Bill Proposal to create a new Tax on Digital Services
The draft law of the General State Budget for 2019 presented by the Spanish Government to the Congress on 14 January 2019 (the “Draft”), contains various tax measures, most importantly in relation to Corporate Income Tax, where a significant increase in revenue is expected. We have set out below the most relevant features of the main proposed tax measures contained in the Draft, which are established to generally enter into force for periods that begin on or after 1 January 2019:
I. Corporate Income Tax
a) Limitation of the Spanish participation exemption: The full participation exemption that generally applies, under certain requirements, to dividend income and capital gains obtained upon the disposal of qualifying shares in Spanish and non-Spanish resident companies would become limited to 95%.
b) Tax consolidation groups: The companies within a tax consolidation group are currently deemed as a single taxpayer, so that internal transactions within the group are disregarded or deferred for tax purposes. This would change under the proposed measures concerning dividend distributions and transfers of shares which, if eligible for the participation exemption regime, would give rise to taxable income that could be neutralized by the participation exemption only to 95%.
c) Permanent establishments abroad: The current full tax exemption of the income obtained abroad through a qualifying permanent establishment is proposed to be limited to 95%.
d) Limitation of tax credits for foreign taxes paid abroad: The taxpayer can credit the foreign taxes paid abroad by it and/or by a subsidiary in the case of dividends and profits distributed to the taxpayer. These credits are currently limited to the Spanish tax result (calculated by applying the tax rate to the positive tax base) that would otherwise arise if the relevant income had been obtained in Spain, and are now proposed to be limited to 95% of such.
e) Establishment of a “minimum taxation” regime
- A regime of “minimum taxation” has been established for taxpayers whose net turnover amount is at least EUR 20 million during the 12 months prior to the date on which the tax period begins, or which are taxed under the tax consolidation regime (regardless of the amount of turnover). This “minimum taxation” would though not apply to certain entities that can benefit from reduced or zero tax rates or to the Spanish REITS (“SOCIMIS”).
- Under this “minimum taxation” regime, the Corporate Income Tax liability (after tax credits and other deductions) could not generally be less than the result of applying 15% to the positive tax base (18% in the case of credit entities and entities dedicated to the exploration, investigation and exploitation of deposits and underground storage of hydrocarbons, that are generally taxed at 30%; and 10% in respect to newly created entities that are generally taxed at 15%).
f) Tax neutral mergers and other restructuring transactions:
- The Spanish law sets forth that where the receiving company has a 5% or higher holding in the capital of the transferring company, any gains accruing to the receiving company on the cancellation of its holding shall not be liable to taxation, in alignment with the Council Directive 2009/133/CE. This is proposed to be modified so that the exemption would be limited to only 95%.
- In addition, the Spanish law currently recognizes full tax effects to the merger difference derived from tax neutral mergers when the shares in the merged company were acquired in tax years started before 1 January 2015 and certain other conditions are met. This allows the tax deduction of the merger goodwill at an annual rate of 5% and/or the tax depreciation of the stepped-up assets based on the stepped-up value. Under the proposed changes, the tax effects of the merger difference would be limited to 95%.
g) Increase of prepayments on account of Corporate Income Tax
- An increase from 17% to 24% in the applicable rate for the calculation of these prepayments is proposed for any companies that apply the method of calculation of the prepayments on the basis of their taxable base (under current regulations the 24% increased rate only apply to large companies).
- An increase from 23% to 24% in the applicable rate for the calculation of the minimum prepayments determined on the basis of their accounting results which taxpayers whose net amount of turnover exceeds EUR 10 million are subject to (from 25% to 29% in the case of credit institutions and entities dedicated to the exploration, investigation and exploitation of deposits and underground storage of hydrocarbons).
h) Shares acquired in fiscal years started (for the transferor) before 1 January 2015: The relevant tax credit currently available on dividends and profits derived from these shares under certain conditions is proposed to be limited to 95% of the tax result.
i) Spanish Groups of Economic Interest (“AIE”) and CFC regime: Taxation on 5% of dividends obtained by the members, partners or shareholders of these type of entities (which under current regulations are not subject to taxation to the extent that these members, partners or shareholders have previously been taxed on the entity´s taxable income corresponding to their participation when such income was generated) is proposed to be introduced.
j) SICAVs: The Spanish tax authorities are proposed to be entitled to verify the number of shareholders required to variable capital investment companies (SICAVs) in order to benefit from a reduced tax rate (so far only the relevant regulator was entitled to make this verification).
k) Spanish REITS (SOCIMIs): This type of entities can currently benefit from a special tax regime that, under certain circumstances, allows them to be generally taxed at 0%. This is proposed to be changed in relation to the part of profits that are not effectively distributed to the shareholders, which would become subject to a special tax of 15% at the hands of the entity.
l) Deduction for the promotion of gender equality: Entities that increase the number of women on their Board of Directors under certain conditions would be entitled to a deduction calculated as 10% of the salaries paid to such women directors.
m) Reduced tax rate for entities with turnover lower than 1 EUR million: A reduced tax rate of 23% (instead of the general 25% rate) is proposed to be established for entities whose net amount of turnover of the immediately preceding tax period is less than EUR 1 million.
II. Personal Income Tax
a) Income tax rates would be increased by 2 points for taxpayers with a taxable base over EUR 130,000 and by 4 points for those with a taxable base over EUR 300,000. As a result, the maximum marginal tax rate (including both general and state) would be increased up to a maximum of 52% for residents in the Community of Catalonia or 47.5% in relation residents in the Community of Madrid, as an example.
b) The income tax rate in respect to savings would also be increased by 4 points for taxpayers whose taxable base of savings exceeds EUR 140,000, who would be taxed at 27% (compared to the previous 23% rate).
c) Tax rates applicable to taxpayers under the impatriate regime would also be increased.
a) The super-reduced rate of 4% is proposed on books, newspapers and periodicals supplied electronically other than publications wholly or predominantly consisting of audible music or video content.
b) The period to submit the VAT returns of November for those taxpayers who are forced to file VAT books by electronic means (S.I.I.) is proposed to be changed to the first 20 calendar days of December (instead of the current period of the first 30 calendar days of December).
IV. Other taxes
Among the tax measures regarding other taxes, we would like to highlight the following:
a) An increase is proposed in tax rates on hydrocarbons in respect to the general use of diesel oil and the use of biodiesel as fuel.
b) An exemption is proposed to be established in the Special Tax on electricity in relation to the electricity generated and consumed aboard vessels.
These comments only purpose is promote discussion, they do not provide any kind of advice and they cannot and must not be taken into consideration for making any decision.