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2015 TAX REFORM

 

1. Tax deduction of acquisition debt: Additional restrictions 2

2. Reduction of tax rates 3

3. Spanish entities can be exempt on “domestic” gains from Spanish shareholdings 3

4. Taxation of “domestic” dividends: Relevant changes 4

5. Spanish entities owning foreign subsidiaries: Relevant changes in participation exemption (dividends and

capital gains) and CFC rules 5

6. Tax losses on shareholdings still deductible, subject to certain conditions 7

7. Use of carryforward tax losses: New rules 7

8. Incentive to strengthen net equity of Spanish entities: Tax deductible “capitalization reserve” 8

9. Tax neutrality regime applicable to mergers and demergers: Relevant amendments 9

10. Tax grouping regime: Main amendments 9

11. Tax depreciation of intangibles is reviewed 10

12. Assets’ accounting impairments non-tax deductible (until loss actually incurred) 11

13. Amendments to transfer pricing rules 11

14. Tax credits: Some are abolished, other are maintained 11

15. Changes with impact in real estate transactions 11

16. Changes to taxation of dividends and capital gains obtained by individuals 12

17. Executives’ compensation schemes: Impact of tax reform 13

18. Changes to taxation of non-residents 14

19. Other recent and expected changes with an impact on M&A transactions 15

Contents

2 Spain’s 2015 Tax Reform approved: What foreign investors and M&A players should know

The Spanish Parliament has finally approved the bills

proposed by the Spanish Government which include

significant amendments to Spanish Corporate Income

Tax (“CIT“), Personal Income Tax (“PIT“) Law, and also

minor changes with respect to VAT and taxation of nonresidents

(the “Tax Reform“).

The Tax Reform includes the following bills:

Law 26/2014, which amends Spanish PIT Law and

Spanish Non-residents’ Income Tax Law

Law 27/2014, which approves a new Spanish CIT

Law (the “New CIT Law“), and

Law 28/2014, which amends Spanish VAT Law

and other tax laws.

The bills were published in the Spanish Official Gazette

on 28 November 2014, and will come into force as of 1

January 2015.

The Tax Reform will impact the Spanish tax position of

sellers and buyers in M&A transactions, and the tax

cash flow projections of Spanish entities, as discussed

below.

In this note we summarize the main tax changes that, in

our view, should be taken into account by M&A players

and foreign investors planning to invest in Spain or with

existing investments in Spanish entities.

1. Tax deduction of acquisition debt:

Additional restrictions

Currently, Spanish CIT Law provides that net financial

expenses (that is, the excess of financial expenses over

interest income), either with related or unrelated

lenders, shall be tax deductible up to a limit of 30% of

the EBITDA (as defined in this tax provision) of the tax

period. Net financial expenses exceeding this 30%

EBITDA limit can be carried-forward and deducted in

the following 18 years (subject to the same 30%

EBITDA limit). If the entity forms part of a Spanish tax

group, the limit shall be applicable at the level of the tax

group (certain particular rules are applicable for

companies joining and leaving the tax group).

1.1 New “anti-LBOs” tax provision

The New CIT Law keeps this 30% EBITDA deductibility

limit, but includes an additional limitation for leveraged

buy-out (LBO) transactions restricting the tax

deductibility of acquisition debt against the taxable

profits of the acquired target entities through tax

consolidation or a merger (being an “anti-LBO” tax

provision).

In particular, this new provision states that, when

calculating the 30% EBITDA limit to deduct the interest

accrued by a Spanish BidCo on the debt borrowed to

acquire the target entities, the EBITDA of the target

entities that have joined the BidCo´s tax group or that

have been merged into BidCo should be excluded.

Also, in order to prevent increasing the EBITDA of the

Spanish BidCo with further acquisitions, the New CIT

Law provides that it should also be excluded the

EBITDA of any other entity that joins BidCo’s tax group

or is merged into BidCo in the four years after the LBO

acquisition.

However, this additional limitation shall not apply if (i)

the amount of the purchase price financed with debt

does not exceed 70% of the total purchase price, and

(ii) in the eight (8) fiscal years following the acquisition

the borrower repays debt principal every year, at least

in an amount of 1/8 each year of the amount of principal

to be repaid until the debt principal is reduced to 30% of

the initial purchase price.

The New CIT Law provides that this anti-LBO provision

shall not apply to acquisitions where the target entities

have joined the BidCo’s tax group in tax periods

commencing before 20 June 2014, or where the target

entities have been merged into BidCo before 20 June

2014. Also, this limitation would not apply when the

merger takes place after 20 June 2014 but the target

entities already belonged to the BidCo’s tax group in a

tax period commencing before 20 June 2014.

This “anti-LBO” tax provision will certainly have an

impact in the structuring of acquisition debt. If the

acquisition debt falls within its scope (for example,

bullet debt), buyers may need to consider strategies to

push down debt to the target entities, although they

should take into account the potential application of

anti-avoidance tax rules preventing the tax deductibility

of refinancing debt (we refer to Spanish Tax Authorities’

and National Court’s position in the “Dorna dividend

recap” case and in debt financing of share buy-backs).

Also, this change may make it advisable to structure

subsequent “add-on” or “build-up” acquisitions through

operating subsidiaries with strong EBITDA, and not

through the group holding company.

1.2 Restrictions to tax deductibility of hybrid

financial instruments

The New CIT Law also includes changes with respect

to the tax deductibility of certain hybrid financial

instruments:

a) The return accrued on hybrid financial instruments

representing share capital or equity of the issuer (for

example, non-voting shares, redeemable shares)

shall be characterized as a dividend for CIT

Spain’s 2015 Tax Reform approved: What foreign investors and M&A players should know 3

purposes of the issuer (and therefore non-tax

deductible), regardless of its characterization for

accounting purposes

b) Interest accrued on profit participating loans,

when the lender and the borrower form part of the

same accounting group, shall be characterized as a

dividend for CIT purposes (and therefore non-tax

deductible), regardless of the tax residency of the

lender. This tax change shall not apply to

participating loans granted before 20 June 2014,

and

c) Interest accrued on financial instruments with

related parties shall not be tax deductible for the

Spanish borrower if this interest is characterized as

a dividend in the lender’s jurisdiction, and as a

consequence of this tax characterization in the

lender’s jurisdiction the income is tax exempt or

subject to a nominal tax rate below 10%.

2. Reduction of tax rates

2.1 Reduction of CIT rate

Existing standard 30% CIT rate for Spanish entities

shall be reduced to 28% in 2015 and to 25% in

2016.

However, credit entities and entities engaging in

exploration and exploitation of hydrocarbons shall be

subject to 30% CIT rate.

2.2 Reduction of withholding tax rates

Existing standard 21% withholding tax rate on

dividends and interest shall be reduced to 20% in

2015 and to 19% in 2016.

