-years’-digits method determines the sum based on the depreciation period established in the official tables.

Small and medium-sized companies may freely depreciate newly acquired tangible assets provided that, during the 24 following months to the start of the tax period in which the assets enter into use, the companies’ staff increases in relation with the average staff of the 12 preceding months and such increase is kept over a 24-month period. The amount is calculated by multiplying the number of new workers hired by €120.000, up to the total amount of the investment.

The corporate income tax law provides for free depreciation of the following assets: fixed assets acquired by worker-owned firms (sociedades anónimas laborales) within five years of the incorporation of the company; mining assets; fixed assets (but not buildings) acquired for R&D purposes; and direct cost on R&D. The law also makes leased goods subject to the same depreciation norms as other assets.

Under the Royal Legislative Decree through which the current corporate income tax law was approved, lease premiums, trademarks and other intangible assets may be amortised; the maximum charge to amortisation is then determined by the life of the particular asset. Goods acquired through leasing arrangements will be depreciated in the same way as other assets that are subject to depreciation, and not only during the length of the leasing contract. Where an option to purchase or review is not exercised, an amount equivalent to depreciation charges will be deductible for the assignee entity. The difference between the amount covering the acquisition price of the goods and the amount to be paid to the assigning entity will be treated as a deductible expense.

For financial leases, the financial charge paid to the leasing entity is deductible. Recovery of the cost of leased goods is also deductible unless the lease covers non-depreciable assets. The amount of this deduction may not exceed the result of applying twice the straight-line depreciation rate in the official tables. The excess is deductible in the following tax period.

When goods were previously transferred from the assignee to the assignor, the assignee continues to depreciate them under the same conditions and using the same value as before the transfer.

Goodwill acquired from non-related parties on an onerous basis may be deducted in 20 years (at 5% per year). Where the conditions mentioned above would not be met, goodwill may be deducted as long as the taxpayer proves its effective and irreversible depreciation.

Capital gains taxation

Capital gains of companies are generally taxed as income. Short-term gains of individuals (on assets held for less than one year) are also taxed as income. Long-term gains of individuals (on assets held for more than one year) are subject to a separate capital gains tax rate of 15%. Gains on an individual’s primary residence are exempt if the proceeds are reinvested in a new primary residence. Rollover relief is available for gains on the sale of a participation in a qualifying collective investment institution, where the proceeds are reinvested in similar participations.

There has been discussion of lifting the capital gains tax under the new Socialist government.

The 2003 budget law reduced the tax on capital gains of companies to 15%, if the money is reinvested in productive assets through recognition of a 20% tax credit on the amount of the capital gain realised.

Capital gains realised from the transfer of real estate can be adjusted using coefficients published in the annual budget law. These tables take into account acquisition cost, depreciation, financing methods and inflation. This way, under corporate tax law, the inflationary component of gains is corrected under index-linked coefficients, depending on when the asset was purchased. These coefficients deflate the value of the asset for the effects of accumulated inflation since the time it was purchased.

Taxation of capital gains derived by companies from the transfer of tangible and intangible assets, as well as from the transfer of securities representing a participation exceeding 5% of the subsidiary company’s equity, can be reduced to a 15% flat rate provided the transfer value is reinvested within the three following years to the date of sale in the acquisition of new tangible or intangible assets, as well as in securities representing a minimum participation of 5% in a company’s equity.

Law 29/91 aligned Spanish law with European Union policy on tax incentives for mergers. The legislation takes a neutral stance on corporate combinations by excluding from the tax base capital gains and losses that result from mergers and takeovers while taking the value of the acquiring company before takeover as taxable.

Capital losses realised by individual taxpayers can be set off against capital gains earned in the same year. Where the final result would be negative, they can be set off against the tax period’s regular income, but capped to 10% of taxable income.

Capital losses realised by companies can be entirely set off against taxable income.

When a company is dissolved, the excess of the market value of distributed assets over the book value of the shares is considered a capital gain for the shareholders.

