PRINT THIS PAGE Feliz año nuevo (fiscal)17/01/2007. Source: SJ Berwin. Alberto Ruano
It promises to be a Happy New (Tax) Year for private equity investors active in Spain. Not only are investment conditions looking very strong - 2006 was an excellent year for buyouts, following a record breaking 2005 - but the beginning of this year also saw some significant tax changes, many of which will benefit the private equity industry. Perhaps the most significant change is a cut in rates of direct tax, but with a reduction in tax allowances. New rules also re-double efforts to attack and eliminate tax fraud in Spain, while making those strategies more practical in approach.
For Spanish individuals, the maximum marginal income tax rate – charged on amounts over €104,720 – has been cut by 2%, to 43%. All dividends, interest (except from related parties) and capital gains are now generally classed as “savings-related income” and taxed at a flat 18% rate.
The main change here is that, until last year, dividends, interest and short term gains (those generated by assets held for less than a year) were taxed at marginal rates of up to 45%, while longer term capital gains were taxed at 15%. The new rules should generally facilitate an 18% rate for Spanish executives' investments, and for carried interest from private equity funds.
The reform also reduces tax rates for companies. The standard rate falls from 35% to 32.5% for tax periods beginning on or after 1 January 2007, and to 30% from the beginning of 2008. These rates also apply to any business with a permanent establishment in Spain.
The rate for the first €120,202 of taxable income of small and medium-sized enterprises drops from 30% to 25%. These rate reductions are accompanied by a gradual reduction in corporate tax investment credits, including, for example, all R&D allowances, which will be all but eliminated by 2012. Double tax credits remain unchanged.
Consistent with the cuts for Spanish tax residents, the withholding tax rates for non-residents have also been adjusted. For Spanish source income, except income from a permanent establishment in Spain, rates drop from 35% to 18% for capital gains, and increase from 15% to 18% for Spanish source dividends and interest.
In addition, transfer pricing rules both for individuals and corporations, whether Spanish resident or not, are significantly strengthened and new documentation requirements are introduced.
Finally, revised Value Added Tax rules will establish a new VAT Group regime, with a dual objective: first, to allow aggregation of VAT debits and VAT credits within the group; and secondly, to avoid decisions being made within a group for VAT saving reasons. The VAT Group regime will apply from the beginning of 2008.
Fortunately, the reform preserves Spanish tax incentives for the private equity industry and, consequently, Spain will continue to be an attractive fund location. The special regime for Spanish venture capital companies (SCR) and funds (FCR) means that capital gains and dividends realised from qualifying private equity investments in Spain and abroad are effectively tax free.
In addition, other tax regimes that benefit the private equity industry remain unaltered. For example, there is no change to the rules applicable to foreign tax transparent entities, or the Spanish holding company regime (ETVE), which fully exempts both dividends and gains from qualifying investments, as well as dividends or gains received by non-tax haven foreign investors.
It remains possible to write off, for tax purposes, the goodwill attributable to shares in an acquired non-Spanish company, or the goodwill arising on a merger (as well as stepping-up for tax purposes the value of the assets acquired at the time of the merger).
In summary, the reform is nothing but good news for the Spanish private equity market. Not only does it reduce and simplify tax planning for Spanish private equity executives - who will, in many cases, be able to abandon their complex capital gains structures - but it will also lower tax costs for Spanish portfolio companies.
Alberto Ruano
SJ Berwin Madrid office
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 our services to the private equity industry please contact Simon Witney in our London office 020 7533 2222 or visit our website at www.sjberwin.com.
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