It aims to encourage foreign investment in Portugal by creating special conditions and tax exemptions for those who want to live part, or all, of their time in Portugal. The transfer of shares may allow the seller to mitigate its capital gains tax for companies through participation exemption rules (take into consideration the amendments for FY2021) and for individuals through capital time-based gains reliefs. We use some essential cookies to make this website work. Also exempt from 1 percent capital duty are contributions in cash or in kind to the share capital or equity of a company and the transfer to Spain of the legal seat of a non-EU company. The abovementioned effective 1.25 percent taxation on dividends would not be eliminated within a tax group, so there appears to be no safe haven from this measure. In this case, the tax-exempt amount equals the gain reduced by the sum of net losses incurred by the PE before FY2013 that exceed the net profit generated by the PE from FY2013 onward. Taxpayers with turnover below EUR20 million in the 12 months before the beginning of the relevant FY may only offset 60 percent of their positive tax base (70 percent for FYs starting in 2017). The Spanish regime applicable to foreign workers is established by Article 93 of Spanish IRS Law 35/2006. Spain - Individual - Taxes on personal income - Worldwide Tax Summaries The Spanish DST has finally been approved. Negative income obtained in a tax period is also subject to reduction if positive income of the same nature was obtained in previous tax periods to which the reduction has been applied. You can change your cookie settings at any time. For a tax group, the tax deduction of the capitalization reserve is calculated on a tax group basis, although the accounting reserve can be recognized by any of the tax groups entities. If no positive reserves exist, the share premium redemption would not have Spanish tax effects (i.e. Tax on foreign income: 'Non-domiciled' residents - GOV.UK rights to use or exploit patents, drawings or models, plans, formulas and know-how) is net income (qualifying income) for tax purposes, where certain requirements are met. Some of the key points that arise when planning the steps in a transaction are summarized later in the report. Paseo de la Castellana Previously, the borrower had to obtain a number of financial operations by filing the appropriate form (PE-1 or PE- 2), depending on the amount of the loan. The statute of limitations period is 10 years from which an entity generates tax losses and/or tax credits (the general limitation period is 4 years). that derive from a different qualification of the financial instruments in the different jurisdictions, (ii) hybrid mismatches that result from differences in the allocation of payments made to hybrid entities or permanent establishment, and (iii) hybrid mismatches that result from differences in the qualification of the hybrid entity. Amount of the rates applied by the Beckham special tax regime For a non-habitual resident in Portugal, employment income obtained in Portuguese territory resulting from activities considered of high added value (HVA) with scientific, artistic, and technical character (whether dependent or independent work) is taxed at a flat rate of 20%. This restriction does not apply to companies lending in the ordinary course of their business or to loans made to employees. Spain does not charge withholding tax (WHT) on interest and dividends paid to EU recipients (see the European Council Interest and Royalties Directive 2003/49/EC and the EU Parent-Subsidiary Directive 90/435/EEC), although some anti-abuse rules must be considered. In any case, a EUR1 million threshold of tax losses applies. All the transactions mentioned earlier, except contributions in kind consisting of individual assets, are exempt from or not subject to transfer tax or the local tax on urban land appreciation. Both are governed by Royal Legislative Decree 1/2010, dated 2 July 2010, on Corporate Enterprises. Generally, asset transfers carried out through such transactions do not have any tax implications (either from a direct, indirect or other Spanish tax perspective) for the parties involved (transferor, beneficiary and shareholder) until a subsequent transfer takes place that is not protected by this regime. There is a clear intention on the part of the Spanish tax authorities to prevent abuse of the treaty by denying application of tax breaks to business decisions made strictly for tax reasons. WHT of 19 percent applies on interest payments to non-Spanish and non-EU entities unless lower rates apply under the relevant tax treaty. A local holding company is the most common vehicle for transactions. However, the buyer cannot step-up the tax basis in the assets of the target and inherits any hidden capital gains and contingencies. These rules are not yet in force. online advertising services targeted at users, so-called earnings-stripping tax rules, which derogated and substituted the previous thin-capitalization regime. Amendments in the CFC regime: Following article 7 of the ATAD, CFC