Global Tax Alert: Spanish Government publishes 2021 draft Budget Act

On October 28, 2020, the Spanish government sent the draft of the 2021 Budget Act (the 2021 Budget) to the Congress for debate and approval. The 2021 Budget includes several tax measures aimed at increasing tax revenue. In this alert we want to highlight some of the main tax measures included in the 2021 Budget Act.

For corporate income tax purposes, among other amendments, the 2021 Budget proposes to reduce the 100% participation exemption regime to a 95% participation exemption (generating a 1.25% tax liability as a general rule) which is not mitigated if the companies form part of a tax consolidated group.

It is foreseen that this tax measure will not apply for three tax years to dividends distributed by companies incorporated after January 1, 2021 when the participation is 100%. However, if the published wording is maintained, its application is very limited since, among other requirements, it requires that the company receiving the income must have an operating profit below €40 million, must not belong to a group of companies according to article 42 of the Spanish Commercial Code and must not be considered an asset-holding company.

In addition, the participation exemption will only be available when the participation is higher than 5% (with the current wording, it is also available when the investment cost is higher than €20 million).

Likewise, the Spanish non-resident income tax exemption for dividends and capital gains obtained by EU shareholders deriving from the participation in entities which do not qualify as real estate-rich will only be available when the participation is higher than 5% (with the current wording it is also available when the investment cost is higher than €20 million). In these cases, the exemption is not limited to 95%.

Moreover, the tax exemption for interest payments and capital gains for EU taxpayers is extended to residents in the European Economic Area with an effective information exchange in tax matters (e.g. Iceland and Norway).

Regarding personal income tax, the 2021 Budget increases 2% the tax rates for taxable income over €300,000. Tax rate for savings income (e.g. dividends and capital gains) over €200,000 will increase from 23% to 26%.

In regards to VAT, the 2021 Budget amends the “use and enjoyment rule” foreseen in the VAT law so that it will no longer apply to services rendered to entrepreneurs established in the Canary Islands, Ceuta and Melilla. In addition, the 2021 Budget will raise the VAT on sweetened drinks from 10% to 21%.

Key takeaways

Corporate income tax amendments increasing the tax burden of holding companies and large multinational groups in Spain will come into force in financial years starting on or after 1 January 2021. The increase in the effective tax burden may be significant if there is a chain of Spanish companies (e.g. holding, sub-holding and SPV structure) where a 1.25% taxation arises on each distribution of dividends within the chain so it may be relevant to review the existing investment structures in order to mitigate such impact. This amendment would also impact ETVEs (Spanish holding companies) only with regards to the application of the participation exemption.

The amendment to the €20 million investment cost requirement referred to above will come into force in financial years starting on or after 1 January 2026 after a five-year transitory regime, applicable if the subsidiary is already held before 1 January 2021.

In addition, the VAT amendment of the “use and enjoyment rule” is especially relevant for gambling operators established in Ceuta and Melilla since, with the current wording of the VAT law, certain services (e.g. advertising) provided by a supplier established in Spanish VAT territory to a customer established in Ceuta and Melilla are deemed to be located in Spain and thus subject to Spanish VAT.

Amendments affecting VAT and non-resident income tax, will enter into force upon the publication in the Spanish official gazette. As regards personal income tax amendments, they will enter into force in January, 1 2020.