Foreign income and tax treaties

Spain has double-tax treaties (convenios de doble imposición) with many countries, including nearly all of its main trade and investment partners. The two latest treaties to come into force were with Estonia, on February 3rd 2005, and with Latvia, on January 10th 2005.

Double-tax treaties set out highly detailed rules on how the countries that are party to them impose taxes on each other’s citizens and companies, including on dividends, interest, and royalties and fees. The texts of all treaties that have entered into force since 2000 can be found on the website of the Ministry of Economy and Finance.

In addition, treaties with other nations are in various stages of negotiation, signing and ratification. Signed treaties were awaiting ratification in February 2005 with Algeria, Costa Rica and Iran; treaties had been negotiated with Colombia, Croatia, Egypt, Guatemala, Macedonia, Malaysia, Namibia, New Zealand, South Africa and Vietnam.

Transfer pricing

Under corporate income-tax law, companies must value their transactions at market prices for tax purposes in the following circumstances: when one company has decision-making power, or if both companies are members of a group that qualifies as a co-operative for tax purposes, or if the shareholders own at least 25% of the two companies; and for transactions between a company and its directors or owners with at least a 5% stake.

Market valuation also applies to donated assets; assets contributed to entities and the securities received in exchange; assets transferred to shareholders in the event of dissolution or withdrawal of shareholders; assets transferred as a result of mergers and absorptions; and assets required as a result of exchanges or conversions.

Spanish legislation incorporates the OECD’s guidelines on valuing operations between related persons or entities. The methods used to determine market prices are, first, the comparable—uncontrolled price method and, second, the cost-plus and resale-price method. If none of these methods is applicable, the profit-split method applies.

Companies may use advance-pricing arrangements if the government gives prior approval. This entitles the company to use its proposed method of valuing its transactions for three fiscal years. Advance-pricing arrangements can also be reached for valuing contributions for R&D and management expenses.

The tax authorities apply a thin-capitalisation rule that uses a debt/equity ratio of 3:1. When a double-tax treaty is involved, and if there is reciprocal treatment in the country concerned, a proposal may be submitted to apply a different ratio. Thin-capitalisation rules do not apply to EU entities as of January 1st 2004.

Turnover and other indirect taxes and duties

Value-added tax (impuesto sobre el valor añadido—IVA) in Spain applies to sales at three rates. The basic rate of 16% applies to the sales of most goods and services. A 7% reduced rate applies to sales and imports of foodstuffs, water, pharmaceutical products, private homes and certain services. A 4% rate applies to basic goods (certain staple foods, medicines, books and newspapers, wheelchairs and special subsidised housing).

Certain transactions are exempt from IVA, in line with general EU guidelines. These include services and supplies of goods relating to insurance and financial activities, health, education and rental of residential property. IVA does not apply in the Canary Islands (where there is an indirect tax named impuesto general indirecto canario, very similar to IVA but with some differences such as lower tax rates) and in the North African enclaves of Ceuta and Melilla.

Royal Decree Law 12/95 introduced modifications to the IVA to align Spanish legislation with EU rules. All contract work (except construction in which the constructor provides materials whose cost exceeds 20% of the total) is treated as supply of services. When located in Spain, these services are subject to IVA at the same rate as goods resulting from contract work (this rate varies by type of labour). Interest and commissions charged to customers for bank loans are exempt from IVA.

Payers of IVA can normally deduct the tax on the goods and services they acquire, if they are used to produce other goods and services subject to IVA or if the IVA was paid on transactions related to international trade or on deductible transactions outside of Spain. Refund claims can be filed only for the immediately preceding fiscal year or quarter, and the deadline is June 30th of the following year.

Excise taxes in Spain come under a new legal framework that Law 38/92 established, with the two following categories:

Common excise taxes (impuestos especiales de fabricación—IEFs) are generally levied at lump-sum rates (with ad valorem rates for cigarettes). They are levied on the phases of production, manufacture or import into the EU of alcohol and alcoholic beverages, hydrocarbons and tobacco products. The Canary Islands, Ceuta and Melilla are generally exempt from these taxes, although they do apply to alcohol in the Canary Islands.

