Spain: New Developments in Non-Resident Income tTax 

May, 2010 - José Ignacio Ripoll

After becoming the object of several infringement procedures conducted by the European Commission, Spain has been forced to amend several non-resident income tax provisions to ensure those provisions comply with the principles enshrined in the Treaty on the Functioning of the European Union.

Accordingly, March 2 saw the publication of Law 2/2010, of March 1 2010, which introduces the amendments that seek to guarantee compliance with the principles of free movement of persons, services and capital. Among the various amendments, the most notable include:

The introduction of an exemption for dividends obtained by European pension funds, the application of which is conditional on fulfillment of certain requirements relating to equivalence with Spanish funds.

The introduction of an exemption for dividends received by collective investment vehicles (IICs) regulated by Directive 2009/65. In this respect, given that the legislation requires that the taxation should not be lower than that applicable to Spanish IICs (1% in most cases) and that this type of income is subject to withholding tax, it can be interpreted that the "exemption" translates into a tax withholding at a rate of 19% (or at the rate of the applicable tax treaty if lower) and into a claim for a refund up to the point where the foreign fund is taxed at 1%.

The possibility for non-residents (residents in the EU) without a permanent establishment to deduct expenses that are related and directly linked to income-deriving activities in Spain, although these expenses are not in principle computed for withholding tax purposes, which could entail having to claim the relevant refund afterwards.

Lastly, it is worth noting that Law 2/2010 brings forward a future amendment relating to the deduction of financial goodwill regulated by Article 12.5 of the Spanish Corporate Income Tax Law, in relation to the acquisition of shareholdings in EU-resident entities, as a result of the Commission's decision declaring that such a provision constitutes State aid incompatible with the treaty. As regards the deductibility of financial goodwill disclosed on acquisitions of shareholdings in entities that are resident outside the EU, it is still pending a decision by the Commission.


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