rules will be extended (i) to foreign holding companies, which are currently excluded from this regime, and (ii) to income obtained by a foreign permanent establishment that is below the minimum taxation threshold (75 percent of the tax that would have been paid in Spain), which applies to foreign companies. Spanish tax residents and non-residents are subject to tax on . The excess can be deducted in following FYs, together with the tax credits generated in the relevant FY, subject to the thresholds noted above but without any timing limitation. Spain - Taxation of cross-border M&A - KPMG Global The CIT Law expands the scope of the definition of partial spin-off (escisin parcial) that can benefit from the tax neutrality regime. Certain quantitative and temporary limitations must be considered to apply these tax credits. Tax in Spain | Spain Tax Guide - HSBC Expat If you qualify, you do not need to do anything to claim. The draft bill law transposes the Directive in line with the wording of the ATAD 2 Directive. The CIT Law provides for a rule that limits the tax-deductibility of interest accruing on acquisition debt, where such interest can be offset against the taxable profits of the target entities acquired (through the applicability of the tax consolidation regimen or a post-acquisition merger). non-voting shares, redeemable shares) and interest on profit-participating loans granted to group entities are characterized as dividends and could benefit from PEX. The rate of the DST is 3 percent. Scrapping 'non-dom' tax perk would net 3.6bn a year for UK, says study This exemption does not apply to capital gains derived directly or indirectly from: The exemption does not apply to any gains on the transfer of holdings in entities resident in a country or territory classified as a tax haven, unless they reside in an EU member state and can demonstrate that their formation and operations are based on valid economic reasons and they engage in economic activities. The CIT Law provides that goodwill and other intangible assets arising because of a merger are no longer tax-deductible if the share deal closes in 2015 or later years. In later FYs, the applicability of the escape clause requires the amortization of the principal amount of the acquisition debt on an annual basis (at a 5 percent rate) until the principal amount is reduced after 8 years to 30 percent of the purchase price. No income is earned through a permanent establishment in Spain. However, a new subcategory is created: intangible assets whose useful life cannot be reliably estimated. setting transfer prices at market value). When applying for the benefits of this regime, it is critical to have a relevant sound business reason for the merger, other than merely achieving a tax benefit (i.e. Spanish CIT Law introduced certain amendments to anti-abuse rules in accordance with the Organisation for Economic Co-operation and Development (OECD) BEPS project. Under a tax allowance included in Spanish CIT Law, only 60 percent of income obtained from, among others, the transfer of the qualifying intangible assets (e.g. This participation must be maintained for the entire FY in which the consolidation regime is applied. The step-up in the assets acquired can be depreciated or amortized for tax purposes. A buyer using a Spanish acquisition vehicle to carry out an acquisition for cash needs to decide whether to fund the vehicle with debt, equity or a hybrid instrument that combines the characteristics of both. Thus, where interest paid to an overseas (or Spanish) parent or overseas (or Spanish) affiliated company is in an amount that would not have been payable in the absence of the relationship, the transfer pricing provisions deny the deduction of the payments for Spanish tax purposes. The acquisition accounting may give rise to goodwill. Failure to comply with the documentation requirements may result in specific penalties for not maintaining the correct documentation or for not applying the arms length principle (i.e. . As of 1 January 2015, the maximum annual depreciation rate is 5 percent. Anyone who has assets in Spain is obliged to pay Spanish wealth tax. Most of the conventions entered into by Portugal only give the right to tax the source State when the professional has a permanent establishment, or the work is carried out in the other State. You can: There are special rules if you work both in the UK and abroad. They remain with the company or are extinguished. No member firm has any authority to obligate or bind KPMG International or any other member firm vis--vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. Travel to Spain to conclude a work contract. The date of acquisition is crucial (for real estate only where the seller is a legal entity and for all assets where the seller is an individual, provided certain requirements are met). In addition to transfer pricing rules, there are other limits on the deduction of interest expenses on debt used to finance an acquisition, such as the general limitation on financial expenses and GAAR. Spanish tax treaties with the UK This