A vehicle-registration tax (impuesto especial sobre determinados medios de transporte—IEMT) applies at ad valorem rates on the final registration in Spain of the following: most new and used vehicles, including most types of passenger cars; most pleasure or sporting boats with a deck length greater than 7.5 metres; and motorised aircraft with a take-off weight of at least 1,550 kg. Exemptions apply for the following: two- or three-wheeled passenger vehicles with a cylinder capacity of less than 250 cc; vehicles for use exclusively by disabled persons who are residents; vehicles used for rental, driver education or taxis; aircraft acquired through a financial leasing arrangement; and aircraft used exclusively for aeronautical education. Exemptions are also available for the registration of cars whose owners have transferred their residence from a foreign country to Spain. The general rate of IEMT is 12% in mainland Spain and the Balearic Islands, and 11% in the Canary Islands. Ceuta and Melilla are exempt. Large families can obtain a reduction.

A special tax on electricity, at a 4.86% rate, applies to the intra-EU production, import and acquisition of electrical power.

Other taxes

Real estate tax. This tax is levied on the property of land. Its taxable base is constituted by the cadastral value, which is determined by cadastral authorities. It is supposed to be close to the market value, but is usually lower. The tax accrues on January 1st of each calendar year and is collected by the local tax authorities during October and November of that year.

Additional taxes are imposed on the increase in urban land values when land is transferred.

Economic activity tax. The economic activity tax is a local tax to which any individual entrepreneur or entity is subject in any kind of economic activity for this purpose. All companies used to pay the economic activity tax to city governments, but since January 1st 2003 it no longer applies to the self-employed and small firms with annual revenues of less than €1m. Larger firms are exempt during their first year of operation but face a steeper rate than previously beginning the second year. Rates rise with the company’s revenues.

Transfer tax. This tax is levied on the transfer of assets between individuals. There is also a transfer tax on various transactions that are not part of a company’s normal activities. The tax rates are 6–7% on the transfer of real estate (tax rate depends on the autonomous region where the real estate is located) and 4% on the transfer of movable assets and the constitution and cession of rights on movable property.

Capital tax. The incorporation, increase and decrease of share capital, mergers, spin-offs and wind-ups of companies are subject to this tax at a 1% rate on the capital assigned to the company or the amount of the increase or decrease of the share capital. The transfer of the tax residency of a foreign company into Spain is also subject to this tax, unless it is an EU-based company and the incorporation of the company would have been subject to an analogous tax in its home country.

The aforementioned transactions are exempted from capital tax where they are carried out under the merger and acquisition tax regime. In like manner, the incorporation and increase of share capital of companies subject to the Spanish holding companies tax regime (ETVE, entidad de tenencia de valores extranjeros) carried out as a consequence of the contribution of shares in foreign companies are exempted from capital tax.

Non-resident entities that own or control Spanish real estate are subject to a 3% special tax on the officially estimated value of the property (ie on the real estate’s cadastral value). This special tax does not apply to Spanish real estate owned by foreign governments, public institutions, international bodies or entities covered by a double-tax treaty with an exchange-of-information clause. The tax is also not applied to foreign entities performing business activities in Spain or companies listed on the secondary stockmarket or to non- profit-making entities.

Tax on construction and installation projects. Anyone undertaking construction activity pays city governments this tax (impuesto sobre construcciones, instalaciones y obras), at a top rate of 4% set by each city government, on projects requiring prior municipal permission.

Tax on insurance premiums. Insurance companies conducting taxable transactions pay a tax of 6% of paid premiums (impuesto sobre las primas de seguros). The insurer then charges this to the person or entity obtaining the insurance.