3. Spanish entities can be exempt on “domestic”

gains from Spanish shareholdings

Currently, Spanish entities are taxed on capital gains

derived from Spanish shareholdings (except for the part

of the gain corresponding to undistributed earnings

generated during the holding period), which makes

foreign investors structure their exit strategies typically

through Luxembourg or Netherlands holding

companies, in order to benefit from the capital gains

exemption provided in the double tax treaties signed

with Spain.

The New CIT Law introduces an exemption to capital

gains from Spanish shareholdings, under the same

participation exemption regime applicable to non-

Spanish shareholdings, with certain specialties.

We understand that this new exemption would give

foreign investors more flexibility to structure their exit

strategies, although the requirements to distribute

dividends out of Spain (after an exit) without withholding

tax should be carefully analysed (for example, the

withholding tax exemption applicable to EU resident

shareholders does not apply to distributions derived

from the liquidation of the Spanish subsidiary).

Also, we note that this new exemption creates a

significant difference in the tax treatment of share

deals versus asset deals (which remain taxable), and

thus we anticipate an increase of pre-sale

reorganizations to prepare a share deal (although we

note that the exemption would not apply if the shares

have been received in exchange for a contribution of

assets, other than shares, implemented under the tax

neutrality regime), and a higher impact of the tax input

in the purchase price offered depending on the deal

structure (because share deals will no longer allow the

purchaser to deduct the embedded goodwill paid, as

explained below).

We summarize below the main requirements to benefit

from the capital gains exemption:

a) Shareholding threshold: The Spanish shareholder

entity should have a direct or indirect shareholding in

the capital or equity of the Spanish subsidiary of at

least 5% or, failing this, an acquisition value of at

least 20 million

b) Additional requirement for indirect

shareholdings held through a “holding

company”: When more than 70% of the income of

the Spanish subsidiary derives from dividends and

capital gains from shareholdings (if the subsidiary is

the parent of a consolidated accounting group, the

computation should be made taking the consolidated

income of the accounting group), the Spanish

shareholder should have an indirect 5% participation

in those second and lower-tier shareholdings, except

if those second and lower-tier entities form part of

the same accounting group of the first-tier

subsidiary. There are special rules to prevent double

taxation in case of a chain of holding companies

c) “Business activity” test: The New CIT Law does

not expressly require the Spanish subsidiary to carry

on a “business activity”, but the following capital

gains would not qualify for the exemption1:

1 There are special rules if this test is met only in some fiscal years

4 Spain’s 2015 Tax Reform approved: What foreign investors and M&A players should know

i. Capital gains derived from shares in a “passive”

holding company (“entidad patrimonial“), as

defined in the Spanish CIT Law (that is, an entity

where more than 50% of its assets consist of

assets not connected with a business activity, or

passive shareholdings, as defined), and

ii. Capital gains derived from shares in CFC

entities, as defined in the Spanish CIT Law

(international tax transparency rules), where 15%

or more of its income qualifies as passive income

for CFC purposes (see below our comments on

the amendments to the definition of CFC passive

income).

However, the New CIT Law expressly states that the

“substance” required to meet the business activity

test shall be measured at a “group level”, as

opposed to as a “single-entity” level, which facilitates

significantly the fulfilment of this requirement.

d) No “subject-to-tax” test: The New CIT Law does

not require the Spanish subsidiary to be subject to a

minimum taxation, as this is only required in the

case of non-Spanish shareholdings2. However, we

note that this test would be relevant if the Spanish

first-tier subsidiary owns non-Spanish shareholdings

(that is, if the lower-tier foreign subsidiaries do not

meet this test, the portion of the capital gain

attributable to unrealized reserves of the Spanish

subsidiary that can be allocated to those underlying

foreign shareholdings would not benefit from the

exemption).

4. Taxation of “domestic” dividends: Relevant

changes

The existing credit method applicable to domestic

dividends is replaced by a participation exemption

regime, with the same shareholding requirements as

described above in the participation exemption

applicable to domestic capital gains (for example,

minimum 5% shareholding, directly or indirectly, or

acquisition value of at least 20 million).

However, we note that in some situations the

application of the participation exemption may be

less beneficial than the existing dividend tax credit:

2 The foreign entity should be subject to a nominal rate of at least

10%, although this requirement is deemed to be met if the foreign

entity is resident in a jurisdiction with a tax treaty with Spain

including an exchange of information clause

a) Shareholdings below 5% would no longer benefit

from the 50% dividend tax credit, although could be

100% exempt if the 20 million acquisition value

threshold is met

b) New requirement to calculate indirect

shareholdings when the Spanish subsidiary

distributing the dividend qualifies as a holding

company, as above defined. For example, Spanish

entities investing in 5% shareholdings in investment

vehicles may no longer benefit from full dividend

relief if the investment vehicle invests in minority

(non-group) shareholdings

c) If the Spanish subsidiary owns non-Spanish

shareholdings, these indirect foreign shareholdings

should meet the “subject to tax” test (otherwise the

portion of the dividend distributed by the Spanish

subsidiary that is paid out of dividends and gains

from those foreign shareholdings would not benefit

from the exemption), and

d) When the buyer of the shares receives a dividend

post-closing, now he could not get a double tax

relief for the capital gains tax paid by the seller

of the shares paying the dividend, as explained

below.

Current Spanish CIT Law allows a Spanish

corporate shareholder (Buyer) receiving a dividend

from a Spanish company (Target) to recognize a

dividend tax credit on account of Spanish tax paid by

the Seller of the Target’s shares, on the basis that

the dividend distributed is paid out of the Target’s

profits crystallizing the goodwill on which the Seller

has paid capital gains tax.

However, the New CIT Law no longer foresees the

possibility of taking this dividend tax credit, arguing

that capital gains obtained by Spanish sellers on the

disposal of shares in Spanish entities shall no longer

be taxable, and thus there is no double taxation to

be mitigated (there is a transitional provision for

dividends paid by shares acquired before 31

December 2014 if the seller of the shares had paid

capital gains tax).

However we note that this new dividend exemption,

compared with the existing dividend tax credit, would

result in double taxation when (i) the Seller of the

Target shares is taxed because he does not meet

the requirements for the capital gains exemption, (ii)

the Seller is a Spanish individual (which remain

taxable on capital gains, as described below), or (iii)

the Seller is non-Spanish resident and is taxed in

Spain on such gain in application of the relevant

double tax treaty with Spain.

