Spain - Adding corporate asset protection to efficient tax planning for investments in Latin America
With its 60 international Double Taxation Treaties (DTT) in place, Spain has become an attractive centre for international corporate tax planning.
For a growing number of multinational investors, the favorable DTTs Spain has signed with almost all Latin American countries have made Spain the country of choice for channelling capital investments into Latin America.
In addition to the favorable DTTs signed with Latin American countries, Spain has Bilateral Investment Agreements (BITs) in place with most Latin American countries, including some countries where the risk for nationalisation or expropriation of assets has increased during recent years, for example Bolivia and Venezuela. In order to stimulate bilateral investments and to protect the assets of investors residing in one contracting State in the other contracting State, BITs have been signed between various countries. International investment agreements, such as BITs and investment chapters in FTAs, obligate host countries to provide certain protections for foreign investments, for example capital and real estate investments. BITs contain certain standard substantive requirements concerning the treatment of foreign investors, such as prohibitions on expropriation without compensation, and guarantees of national treatment, most-favored-nation treatment, fair and equitable treatment, and free transfer of funds. For example, in the case of Bolivia and Venezuela, any expropriation of assets held by Spanish Companies in those countries, in accordance with the BITs Spain signed with these two countries, has to be compensated at the market value of those assets immediately before expropriation. Disputes may be brought to the International Centre for Settlement of Investment Disputes (ICSID) or any other Court for International Arbitration.
Most Latin American countries are contracting States under the ICSID Convention on the Settlement of Investment Disputes between States and Nationals of other States. Countries that have consented to be bound by this Convention must follow awards of arbitral panels organised under this Convention. In the past few years important case law has been developed on which parties can reply when bringing forward their disputes to ICSID.
Spain offers an exceptional regime for international holding companies and compares favorably with traditional European centres such as Luxembourg, the Netherlands and Belgium.
When properly structured, international holding companies are fully exempt from Spanish tax on dividends received from non-Spanish subsidiaries, and from tax on capital gains derived from the disposal of participations in non-Spanish subsidiaries.
Spanish holding companies, in Spanish “Entidad de Tenecia de Valores Extranjeros” (ETVE), were created by Law 43/95 which came into force on 1 January 1996. In order to qualify for the regime the following conditions must be satisfied:
Substantial legislative changes, in place since 2000, have further enhanced the Spanish Holding Company regime. In particular:
In addition to the favorable DTTs signed with Latin American countries, Spain has Bilateral Investment Agreements (BITs) in place with most Latin American countries, including some countries where the risk for nationalisation or expropriation of assets has increased during recent years, for example Bolivia and Venezuela. In order to stimulate bilateral investments and to protect the assets of investors residing in one contracting State in the other contracting State, BITs have been signed between various countries. International investment agreements, such as BITs and investment chapters in FTAs, obligate host countries to provide certain protections for foreign investments, for example capital and real estate investments. BITs contain certain standard substantive requirements concerning the treatment of foreign investors, such as prohibitions on expropriation without compensation, and guarantees of national treatment, most-favored-nation treatment, fair and equitable treatment, and free transfer of funds. For example, in the case of Bolivia and Venezuela, any expropriation of assets held by Spanish Companies in those countries, in accordance with the BITs Spain signed with these two countries, has to be compensated at the market value of those assets immediately before expropriation. Disputes may be brought to the International Centre for Settlement of Investment Disputes (ICSID) or any other Court for International Arbitration.
Most Latin American countries are contracting States under the ICSID Convention on the Settlement of Investment Disputes between States and Nationals of other States. Countries that have consented to be bound by this Convention must follow awards of arbitral panels organised under this Convention. In the past few years important case law has been developed on which parties can reply when bringing forward their disputes to ICSID.
Spain offers an exceptional regime for international holding companies and compares favorably with traditional European centres such as Luxembourg, the Netherlands and Belgium.
When properly structured, international holding companies are fully exempt from Spanish tax on dividends received from non-Spanish subsidiaries, and from tax on capital gains derived from the disposal of participations in non-Spanish subsidiaries.
Spanish holding companies, in Spanish “Entidad de Tenecia de Valores Extranjeros” (ETVE), were created by Law 43/95 which came into force on 1 January 1996. In order to qualify for the regime the following conditions must be satisfied:
- At the time of the distribution of a dividend or the generation of capital gain, the ETVE has owned, directly or indirectly, at least 5% of the share capital of the non-Spanish subsidiary for an uninterrupted period of at least one year. The exemption is also granted if a distribution of dividend is made to the ETVE before the conclusion of the one year holding period, provided the ETVE continues to hold the participation in the non-Spanish subsidiary for the remaining period;
- The non-Spanish subsidiary is subject to, and not exempt from, a tax system that is similar to Spain’s corporate tax system. There is no minimum tax rate required. The requirement refers to being taxed on income, turnover or any other concept or base. This condition is deemed to be fulfilled if the non-Spanish subsidiary is established in a country which has concluded a DTT with Spain;
- The non-Spanish subsidiary and the Spanish holding company’s shareholders are not resident in a country identified by the Spanish tax authorities as a tax haven; and income derived by the non-Spanish subsidiary is connected with business activities outside Spain. The term “business activities” does not include passive investment income.
Substantial legislative changes, in place since 2000, have further enhanced the Spanish Holding Company regime. In particular:
- ETVE qualification is no longer restricted to special-purpose companies;
- Spanish companies need no longer apply for authorization from the Spanish Finance Ministry to use the regime, a simple notification to the tax authorities opting for the holding regime is sufficient;
- The regime was extended to include participations of less than 5% provided that the value of the investment is in excess of €6,000,000.
Because of Spain’s DTT network and the European character of the ETVE, it has become an interesting vehicle for channeling capital investments into Latin America as well as a tax efficient repatriation route for EU capital investments by non-EU companies. Another important factor of the attractiveness for the use of ETVEs is that by utilising an ETVE the investor has access to the Spanish BITs, resulting in an effective insurance policy for the protection of capital investments in Latin America. Therefore, when properly structured, the use of an ETVE to hold investments in, for example, closely held family business in Latin America can add another protection level against the risk of exportation of these investments. Additional benefits, which are sometimes overlooked, include Spain’s cultural, linguistic, and historical business ties with Latin America.
For further information or discussion relating to this article please contact Mark Vrijhoef (E: mark.vrijhoef@atcgroup.com / T: +34 93 341 6075).