Tax compliance and administration

A company’s tax period is its fiscal year. It must file tax returns and pay taxes within 25 days following the six months after the close of its fiscal year. The tax administration may require as much as four years to determine final tax liability. Pre-payments of the current year’s taxes are due in April, October and December; pre-payments are made at the rate of 18% to the gross tax payable (net of tax credits) in the latest tax year. Pre-payments can also be made based on taxable income derived from the beginning of the tax period to the end of the pre-payment period (that is, from the beginning of the tax period to March 31st – prepayment of April -, September 30th – prepayment of October -, and November 30th – for the prepayment of December), applying a rate equal to five-sevenths of the applicable tax rate (for taxpayers taxable at the standard rate, the prepayment would be 25%). The latter method is required for taxpayers whose business volume exceeded €6,010,121 for the 12 months before the beginning of the current year’s tax period.

Passive holding companies (companies held by family groups or by ten or fewer shareholders and whose assets are not assigned to an economic or entrepreneurial activity or consist of real estate assets) are required to make tax pre-payments as any other Spanish company. Pre-payments and withholdings may be taken as tax credits in the annual return; if their sum exceeds final tax payable, the company is entitled to a refund for excess tax paid.

Pre-payments and withholdings are taken as tax credits in the annual return; if their sum exceeds final tax payable, the company is entitled to a refund for excess tax paid.

The governments of the Basque provinces and Navarre collect corporate income taxes themselves and remit a portion to the central government, under an agreement signed every five years.

PERSONAL TAXATION

Taxable income and rates

Spain reformed its personal income tax system on January 1st 2003 by reducing the number of tax brackets to five (from six), cutting the top tax rate to 45% (from 48%) and trimming the bottom rate to 15% (from 18%). The reform reduced the average personal income-tax burden by 11%. A previous reform, Law 40/98 (implemented by Royal Decree 214/99), had already simplified tax brackets and cut tax rates by an average of 11% in 1999.

Law 14/96 granted wider income taxation powers to Spain’s autonomous regions. It broadened their regulatory and tax-collection powers and allowed them to retain 30% of personal income-tax revenues collected locally. Although the reform was controversial, regions will probably get more rather than less fiscal autonomy in future.

Spain has five personal income tax brackets, ranging from a minimum of 15% to a maximum of 45%. They are adjusted for inflation. The autonomous governments have had some discretion over income tax since 1997. They have so far used this mainly for deductions rather than to raise or lower their portion of the income-tax rate. Madrid and Castilla y Leon provide more generous deductions for children, and Murcia and La Rioja give tax breaks for housing. The tax cuts of recent years have affected only the central government’s portion of the tax rate, leaving the regional rates intact.

Determination of taxable income
All individuals with total annual household incomes of €8,000 must file a tax declaration where income is paid by more than one employer. Otherwise, the minimum threshold to file a tax return is €22,000. Married couples may choose to file taxes jointly or separately. Taxable income includes earned income (such as salaries, wages and business or professional income) and passive income (like interest, dividends and capital gains). Specific expenses are deductible from each type of income. Social security contributions are the primary permitted deductions.

Unemployment benefits are taxable, as is “irregular” income such as severance pay, sick-leave pay and other income earned over a period exceeding two years (including share options and life insurance contracts collected as lump sums). In the case of stock options plans, the 40% reduction in the taxable base can be applied to an amount not exceeding the result of multiplying the annual average salary by the number of years over which the income will be generated; this must be at least two (to qualify as irregular income) and not more than five.

Under Royal Decree 7/96, capital gains are no longer subject to personal income-tax rates but to a flat tax of 15% for all assets held more than one year, beginning on January 1st 2003. A capital gain or loss is the difference between the acquisition and sale values of the items transferred. Adjustment coefficients are no longer used to correct for inflation, except for real estate and for assets acquired before December 31st 1994. (For assets acquired before that date, the capital gain is reduced by a given percentage depending on the type of asset.)

The following are the primary allowances and tax credits: personal exemption, €3,400; and family allowances, €1,400 for the first single dependant younger than age 25, €1,500 for the second, €2,200 for the third and €2,300 for the fourth and subsequent (as of January 1st 2004 the tax basis can be reduced up to €1,200 per each descendant younger than three years); and €800 for dependants older than age 65. Other deductions include housing tax credits, tax credits for income obtained in Ceuta and Melilla, for donations to certain institutions, and for investment in and expenditure on assets of cultural interest, subject to some limits. The taxable basis of personal income-tax taxpayers may be reduced by the amounts contributed to pension plans capped at €8,000. This amount can be increased where the taxpayer is older than 52 years, but capped in any case at €24,250. The total investment amount qualifying for these credits may not exceed 10% of taxable income. Tax payable is reduced by the amount of withholding taxes and social security payments deducted at source during the year.