Spain’s 2015 Tax Reform approved: What foreign investors and M&A players should know 5

Also, the New CIT Law includes special rules for

hybrid instruments and equity derivatives:

Interest on hybrid financial instruments representing

share capital of the issuer (for example, non-voting

shares, redeemable shares), and interest on profit

participating loans granted to group entities3 shall be

characterized as dividends and could benefit from

participation exemption, and

The New CIT Law provides a special rule for

derivatives when the legal holder of the shares is not

the beneficial owner of the dividend, such as stock

loans or equity swaps. In these cases, the

exemption is granted to the entity that economically

receives the dividend (through a manufactured

dividend or compensation payment), and not to the

formal holder of the shares, provided that certain

conditions are met (for example, accounting

recognition of the shares).

5. Spanish entities owning foreign subsidiaries:

Relevant changes in participation exemption

(dividends and capital gains) and CFC rules

5.1 Exemption on dividends and gains from non-

Spanish shareholdings

The New CIT Law introduces several amendments to

the existing participation exemption on non-Spanish

shareholdings. Foreign investors owning Spanish

companies with foreign subsidiaries should review the

new requirements to check if they can still benefit from

participation exemption.

a) Shareholding threshold: Existing participation

exemption regime requires a direct or indirect

shareholding in the capital or equity of the non-

Spanish entity of at least 5%. Moreover, if the

Spanish entity has elected for the ETVE (that is,

Spanish holding company) tax regime, this

shareholding threshold would also be met if the

acquisition value is equal to, or greater than, 6

million.

The New CIT Law keeps the ≥5% shareholding

requirement, but adds to the general participation

exemption regime the acquisition value threshold as

an alternative when this 5% shareholding is not met,

even if the Spanish entity is not an ETVE, although

3 This applies only to profit participating loans granted after 20 June

2014

this threshold is increased to 20 million (this also

applies to ETVEs4).

b) Additional requirement for indirect

shareholdings held through a “holding

company”: When more than 70% of the income of

the non-Spanish subsidiary derives from dividends

and capital gains from shareholdings (if the

subsidiary is the parent of a consolidated accounting

group, the computation should be made taking the

consolidated income of the accounting group), the

Spanish shareholder should have an indirect 5%

shareholding in those second and lower-tier

shareholdings, except if those second and lower-tier

entities form part of the same accounting group of

the first-tier subsidiary (this is similar to the existing

rule for ETVEs, which is now applied also to non-

ETVEs). There are special rules to prevent double

taxation in case of a chain of holding companies.

c) “Business activity” test: The New CIT Law

removes the “business activity test” of the non-

Spanish entity in order to benefit from participation

exemption on dividends5.

However, the New CIT Law keeps this requirement

in order to benefit from the exemption on capital

gains. Specifically, capital gains derived from shares

in “passive” holding companies, as defined in the

Spanish CIT Act, and from shares in companies

where 15% or more of its income qualifies as CFC

passive income, as defined in the Spanish CIT Act,

would not qualify for the exemption. However, the

New CIT Law expressly states that the “substance”

required to meet the business activity test shall be

measured at a “group level”, as opposed to at a

“single-entity” level, which facilitates significantly the

fulfillment of this requirement.

d) “Subject-to-tax” test: The New CIT Law introduces

a new “subject-to-tax” requirement: the foreign entity

should be subject to a nominal CIT rate of at least

10%, although this requirement is deemed to be met

if the foreign entity is resident in a jurisdiction with a

tax treaty with Spain including an exchange of

information clause.

If the first-tier foreign subsidiary obtains dividends

and gains from second and lower-tier entities, the

New CIT Law provides that the participation

4 However there is a grandfathering provision for existing ETVEs

5 Without prejudice of the potential application of Spanish CFC rules

6 Spain’s 2015 Tax Reform approved: What foreign investors and M&A players should know

exemption on dividends and gains from this first–tier

foreign entity would only apply to (proportional rule)6:

i. The portion of the dividends distributed by the

first-tier subsidiary that is paid out of dividends

and gains from second and lower-tier entities

meeting the “subject-to-tax” test, and

ii. The portion of the capital gain attributable to

unrealized reserves of the first-tier subsidiary that

can be allocated to those underlying second and

lower-tier entities meeting the “subject-to-tax”

test.

We note that, under the existing participation

exemption regime, if non-qualifying dividends and

gains, or non-qualifying shareholdings, represent

less than 15% of the total income or assets of the

first-tier foreign subsidiary, the full dividend and

capital gain could be exempt in Spain. But, if the

non-qualifying dividends/gains or assets exceed the

15% threshold, the full dividend or gain is tainted.

The New CIT Law replaces this “all-or-nothing”

calculation rule with the above described

“proportional” rule.

e) “Anti-tax haven” rule is maintained (but only

partially): Like in the existing exemption regime,

the New CIT Law confirms that the participation

exemption would not apply when the foreign

subsidiary is resident in a tax haven jurisdiction

(except if resident in the EU and it can be evidenced

that it has been incorporated for good business

reasons and it carries on business activities).

However, the New CIT Law does not prevent the

application of the participation exemption when the

buyer of the shares is located in a tax haven (as

opposed to existing legislation).

f) New special rules applicable to hybrid

instruments and equity derivatives:

i. Participation exemption shall not apply to those

dividends that are characterized as a tax

deductible expense in the entity distributing the

dividend

ii. Interest on hybrid financial instruments

representing share capital of the issuer (for

example, non-voting shares, redeemable

shares), and interest on profit participating loans

granted to group entities7 shall be characterized

6 There are special rules if this test is met only in some fiscal years

7 This applies only to profit participating loans granted after 20 June

2014

as dividends and could benefit from participation

exemption, unless the interest is tax deductible in

the borrower’s jurisdiction; and

iii. The New CIT Law provides a special rule for

derivatives when the legal holder of the shares is

not the beneficial owner of the dividend, such as

stock loans or equity swaps. In these cases, the

exemption is granted to the entity that

economically receives the dividend (through a

manufactured dividend or compensation

payment), and not to the formal holder of the

shares, provided that certain conditions are met.

5.2 CFC rules: Scope of application is extended

New categories of income added to the “passive

income” list

When a foreign subsidiary is regarded as a “CFC entity”

(that is, an entity with an effective tax rate below 75% of

the Spanish tax, in which the Spanish shareholder

holds, individually or together with related parties, a

participation of 50% or more in its capital, equity, profits

or voting rights), current Spanish CFC rules provide a

“closed” list with the categories of income that should

be deemed “passive income” for CFC purposes.

This list has been criticized by scholars because it

excludes certain sources of income deriving typical

passive income, and now the New CIT Law completes

the list with the following:

a) Income derived from capitalization and insurance

contracts, when the beneficiary is the same CFC

entity

b) Income derived from intellectual property, when the

CFC entity is not the author, and from industrial

property, when it is not connected with business

activities carried on by the CFC entity

c) Income derived from providing technical assistance,

except when provided in the context of a business

activity

d) Income derived from the lease of movable assets, a

business or mines, when the lease is not carried out

as a business activity, and

e) Income from the assignment of image rights, when

this assignment is not carried out in the context of a

business activity.