is a substantial reduction of the progressive rate applicable to the remaining Portuguese residents, which can go up to 53%. Losses arising on the liquidation of a subsidiary are tax-deductible unless the liquidation is part of certain types of reorganizations (regardless of whether the tax rollover regime applies). Distributions of profit may be made only out of a companys distributable reserves provided that the minimum legal reserve has been recorded. Buyer acquires unrealized tax liability for depreciation recovery on difference between market and tax book value of assets. Law 3/2009 regulating structural modifications of commercial companies also deals with financial assistance. As of FY2016, there are quantitative limitations on carryforward of the tax losses (see Restrictions on carryforward of tax losses earlier in this report). KPMG International provides no client services. Thus, your tax residency will be considered the country where you have your residence. Spain has also included clauses to prevent abuse due to the use of hybrid mechanisms and clauses aimed at avoiding the artificial circumvention of permanent establishment (PE) status. In exchange, the shareholders of the company acquired are given participation in the acquiring company and, if necessary, monetary compensation that cannot exceed 10 percent of the nominal value of the shares. Transactions in which the consideration is received, in whole or in part, in a series of payments or a single late payment are deemed to be instalment or deferred price transactions, provided that the period between delivery and the maturity of the last or only instalment exceeds 1 year. You do not have to pay tax on foreign income or gains (even those you bring into the UK) if you get the foreign workers exemption. Learn more about these topics in the NEWCO library, Recruitment / Beckham law in Spain. Facilitated tax regime up to 600,000 Non-Domiciled Tax Scheme Taxation Spain introduced a special tax regime for wealthy expatriates following in the wake of other countries. It is not a subsidiary of another company fulfilling the requirements to be regarded as the controlling company. the tax return of the tax period in which the carried forward tax loss (and/or tax credit) was generated. The regulations, which are not enacted yet, would clarify timelines for the submission of operations in retrospective period and the timing on submission of new transactions as of 1 January 2021 (i.e. In the latter case, the loss is reduced by the sum of the profit from the PE that benefited from the PEX in earlier years. These cookies store information regarding users' behaviour through their browsing of the website, which allows a specific profile to be developed and advertising to be targeted according to said profile. However, according to the CIT Law, Spanish sister entities with a non-Spanish parent (and Spanish subs indirectly owned) can form a tax group. Basis, View a printable version of the whole guide, Capital Gains Tax: what you pay it on, rates and allowances, How to apply for a certificate of residence to claim tax relief abroad, HMRC email updates, videos and webinars for Self Assessment, read chapter 5 of HM Revenue and Customs (, you do not bring them into the UK, for example by transferring them to a UK bank account, pay an annual charge if youve been resident of the UK for a certain amount of time, 30,000 if youve been here for at least 7 of the previous 9 tax years, 60,000 for at least 12 of the previous 14 tax years, your income from your overseas job is less than 10,000, your other foreign income (such as bank interest) is less than 100, all your foreign income has been subject to foreign tax (even if you did not have to pay, for example because of a tax-free allowance), your combined UK and foreign income is within the, you do not need to fill in a tax return for, pay UK tax on UK employment income based on the number of days youve worked here, do not pay tax on income from days you work abroad (as long as you do not bring it into the UK). Aware of their excellent natural features, both Portugal and Spain have, in the last decade, created very attractive tax regimes for foreigners who become residents. Generally, it is illegal for a company to give financial assistance, directly or indirectly, for the purpose of acquiring that companys shares. Goodwill may be included as an asset when it is acquired in onerous basis and, in principle, will be amortized over 10 years. The CIT Law provides for transitional rules for shares acquired before 1 January 2015. Spain has chosen to extend an arbitration procedure to cover its treaties for avoidance of double taxation that obliges authorities to correct situations of double taxation. Although the Spanish domestic rules already included most of the measures required by the ATAD, some adjustments in terms of the CFC regime and exit tax were required to entirely align the Spanish provisions with the Directive. re-characterization of debt into equity). Fill in your details and we will contact you to schedule the call, 24% up to 600.000 (above this