Since 1996 in Spain there has been legislation providing for the application of a special tax regime to Spanish holding companies. The regime is called ETVE (Entidad de Tenencia de Valores Extrajeros), which means "foreign securities holding company." The essence of the regime is that if certain conditions are met, the company is exempted from tax on dividends it receives and on income from the sale of assets (capital gains), as well as from withholding tax on outgoing dividends. Thus, the Spanish holding acquires the property of tax transparency, and the negative effects of double taxation of foreign income are eliminated, which was the goal of the Spanish legislator.
Certain requirements are imposed on both the holding itself and its subsidiaries (that is, those whose shares belong to the holding). The following conditions must be met.
1. The subsidiary is a non-resident company with no business in Spain.
2. The holding's share in the capital of the subsidiary is at least 5% or, alternatively, EUR 6 million.
3. These shares are owned by the holding for at least 1 year (before or after receiving the dividend).
4. The subsidiary is subject to corporate tax in the country of its location, similar in nature to the Spanish corporate income tax.
5. The subsidiary is not located in an offshore zone (the list of which is approved by the Spanish tax authorities; currently the list includes 48 countries and territories).
6. The income received by the subsidiary comes from commercial activities outside Spain; at the same time, her income should not be "passive" (dividends, etc.).
The holding itself must have some degree of actual presence in Spain, that is, it must not be a purely "paper" company. The degree of presence required is determined by the tax authorities and may depend on the amount of capital invested.
Tax on dividends received
Subject to the above conditions, dividends received from this subsidiary are fully exempt from Spanish income tax. The regular income tax rate is 35%. It is applied if at least one of the conditions is not met.
Capital gains tax
Subject to the same conditions, the proceeds from the sale of shares of this subsidiary (net of expenses called capital gains) are completely exempt from Spanish capital gains tax. Its usual rate is also 35%.
Withholding tax on outgoing dividends
Dividends paid by a Spanish holding to its foreign shareholders are not subject to withholding tax, provided they are generated from dividends or capital gains received, which are exempt from tax. This only applies to shareholders who are not offshore (according to the same list).
The normal withholding tax rate (applied if a condition is not met) is 25%, but it can be reduced by an international tax treaty. In addition, dividends paid to EU shareholders are exempt from withholding tax under the terms of the relevant EU directive (for this, the shareholder must own 25% of the company's shares for a year). However, the application of the Directive in some cases may be limited by the legislation of the respective EU countries against tax evasion.
Withholding tax on incoming dividends
As for the withholding tax on incoming dividends, which is levied in the country of origin of the dividends, its rate is determined by the domestic legislation of that particular country or its tax treaty with Spain. So, under the terms of the tax treaty between Russia and Spain, the rate is 5, 10 or 15%, depending on the fulfillment of a number of conditions. In the case of dividends originating from EU countries, they can be exempt from withholding tax in accordance with the aforementioned EU directive.