Existing CFC rules provide that the passive income of

the CFC entity should not be attributed to the Spanish

shareholder when the sum of all the passive income is

lower than 15% of the total income, calculated at the

level of the CFC entity or aggregating the total income

Spain’s 2015 Tax Reform approved: What foreign investors and M&A players should know 7

of all the non-Spanish subsidiaries of the same

accounting group.

Now, the New CIT Law provides that this 15% threshold

shall be measured at the level of the CFC entity on an

individual basis, and also that the passive income

derived from financial activities and services to Spanish

related entities should be attributed regardless of this

threshold (with certain exceptions), which means that

former situations not falling within CFC rules may now

be caught by them.

New “total-income” imputation rule

In addition to the closed “passive income” list, the New

CIT Law introduces a general imputation rule providing

that the “total income” (and not only the passive

income) of a CFC entity should be attributed to the

Spanish shareholder when the CFC entity does not

have enough “substance” (that is, human and material

resources) to carry on its activity.

However, the New CIT Law clarifies that this rule would

not apply when (i) the activity is carried on with the

substance of another non-Spanish entity belonging to

the same accounting group, or (ii) the existence and

operations of the CFC entity can be justified with valid

commercial reasons.

6. Tax losses on shareholdings still deductible,

subject to certain conditions

Impairment losses on shareholdings are no longer tax

deductible since 2013. However, the tax loss generated

as a consequence of the disposal of the shareholding in

a Spanish or non-Spanish entity, or resulting from the

liquidation of such entity (amounting to the difference

between the fair value of the shares and their tax base

cost), would be generally tax deductible, even if the

shareholding qualifies for the Spanish participation

exemption, with the following limitations:

a) Losses incurred on transfers of shares in a (Spanish

or not) subsidiary to another entity (Spanish or not)

of the same accounting group, shall not be tax

deductible until such shares are transferred outside

the group (in this regard the New CIT Law provides

that the amount of the deductible tax loss shall be

reduced if the sale to the third party is made at a

gain, unless the gain is subject to effective taxation),

or the acquirer/transferor of the shares ceases to

form part of the group.

However, this limitation shall not apply in cases of

extinction of the transferred entity (except when

such dissolution is made under the tax neutrality

regime applicable to mergers and divisions), and

b) Losses incurred on the transfer of shares in a

(Spanish or not) subsidiary shall not be tax

deductible up to an amount equivalent to (i) capital

gains obtained in previous transfers of

homogeneous shares that benefitted from

participation exemption, and to (ii) the dividends

distributed by such entity since the tax period

starting in 2009, to the extent that such dividends

have not reduced the tax base cost in the

shareholding but have been exempt in Spain or

have generated dividend tax credits.

7. Use of carryforward tax losses: New rules

The New CIT Law makes permanent the existing

temporary limitation (since 2011) to the use of carried

forward tax losses, but increases the existing thresholds

and allows using the tax losses indefinitely. However,

the New CIT Law worsens the change of control rule

and the statute of limitation period of tax losses carried

forward.

7.1 Carryforward tax losses can offset only up to

70% of taxable income, but without time limit

Transitional regime in 2015

During 2015, as a transitional measure, the New CIT

Law provides that the transitional tax regime currently

applicable in 2014 shall be extended, which implies that

carryforward tax losses can only offset up to 25% of the

positive taxable income (before the deduction of the

capitalization reserve described below) of companies or

tax groups with a turnover in the previous fiscal year

higher than 60 million (and up to 50% of the taxable

income if the turnover is between 20 and 60 million).

Regime in 2016 onwards

In 2016 onwards, the New CIT Law provides that

carryforward tax losses can offset up to 70%8 of the

annual positive taxable income (calculated before the

deduction of the capitalization reserve), irrespective of

the turnover of the company or tax group. In any case,

carryforward tax losses up to 1 million can be used

without any limitation.

On the other hand, the New CIT Law states that tax

losses can be carried forward for use indefinitely,

without time limit (now they can be carried forward for

use in the following 18 years only, and they expire if not

used within this period).

8 In 2016 the percentage shall be 60% pursuant to an amendment

included in the Budget Act for 2015

8 Spain’s 2015 Tax Reform approved: What foreign investors and M&A players should know

We note that the New CIT Law envisages three

situations where the 70% limitation shall not apply (and

thus the carryforward tax loss can fully absorb the

taxable income of the year):

a) When the carryforward tax losses are used to offset

the taxable income derived from debt waivers

resulting from an agreement with creditors9,

b) When the company is dissolved or liquidated, except

if the dissolution is implemented under the tax

neutrality regime applicable to mergers and

divisions, and

c) To taxable income derived from the recapture of

impairment losses that were tax deductible in

previous years, when the carryforward tax losses

now applied had been substantially generated by

such impairment losses.

7.2 Tax Authorities can review carryforward tax

losses generated in previous 10 years

The New CIT Law extends to 10 years (starting from

the due date to file the tax return where the tax loss is

generated) the statute of limitation period to review

carryforward tax losses (and tax credits) generated in

previous years (general limitation period is four years).

Once this 10-year limitation period has elapsed, the Tax

Authorities cannot review the correctness of the

calculation of carryforward tax losses (or tax credits),

but the taxpayer should be able to provide in a tax audit

(i) the tax return of the tax period when the carried

forward tax loss (or tax credit) was generated, and (ii)

the accounts of the fiscal year when the tax loss (or tax

credit) were generated, and evidence that those

accounts have been deposited with the Mercantile

Registry.

This amendment tries to solve the controversy created

by recent tax rulings issued by the Spanish Supreme

Court, which have been construed by the Tax

Authorities as a right to audit carryforward tax losses

and tax credits generated in time-barred tax periods

without any limitation.

9 This exception is applicable already in 2014, but it is restricted to

agreements with creditors that are non-related with the debtor (this

restriction shall still apply in 2015 in application of the transitional

regime).

7.3 Change of control may lead to forfeiture of

carryforward tax losses

Currently Spanish CIT Law only foresees the forfeiture

of carryforward tax losses as a consequence of the

change of control in the Spanish company when the

Spanish company has been dormant during the six

months prior to the change of control.

The New CIT Law includes additional situations where

the change of control would trigger the forfeiture of the

carryforward tax losses, namely:

a) When, within the two years following the change of

control, the Spanish entity undertakes a business

activity different or additional to the one carried on

before the change of control, and the net sales

derived from this new activity in these two years is

higher than 50% of the average net sales figure of

the Spanish entity in the preceding two years; or

b) When the Spanish entity is a passive holding

company, as defined in the Spanish CIT Law.