amount, the rate is 45%), To have acquired fiscal residence in Portugal, Not have had a residence in Portugal in any of the previous 5 years. On 7 June 2017, Spain signed the Multilateral Instrument (MLI) and is currently in the process of ratifying this instrument, but at this date, the MLI has not effectively entered into force in Spain. The Spanish system for direct taxation of individuals is mainly comprised of two personal income taxes: Spanish personal income tax (PIT), for individuals who are resident in Spain for tax purposes, and Spanish non-residents' income tax (NRIT), for individuals who are not resident in Spain for tax purposes who obtain income in Spain. Finally, the scope of the safe-harbor clause for EU tax resident subsidiaries is broadened to include companies that are resident in the European Economic Area (EEA). If obtained in Spain, they are taxed between 19 and 23%, depending on the amount. The main rule governing transactions between associated parties is that the transactions should be carried out at prices that would have been agreed under normal market conditions between independent companies (i.e. It is worth noting that this tax has been declared unconstitutional in cases where no profit is generated at the time of transfer. The principal advantage of debt is the potential tax-deductibility of interest (see Deductibility of interest later in this report), whereas the payment of a dividend does not give rise to a tax deduction. The minimum holding requirement for the application of the Spanish participation exemption regime is also amended. The Beckham taxation regime, and to be taxed as non-residents only for employee income produced in Spain (income generated abroad is exempt) at a rate of 24% up to a threshold of 600,000. There is a deferral regime in the Spanish CIT Law for mergers, spin-offs, contributions in kind and exchanges of shares, among others. Spain - Individual - Other issues - Worldwide Tax Summaries Online Not subject to VAT or transfer tax (unless anti-avoidance rules apply where real estate, non linked to business activity, is involved). Regarding ATAD 2 considerations, refer to Recent Spanish tax developments Neutralization of the effect of hybrid mismatches EU ATAD 2. Merger goodwill or the step-up of assets on a merger no longer has tax effects (deferred tax liabilities [DTLs] may crystallize in this case). Accordingly, although a further development regulating the different hallmarks is still pending to be issued, as of 1 January 2021, DAC6 has become applicable for new transactions that shall then be examined on a case-by-case basis. However, the percentage of withholding or payment on account on earned income will be 24%.When the payments made by a single payer for income from work during the natural year exceed 600,000 euros, the withholding percentage . In this case, the buyer may limit its liability by obtaining a certificate from the Spanish tax authorities showing the tax liabilities and debts. As a result of these amendments, for tax years starting in 2016 and later, the amortization expense of intangible assets must be recognized for accounting purposes in order to be tax-deductible. A tax deduction may be available at higher rates in other territories. But are Portugal and Spain really that similar when it comes to taxation? The purpose of the FTT is to tax transactions that are not subject to any current indirect taxation. Privacy policy / A financial split occurs where a company separates part of its assets consisting of the majority shares in other companies (maintaining at least a controlling stake in a subsidiary or a branch of activity) and transfers it to a company (new or pre-existing), receiving as consideration shares in the acquiring entity that should be allocated to its shareholders in proportion to their participations in the transferring entitys share capital. A profitable business could use its acquirers tax losses. Three kinds of mergers are possible in Spain according to the tax definition of merger. Member firms of the KPMG network of independent firms are affiliated with KPMG International. The rationale for this change is that capital gains incurred by Spanish sellers on the disposal of shareholdings in Spanish entities are no longer taxable (due to the PEX regime), so there is no double taxation to be mitigated. This entitles them to claim the 'remittance basis' of taxation, meaning they neither have to report nor pay UK tax on investment income or capital gains from assets held abroad unless these are remitted to the UK. It should be noted that certain countries with which Spain has important trade relations have not joined the Convention (US, Brazil, Morocco and Ecuador, among others) or have excluded their treaties with Spain from the list of treaties affected by the Convention (as has Switzerland, for example). Although branches are taxed in a similar way to resident companies, they have the advantage of not attracting WHT on remittance of profits abroad, provided the foreign company resides in a tax treaty country or in the EU (with some exceptions).