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Spanish tax

The Spanish private equity industry has been attracting increasing attention amongst European players in recent months, with various large firms opening offices in the country. And, says SJ Berwin, a recent change in the law has made it easier for international private equity fund vehicles to do deals in Spain.

At the beginning of this year, a new law took effect which has important consequences for those doing deals in Spain - and which shows the power of concerted lobbying by the industry. Put simply, the new law improves the Spanish tax treatment of English limited partnerships - and many other international private equity fund vehicles (including German partnerships, French FCPRs and US LLCs) - by confirming that they are tax transparent, and clarifying the operation of the tax regime which applies to them. These changes will (in many cases) eliminate the need for complex tax structuring, saving time and money for investing funds.

It was always assumed that foreign vehicles that were "tax transparent" in their own country would be taxed on a "look through" basis in Spain. But nothing in Spanish law clearly said that: the law only referred to Spanish entities. More importantly, the tax regime in question had always been poorly defined and its application raised a number of important questions.

As a result it was never advisable for a typically structured international private equity fund to invest directly, and most Spanish investments were channelled through an intermediate holding company (usually a Luxembourg-based vehicle). For the same reasons, it was very unusual for a Spanish-based investor in a foreign fund to hold its interest directly: the use of intermediate holding vehicles was also the norm. The additional structuring costs were considerable.

At the beginning of last year the Spanish tax authorities decided to address this problem, and prepared draft regulations for the so-called "income allocation" regime. These clarified the situation for foreign funds investing in Spain (and of Spanish investors in foreign funds). The industry had lobbied to bring this about, and continued to discuss the draft rules with the tax authorities throughout the year.

The result of these efforts is (in part) included in the new law, and the relevant tax regulations now include a detailed (although overly complex) special chapter dedicated to foreign entities. The legal basis for a "look-through" approach for income and capital gains obtained by (and from) tax transparent entities (such as limited partnerships) is now clear, and the regime is clearer. This means that, from a tax point of view, the fund vehicle is ignored and the investment is treated as if it had been made directly by the investor. Greater legal certainty is achieved and, if certain conditions are met, the use of intermediate vehicles can often be avoided.

As usual, the reforms are not perfect and some details have yet to be clarified. But the changes will represent an important improvement in the Spanish regulatory environment for international venture and buyout investors.

This is an extract from a weekly bulletin produced by SJ Berwin providing an update of legal and tax developments relevant to the European private equity community. If you would like to be added to its mailing list please send an e-mail to sjbnetworks@sjberwin.com

Copyright © 2002 SJ Berwin

SJ Berwin is a pan-European law firm with a particular focus on private equity. It has offices in London, Frankfurt, Munich, Berlin, Madrid, Paris and Brussels. If you would like further information on its services to the private equity industry please contact Jonathan Blake or Simon Witney in the London office on 020 7533 2222 or visit our website at www.sjberwin.com