7.4 Carryforward tax losses can be taken over in

acquisition of a business unit

The New CIT Law allows the transfer of carryforward

tax losses to the acquiring entity in

demergers/contributions of business units, even if the

transferring entity is not extinguished (the existing

position of the Spanish Tax Authorities is that

carryforward tax losses can only be transferred when

the transferring entity is extinguished).

7.5 Deferred tax assets derived from temporary

differences: New limitation for tax deductibility

Deferred tax assets derived from certain non-deductible

accounting provisions can be deducted as a tax

adjustment in the following tax periods, but the New CIT

Law provides that this tax deduction cannot exceed the

limit of 70% of the annual positive taxable income

(calculated before the inclusion of the tax adjustments

derived from these deferred tax assets, before the

deduction of the capitalization reserve and before the

use of carryforward tax losses).

The New CIT Law provides a transitional regime in

2015, similar to the one for the use of carryforward tax

losses.

8. Incentive to strengthen net equity of Spanish

entities: Tax deductible “capitalization reserve”

In order to stimulate the strengthening of the net equity

of Spanish entities by keeping retained earnings

Spain’s 2015 Tax Reform approved: What foreign investors and M&A players should know 9

undistributed, the New CIT Law introduces a so-called

tax deductible “capitalization reserve”.

Basically this “capitalization reserve” enables a tax

deduction in the company’s annual taxable income

amounting to up to 10% of the increase in its net equity

during the year (that is, comparing the net equity at year

end (excluding profits of the year), with the net equity at

the beginning of the year (excluding profits of the

previous year), and without taking into account any

shareholder contributions and other specific items). This

tax deduction is capped at 10% of the taxable income of

the year, and any excess can be carried forward for use

in the following two years.

To utilize this tax relief the amount of the net equity

increase would need to be maintained during the

following five years after the tax deduction is applied

(except in the case of accounting losses), and the

company should recognize a specific reserve in its

statutory accounts for the amount of the tax deduction

(this capitalization reserve cannot be distributed during

the following five years, except in certain situations).

In the case of a tax group, the tax deduction of the

capitalization reserve would need to be calculated on a

tax group basis, although the accounting reserve can

be recognized by any of the tax group’s entities.

9. Tax neutrality regime applicable to mergers and

demergers: Relevant amendments

9.1 Scope for tax neutral partial demergers is

extended

The New CIT Law expands the scope of the definition

of partial demerger (escisión parcial) that can benefit

from tax neutrality. Currently, when the transferring

entity transfers a business unit in a partial demerger, in

order to benefit from tax neutrality it should keep

another business unit (different from a shareholding).

Now, the New CIT Law allows the application of the tax

neutrality when the transferring entity keeps a

controlling stake in a subsidiary.

9.2 Demerger/contribution of business units can

bring carryforward tax losses generated by the

business unit

Also, the New CIT Law allows the transfer of

carryforward tax losses to the acquiring entity together

with the business unit transferred, even if the

transferring entity is not extinguished (the existing

position of the Spanish Tax Authorities is that

carryforward tax losses can only be transferred when

the transferring entity is extinguished).

9.3 Merger goodwill no longer tax deductible

The New CIT Law provides that goodwill and other

intangibles arising as a consequence of a merger

following a share deal shall no longer be tax deductible

if the share deal has been closed in 2015 onwards. The

New CIT Law justifies this tax change arguing that

capital gains incurred by Spanish sellers on the

disposal of shareholdings in Spanish entities shall no

longer be taxable, and thus there is no double taxation

to be mitigated.

However we note that there would still be double

taxation when the seller is a Spanish individual, the

selling Spanish entity did not meet the participation

exemption requirements, or a non-Spanish resident

entity or individual is taxed in Spain on such gain in

application of the relevant tax treaty with Spain.

9.4 Challenge of tax neutrality no longer triggers

“tax charge” of unrealized gains

Under current tax legislation, if the Spanish Tax

Authorities challenge the application of the tax neutrality

regime on the basis that the merger, demerger or

exchange of shares have not been carried out for valid

business reasons, but mainly to obtain a tax advantage,

the consequence of this tax assessment is not only the

rejection of the tax advantage obtained, but also the

taxation of the unrealized gains of the dissolved entity

(what is colloquially called the “tax charge of the dead

entity” or “plusvalía de la muerta“).

Now, the New CIT Law expressly provides that the Tax

Authorities can only regularize the tax advantage

unduly taken, but cannot claim the tax charge on the

unrealized gains of the dissolved entity.

This is a substantial change to be taken into account

when analysing the pros and cons of undertaking a

corporate reorganization (that is, now, many

reorganizations cannot be undertaken without an

advanced binding ruling from the Tax Authorities,

because the risk of the “tax charge of the dead entity” is

not assumable).

10. Tax grouping regime: Main amendments

10.1 Changes in the perimeter of the CIT tax group

Spanish sister entities with a non-Spanish parent (and

Spanish subs indirectly owned) can now form a tax

group

The New CIT Law, in application of EU doctrine, now

allows Spanish subsidiaries with a common non-

Spanish parent (or Basque parent) to form a Spanish

10 Spain’s 2015 Tax Reform approved: What foreign investors and M&A players should know

tax group, and also to include in the tax group those

Spanish subsidiaries (or permanent establishments) in

which the shareholding is held through a non-Spanish

(or Basque) holding company.

We note that, if the tax group regime is elected, all the

Spanish direct or indirect subsidiaries of the ultimate

non-Spanish parent should be included in the same tax

group. This means that multinational groups with

several tax groups in Spain (because each Spanish

division or subgroup is held by a different non-Spanish

holding company) may be obliged to form a single

Spanish tax group if they are controlled ultimately by

the same parent10.

Parent should now have majority of voting rights

Also, we note that, in addition to the current ≥75%

shareholding requirement that the parent entity should

hold, directly or indirectly, in the share capital of the

Spanish subsidiary (reduced to 70% if the subsidiary is

a listed entity), now the New CIT Law requires that the

parent company also should have the majority of the

voting rights in the subsidiary (in the past it was not

unusual to have structures with different classes of

shares to keep the subsidiary within the tax group even

if the majority of the voting rights have been transferred

to a third party).

10.2 No “de-grouping tax charges” if the former tax

group is included in a new group

With the existing legislation, when an existing tax group

is broken because it joins a new tax group, the existing

tax group should recapture the previous tax

adjustments for profits/losses derived from intra-group

transactions, and should allocate the carryforward tax

losses and other tax credits generated by the tax group

proportionally to each of the group entities that

generated these tax losses, which means that those

carryforward tax losses and credits could only be used

by those entities on a standalone basis, against its own

taxable income (that is, we refer to the above as the

“de-grouping” tax charges).