Salary income for work performed abroad is exempt from tax up to €60,101 per year if a tax similar to the Spanish personal income tax applies in the other country.

The Income Tax on Non-residents Law treats separately the taxation of non-residents who operate in Spain through a permanent establishment (PE) and non-residents who derive Spanish-source income but do not operate through a PE. If a non-resident has a permanent establishment in Spain, the permanent establishment is taxed on its net income at the same rate as Spanish companies (normally 35%). A 15% branch profit tax applies on the remitted profits of non-residents obtaining income through a permanent establishment in Spain (although many tax treaties offer relief). If the non-resident’s income is not obtained from a permanent establishment, the individual is taxed separately on each total or partial accrual of Spanish-source income.

Spain has implemented EU Directive 2003/48, which aims to combat tax evasion by individuals on crossborder savings income. The directive empowers authorities in member states to collect and interchange information automatically on payment of savings income to residents of other countries.

Residency

Residents of Spain are liable for the general personal income tax (impuesto sobre la renta de las personas físicas—IRPF) on income from worldwide sources. The tax on earned income is levied on all persons working in Spain from their first day of employment. An individual is considered a resident for tax purposes if he or she is resident in Spain (or in a Spanish territory) for more than 183 days in any calendar year, or if the main centre or base of the taxpayer’s business, professional activities or economic interests is in Spain, either directly or indirectly. A person is considered a resident of Spain if he/she is habitually resident in Spanish territory, or his/her spouse and dependent underage children are habitually resident in Spain (absent proof to the contrary).

Individuals who are taxpayers under non-resident income tax rules and are resident in a member state of the EU may elect to be taxed under Spanish personal income tax if they demonstrate that their habitual residence is in another EU state and that at least 75% of their total income during the year was obtained as salary or business income in Spain. Foreign taxes paid may be credited against Spanish tax (up to the amount that would have been payable in Spain).

Under Law 62/2003 of December 30th 2003 a person who is assigned to Spain, and therefore subject to Spanish personal income tax, may opt to file as a non-Spanish tax resident for the first six years of the assignment. He or she must have not been a tax resident in Spain over the past ten years, must be working in Spain for a Spanish tax-resident company or a permanent establishment of a non-Spanish tax-resident company, and his/her income must not be tax-exempt in Spain under the Spanish non-resident income-tax law.

As part of the tax package implemented on January 1st 2003, no taxpayer pays a total rate of more than 60% (formerly 70%) on income plus net worth.

Special expatriate tax regime

Spanish domestic legislation does not foresee a special expatriate tax regime as such, but provides for several tax benefits in relation to income from employment derived by Spanish tax residents who work outside of Spain less than six months within a calendar year.

Wealth tax

Resident individuals pay net-worth tax (impuesto sobre el patrimonio) on their worldwide assets on December 31st of each year, whereas non-residents are taxable on property situated, or rights exercisable, in Spain (tax treaties may affect this rule). Certain assets are exempt such as art and antiques.

The rates for the 2005 tax year range from 0.2% on the first €167,129 to 2.5% for amounts above €10.7m. Rates can differ in some regions. Individuals must file a return once they have assets exceeding €108,182. The amount payable each year for net wealth and income tax combined may not exceed 60% of total taxable income.

No taxes are payable on the taxpayer’s usual residence if it is valued at less than €150,253.

Assets located in Spain that are owned by non-residents and rights that can be exercised within Spanish territory by non-residents are subject to the wealth tax at a maximum 2.5% rate.

Spain also applies inheritance and gift taxes (impuesto sobre sucesiones y donaciones) on all Spanish resident heirs, beneficiaries and recipients. Rates range up to 34%.