This situation is fairly common when a non-Spanish

investor acquires a Spanish group through a Spanish

BidCo/SPV, which becomes the parent entity of a new

Spanish tax group and breaks the existing Target’s tax

group.

Now, the New CIT Law provides that the inclusion of an

existing tax group into another tax group, as a

consequence of the existing parent entity becoming a

10 The New CIT Law defers this situation to year 2016, in order to give

more time to adapt to this change.

subsidiary of another parent, or being merged into an

entity of other tax group, would not trigger the degrouping

tax charges (that is, carryforward tax losses

and credits can be used by the entities of the former tax

group as if they were taxed as a “subgroup” of the new

tax group).

Also, we note that the New CIT Law provides that,

when a subsidiary leaves the tax group and this

subsidiary has generated a profit or loss in an intragroup

transaction that was eliminated from the tax

group’s consolidated taxable income, it should be the

subsidiary, and not the tax group (as happens today),

who should recognize the recapture of the tax

adjustment in its individual taxable income in the fiscal

year when it leaves the tax group. This would be

particularly relevant in the tax due diligence of a tax

group’s subsidiary, as the de-grouping tax charges

could be claimed to the acquired subsidiary (and no

longer to the tax group).

Finally, the New CIT law clarifies in a transitional

provision that the recapture of an eliminated intragroup

capital gain derived from the transfer of shares could

benefit from the participation exemption regime

provided in the New CIT Act (even if the participation

exemption was not applicable when the capital gain

was eliminated from the tax group’s taxable base).

10.3 Changes in the requirements to form a VAT

Group

The Tax Reform amends several provisions of Spanish

VAT Law, including some provisions related to Spanish

VAT Groups:

a) It is clarified that a pure holding company can be the

parent entity of a VAT Group, even if it is not

deemed a taxable person for VAT purposes, and

b) The parent entity should have a participation of more

than 50% of the share capital or voting rights of the

subsidiaries in order to form a VAT Group (currently

a participation of 50% in the capital is sufficient).

This new requirement shall enter into force as of 1

January 2016 for existing VAT Groups.

11. Tax depreciation of intangibles is reviewed

Transitional regime in 2015

During 2015, as a transitional measure, the New CIT

Law provides that the transitional tax regime currently

applicable in 2014 shall be extended, which implies that

goodwill and other intangibles with indefinite useful life,

either arising in an asset deal or as a consequence of a

merger after a share deal, can be amortized for tax

purposes (even in the absence of accounting

Spain’s 2015 Tax Reform approved: What foreign investors and M&A players should know 11

impairment) at a maximum annual rate of 1% and 2%

respectively.

Regime in 2016 onwards

However, the New CIT Law provides that in 2016

onwards both goodwill and other intangibles with

indefinite useful life can be amortized for tax purposes

at a maximum annual rate of 5%, even if the seller

and the purchaser belong to the same accounting group

(the New CIT Law clarifies that this tax regime shall not

apply to intangibles acquired before 1 January 2015

when the seller and the purchaser belonged to the

same accounting group).

Intangibles with definite useful life can be amortized

over the useful life of the intangible.

Restrictions to goodwill and other intangibles arising in

mergers after a share deal

As anticipated, the New CIT Law provides that goodwill

and other intangibles arising as a consequence of a

merger following a share deal shall no longer be tax

deductible if the share deal has been closed in 2015

onwards. The New CIT Law justifies this tax change

arguing that capital gains incurred by Spanish sellers on

the disposal of Spanish shareholdings shall no longer

be taxable, and thus there is no double taxation to be

mitigated. However we note that there would still be

double taxation when the seller is a Spanish individual,

or a Spanish entity failing to meet the participation

exemption requirements, or a non-Spanish entity or

individual who is taxed in Spain on such gain in

application of the relevant tax treaty.

12. Assets’ accounting impairments non-tax

deductible (until loss actually incurred)

As above mentioned, in 2013 the Spanish CIT Law was

amended to prevent the tax deductibility of losses on

impairments of shareholdings.

Now, the New CIT Law extends this restriction to

accounting impairments or unrealized losses of

tangible/intangible non-current assets and debt

instruments, which shall not be tax deductible until the

losses are actually incurred, as a result of amortization,

disposal (to a third party outside the group) or removal

of the assets from the balance sheet. Bad debt

provisions (subject to certain requirements) and

accounting impairment of inventories are still tax

deductible.

Also, we note that the tax loss generated as a

consequence of the disposal of the tangible

/intangible non-current asset or debt instrument to

another entity (Spanish or not) of the same accounting

group, shall not be tax deductible until such assets are

removed from the balance sheet, transferred to a third

party outside of the group, or when the transferor or

acquirer leaves the group or during their useful life if the

assets are amortized for tax purposes.

13. Amendment to transfer pricing rules

The New CIT Law has introduced some changes to

transfer pricing rules, which mainly refer to:

a) Change in the definition of “related parties”: As from

1 January 2015 a shareholder shall only be

regarded as a related party to the participated entity

when it holds a shareholding of at least 25% (now

the threshold is 5%, and 1% when the participated

entity is listed). Other situations have been removed

from the definition of related parties (for example,

two shareholders investing in a JV company, when

one of them controls the JV, now shall not be

deemed to be related parties)

b) The secondary transfer pricing adjustment shall not

be applied if there is a repatriation of funds (i.e.

payment of funds so that the accounts of the parties

involved are in line with the economic intent of the

primary transfer pricing adjustment), and

c) Advance pricing agreements (APAs) can have

effects in previous years, except if time barred.

14. Tax credits: Some are abolished, other are

maintained

The New CIT Law abolishes the reinvestment tax

relief (which can reduce the effective CIT rate of a

capital gain from 30% to 18%, if certain requirements

are met) and the environmental tax credit, but it keeps

the tax incentives for intangibles (that is, the tax

credit for research & development & innovation

activities, and the patent box regime).

15. Changes with impact in real estate transactions

The Tax Reform includes some changes that could be

relevant for an investor in real estate:

a) The Tax Reform eliminates, when calculating the

capital gain obtained by a Spanish entity or

individual in the transfer of real estate assets, the

inflation adjustment coefficients (applicable

depending on the acquisition date of the property) to

mitigate the deemed impact of inflation. This

12 Spain’s 2015 Tax Reform approved: What foreign investors and M&A players should know

amendment would result in higher taxable gains for

the Spanish sellers (or a lower tax loss)

b) In order not to be regarded as “passive income” for

certain tax purposes (that is, application of

participation exemption, CFC rules), when a Spanish

investor invests in rental property outside Spain it

is essential that the lease of real estate qualifies as

a “business activity” for tax purposes. In this

regard:

i. The New CIT Law still requires a full-time

employee with a labor contract to be assigned to

the lease activity in order to qualify as a business

activity, but has eliminated the office space

requirement, and

ii. Moreover, what is more relevant, the New CIT

Law states that in the case of a group of

companies, this requirement should be met at a

group level, as opposed to at a “single-entity”

level. This change would now allow Spanish

entities to invest in real estate assets outside

Spain through separate SPVs, and benefit from

participation exemption on dividends and gains

derived from these SPVs, without the need to

have a full-time employee and office space in

each of the SPVs.

c) The VAT exemption on second-supplies of real

estate assets can now be waived even if the

purchaser does not have the right to deduct 100% of

the input VAT borne. This would allow mitigating the

Transfer Tax cost when the purchaser applies the

pro rata VAT rule because the real estate asset is

partially used for activities that are exempt from

VAT, and

d) The Tax Reform also includes some minor

amendments to the tax regime applicable to

SOCIMIs (Spanish REITs): Now (i) dividends

distributed to a SOCIMI shall not be subject to

withholding tax at source, and (ii) SOCIMI’s nonresident

investors with a shareholding of less than

5% in the SOCIMI can benefit from the capital gains

exemption applicable to transfers in listed shares

(provided that the investor is resident in a jurisdiction

with a tax treaty signed with Spain including an

exchange of information clause).

16. Changes to taxation of dividends and capital

gains obtained by individuals

The Tax Reform also amends the Spanish PIT Law,

and includes several changes to the taxation of

dividends and capital gains obtained by Spanish

residual individuals. The most significant are the

following:

a) Tax rates applicable to dividends, interest and

capital gains are reduced from 21%-27% (the top

rate applies to income/gains above 24,000) to

20%-24% in 2015 and to 19%-23% in 2016 (with

the Tax Reform the top rates apply to income/gains

above 50,000)

b) As anticipated, the Tax Reform eliminates, when

calculating the capital gain obtained by a Spanish

individual in the transfer of real estate assets, the

inflation adjustment coefficients to mitigate the

deemed impact of inflation

c) Existing Spanish PIT Law provides a transitional

regime for the taxation of capital gains derived from

the transfer of assets or rights acquired before

year 1994, which basically reduces the taxable gain

allocated proportionally to the part of the holding

period until year 2006. The Tax Reform

substantially amends this transitional tax

regime, which on transfers made from 1 January

2015 onwards can apply up to only an aggregated

transfer value of 400,000 (except in the case of

gains derived from listed shares and participations in

collective investment schemes, which can benefit

from the transitional tax regime up to the market

price they had for Wealth Tax purposes in year

2005). This amendment may imply that taxable

gains on the sale of non-listed shares or real estate

assets acquired before year 1994 could be

substantially higher if sold from 1 January 2015

onwards

d) Currently, capital gains generated in less than one

year are taxed at the progressive tax rates. Now with

the Tax Reform any capital gain shall be taxable at

the flat tax rates (19%-23% in 2016, 20%-24% in

2015)

e) Gains derived from the transfer of pre-emptive

rights on listed shares shall now be taxable

(currently the sale proceeds reduce the tax base

cost in the shares, implying that the taxable gain is

deferred to the sale of the shares). This amendment

shall come into force as of 1 January 2017

f) Distributions paid out of share premium or a

share capital reduction of non-listed shares shall

now be taxed as “dividends”, up to the amount of the

positive difference between the net equity of the

distributing entity (proportional to the shareholding

held, and excluding non-distributable legal reserves)

and the tax base cost of the shareholding. The

excess over this limit shall reduce the tax base cost

in the shares. Currently such distributions first

reduce the tax base cost, and the excess is taxable,

so in practice this change would imply an

anticipation of taxes (in fact this amendment

prevents existing tax deferral schemes when the

Spain’s 2015 Tax Reform approved: What foreign investors and M&A players should know 13

company making the distribution has generated

retained earnings during the holding period of the

individual shareholder), and

g) The Tax Reform introduces an “exit tax” when a

Spanish individual that has been resident in Spain

for at least 10 years in the last 15 years transfers its

tax residence out of Spain and has unrealized gains

on shares. Specifically, the Spanish individual

should pay capital gains tax on the difference

between the fair value of the shares and their tax

base cost, even if the shares are not alienated, if

certain requirements are met (for example, fair value

of the shares exceeds 4 million, or the

shareholding is >25% and the fair value of the

shares is > 1 million). It is possible to suspend the

payment of this exit tax in certain cases, and to even

mitigate this exit tax if the Spanish individual moves

back its tax residency to Spain without having

transferred the shares.

This “exit tax” targets the potential tax planning of

Spanish individuals planning to sell their

shareholdings, preventing the transfer of their tax

residency in order to sell the shares when they are

non-Spanish residents and can benefit from tax

treaty exemptions.

17. Executives’ compensation schemes: Impact of

the Tax Reform

17.1 Reduction in marginal rates for salary income

Salary income is taxed at progressive rates. Current

marginal tax rate is 52% in the State, plus the regional

surcharge (which increases the marginal rate up to 56%

in some regions).

The Tax Reform reduces the marginal rate to 47% in

2015 and to 45% in 2016. However, the impact of this

reduction in the marginal rate should be analyzed on a

case by case basis, because with the Tax Reform the

marginal rate applies to income from 60,000 onwards,

whereas in the current PIT Law the top marginal rate

applies to income exceeding 300,000 (i.e. income

between 60,000 and 300,000 is subject to

progressive rates between 47% and 51%).

17.2 Bonus payments generated over more than

two years are taxed with a 30% reduction

Under existing tax legislation, bonus payments

generated over a period of more than two years can be

included in the PIT taxable base with a reduction of

40% of its gross amount, provided that these bonus

payments are not obtained on a periodical or ongoing

basis. There are special rules if the bonus is paid in

instalments, and the 40% reduction applies up to a

maximum annual amount of 300,000 (except in the

case of income derived from the exercise of stock

options, where this cap is substantially lower).

The Tax Reform keeps this tax reduction for salary

income generated over more than two years, and the

same limit of 300,000, but includes the following

amendments:

The reduction percentage is reduced from 40% to

30%

The payment should be made in a single year (not in

installments)

The tax reduction shall not apply if the executive has

received in the previous five years another bonus

payment which has benefited from this reduction

(dismissal severance payments are excluded for this

purpose), and

The tax reduction applicable to income from the

exercise of stock options is subject to the same

300,000 cap.

The Tax Reform includes transitional provisions in the

case of bonuses agreed before 1 January 2015 to be

paid in instalments as from such date, and for stock

options granted before 1 January 2015.

17.3 Income tax incentive for expatriates (the

formerly-called “Beckham” law)

Under existing tax legislation, expatriates coming to

Spain and becoming Spanish tax residents can elect to

be taxed as a non-Spanish resident in the year of arrival

and for the following five fiscal years, which means that

they will only be taxed on the Spanish-source income

(and not on their worldwide income) at a flat 24.75% tax

rate, rather than at the progressive tax rates applicable

to Spanish tax residents (current marginal tax rate

varies from 52% to 56%, depending on the Spanish

region).

This tax incentive is subject to certain conditions, and is

applicable only when the salary does not exceed

600,000 annually.

The Tax Reform keeps this tax incentive but includes

some improvements:

Expatriates with salary income exceeding 600,000

annually can now apply this incentive. However, the

flat rate (24%) would only apply to the first 600,000,

and the excess would be subject to the marginal rate

applicable to residents (47% in 2015, 45% in 2016)

14 Spain’s 2015 Tax Reform approved: What foreign investors and M&A players should know

The tax incentive is also applicable to directors in a

Spanish company, when they do not have a

shareholding in the Spanish company or the

shareholding does not reach 25%, and

It is no longer required that the work is effectively

carried on in Spanish territory and provided to a

Spanish entity or permanent establishment.

On the other hand, we note that professional sportsmen

have been expressly excluded from this incentive.

17.4 Limit to the tax exemption on severance

payments

Currently, severance payments on dismissal are tax

exempt up to the minimum obligatory amounts

established in Spanish employment law.

However, with the Tax Reform the exemption would

only apply up to an amount of 180,000. The excess

could benefit from the 30% tax reduction for income

generated over a period of more than two years,

subject to the 300,000 cap (in this case the reduction

applies even if paid in instalments, subject to certain

requirements).

18. Changes to taxation of non-residents

18.1 New exemption for capital gains derived from

(non-real estate) Spanish shares

EU resident corporates obtaining capital gains from

Spanish shares, even if not listed, shall now be tax

exempt in Spain, pursuant to a domestic exemption, if

the requirements for the Spanish participation

exemption are met (see above). However this

exemption shall not apply when the assets of the

Spanish company consist mainly, directly or indirectly,

of immovable property situated in Spain.

We note that, until 31 December 2014, the domestic

exemption does not cover capital gains of non-listed

Spanish shares when the EU shareholder has owned

25% of the share capital or equity of the Spanish

company in the 12-month period preceding the sale.

This would benefit EU shareholders that are resident in

a jurisdiction with a tax treaty with Spain which allows

Spain to tax capital gains from substantial

shareholdings (e.g. Spain/France tax treaty).

18.2 Shareholding threshold for dividend

withholding tax exemption is relaxed

With the Tax Reform the dividend withholding tax

exemption provided by the Spanish provisions

implementing the EU Parent/Subsidiary Directive would

apply even if the EU parent has a shareholding in the

Spanish subsidiary below the minimum 5% threshold,

provided that the EU shareholder has an acquisition

value higher than 20 million.

This would allow foreign investors investing in Spanish

listed entities to benefit from the withholding tax

exemption on dividends even if they do not reach the

minimum 5% shareholding threshold.

18.3 Reduction of withholding tax rates

Existing standard 21% withholding tax rate applicable to

dividends, interest and capital gains shall be reduced to

20% in 2015 and to 19% in 2016 (without prejudice to

applicable domestic and tax treaty exemptions and

reduced rates).

Existing standard 24.75% tax rate on other types of

income shall be reduced to 20% in 2015 and to 19% in

2016 for taxpayers who are resident in the European

Economic Area and to 24% in the rest of cases.

18.4 New rule for distributions paid out of share

premium or share capital reductions

The Tax Reform provides that distributions paid out of

share premium or a share capital reduction of non-listed

shares shall now be taxed, up to the amount of the

positive difference between the net equity of the

distributing entity (proportional to the shareholding held,

and excluding non-distributable legal reserves) and the

tax base cost of the shareholding. The excess over this

limit shall reduce the tax base cost in the shares.

We note that currently such distributions first reduce the

tax base cost, and the excess is taxable, so in practice

this change shall imply an anticipation of taxes, unless

a withholding tax exemption is applicable under a tax

treaty (in fact this amendment prevents existing tax

deferral schemes when the company making the

distribution has generated retained earnings during the

holding period of the non-resident shareholder).

18.5 Changes to Wealth Tax and Inheritance and

Gift Tax to adapt to EU Law

The Tax Reform also amends certain provisions of the

Spanish Wealth Tax and Inheritance and Gift Tax

applicable to non-resident individuals, in order to make

them compatible with EU Law. Basically, non-resident

individuals that are tax resident in a EU or EEA member

State would now be entitled to apply the tax reliefs

approved by the Autonomous Region where the assets

or rights concerned are located (there are different

“connection points” depending on the taxable event),

instead of the State legislation, which is normally more

burdensome.

Spain’s 2015 Tax Reform approved: What foreign investors and M&A players should know 15

19. Other recent and expected changes with an

impact on M&A transactions

19.1 Implementation of AIFMD may restrict cash

distributions to PE Funds

The implementation in Spain of the EU Directive on

Alternative Investment Fund Managers (AIFMD) could

have an impact on the ability to make distributions from

the Spanish Target entities to the Spanish BidCo in

order to pay the cash interest on the third party debt or

to push down acquisition debt to the Target. This would

affect Spanish BidCos owned by Spanish private equity

funds and other alternative investment funds, and also

to non-EU Funds registered in Spain.

Specifically, the recently approved Law 22/2014, of 12

November, implementing AIFMD provides that, within

the 24 months after taking control of a non-listed target

entity, the target entity cannot make distributions out of

capital reductions or share premium under certain

circumstances.

We note that this may damage the possibility to

distribute cash to BidCo to repay cash interest or

principal on acquisition debt, and also debt push down

strategies when BidCo has funded the acquisition with

bridge loans and pretends to refinance or repay this

bridge loan with a debt push down to Target.

19.2 Non-listed Spanish groups can issue debt

without withholding tax

Recently enacted Law 10/2014 has included a very

relevant change affecting the scope of the issuers who

can benefit from the special tax regime applicable to

preference shares and certain debt instruments, which

provides for a withholding tax exemption for nonresident

investors, in the same terms as income from

Spanish public debt.

So far, only credit institutions or listed entities (directly

or through fully-owned Spanish or EU-resident special

purpose vehicles, except if located in a tax-haven

territory) could issue preference shares or debt

instruments subject to the special tax regime, which is

now extended to debt instruments issued by any nonlisted

Spanish resident company or public-law

companies (“entidades públicas empresariales“),

directly or through a fully-controlled EU-resident special

purpose vehicle (except if located in a tax haven

territory), provided that the debt instrument meets the

requirements described in this first additional provision

of Law 10/2014 (for example, they should be listed in

regulated markets, multilateral trading facilities, or in

other organized markets).