The tax will not be payable by:

(i) foreign governments and public institutions and international organizations;

(ii) entities that are residents prior to 4 August 1990 of countries that have signed treaties to avoid double taxation with Spain, which include an exchange of information clause, with regard to property owned by them before that date;

(iii) entities carrying out in Spain, in a continuous or habitual manner, economic projects or activities that can be distinguished from the exploitation of properties which are subject to the special tax;

(iv) those entities that prove to the satisfaction of the Tax Authorities the real origin of the resources invested in Spain and who the direct or indirect holders of the share capital are, and further undertake to notify any change and the reasons for it to the relevant Authorities. There is a special procedure which includes the filing of a declaration at the Tax Department. The declaration may be filed by the Company's legal representative in Spain.


In addition to the taxation of property in Spain which has been dealt with in the foregoing section, this section refers to the taxation of Spanish companies and of foreign companies operating in Spain whether by means of a permanent establishment or not, and of individuals with and without residence in Spain (and in the latter case operating in Spain by means of a permanent establishment or not).

5.1 Corporate Taxation

The main taxes to which a Spanish company is subject are the following:

5.1.1 Upon incorporation of the company

a) Tax on Capital Transfers and Documented Juridical Acts (Impuesto de Transmisiones Patrimoniales y Actos Jurdicos Documentados) which is levied once at the current rate of 1% on the subscribed capital upon the incorporation of the company. This tax is also payable on any capital increases. As a general rule, subsequent transfers of shares are tax exempt. Under certain circumstances the transfer of shares in companies owning immovable property are subject to Transfer Tax at the rate of 6%(51).

b) Opening Licence (Licencia de Apertura or permission of the City Council to open up business premises) which is paid once to the City Council.

5.1.2 On the Activities of the company

a) Economic Activities Tax (Impuesto sobre Actividades Economicas), effective from January 1st 1992 (replaced the former Fiscal Licence or Licencia Fiscal), consisting of a fixed quota paid annually, the amount of which is determined by the type of commercial or industrial activity carried out by the company. The minimum payable quota is 15,000 pesetas per year approximately. Regional governments may impose a surcharge on this tax which may not exceed 40%.

b) Value Added Tax (Impuesto sobre el Valor Aladido), levied on all contracts or habitual trade transactions made by the company, at three different rates: 4%, 7% and 16% (standard rate).

5.1.3 On Company profits Companies domiciled in Spain

Corporate Income Tax (CIT) is levied on the worldwide net income of all companies having their registered offices in Spain at the current flat general rate of 35%. There are special CIT rates: e.g., Insurance Mutual Associations, 26%; Cooperative Societies, 20%; Collective Investment Institutions (investment funds, investment companies, etc.), 1%.

All expenses required for generating revenues are in principle deductible subject to the limits envisaged in the law. A significant innovation has been the introduction of the debt to equity ratio which limits the deductibility of interest paid on loans given to Spanish companies by any non-resident related company as defined by the law (the current ratio which applies beginning on fiscal 1992 has been set at 2 to 1). Losses may be carried forward and offset against future profits, the limit being five years. Nevertheless, and under certain circumstances, fiscal losses incurred on new business activities which have been carried out between March 3rd, 1993 and December 31st, 1994, can be offset with no time limit.

General and special depreciation rates, investment incentives and tax credits are available. For fiscal 1994 and 1995(52) new assets can be freely depreciated, provided that a certain level of employment is created and other conditions are met. Foreign companies operating through a permanent establishment in Spain:

A Company is deemed to have a permanent establishment in Spain whenever it has in the Spanish territory headquarters, branches, offices, factories, workshops, installations, warehouses, shops or other establishments; construction, installation or assembly projects lasting for more than 12 months, agencies or representative offices which are authorised to contract in its name, or mines, quarries, gas or oil wells, farming, cattle and timber businesses or any other place intended for extraction of natural resources, or if it performs professional or artistic activities or has other places of business where it performs its activity in whole or in part.

Consequently, a company would be receiving income by means of a permanent establishment in Spain if it fell in any of the situations listed above.

The foregoing concept of permanent establishment has been laid down by Spanish tax law. If the particular case fell within the scope of one of the many treaties signed by Spain to avoid double taxation, the concept "permanent establishment" as laid down in the applicable treaty would prevail. Generally, the concepts are very similar.

These Companies are taxed on their Spanish source income only at the rate of 35%. This will include any foreign source income that could be ascribed to the permanent establishment. They are required to keep accounting books. Losses may also be carried forward and offset against future profits, the limit being five years. Investment incentives and tax credits are also available.

Beginning on fiscal 1992, in addition to CIT at the rate of 35% on income and capital gains, the actual transfer of profits outside Spain is subject to an additional 25% withholding tax. This affects in particular branches of foreign companies which formerly were only subject to CIT at the flat rate of 35% (53). The additional 25% withholding tax does not apply to transfers made by permanent establishments (including branches) belonging to entities domiciled in the European Economic Community (54) . Further, the additional 25% withholding tax would not apply to income transferred by permanent establishments (including branches) belonging to entities domiciled in countries with whom Spain has signed double taxation conventions which do not envisage the possibility of taxing these transfers. This opinion may not be shared necessarily by the Spanish tax authorities.

For CIT purposes, the representatives of the permanent establishment in Spain are those appearing in the Commercial Register or those authorised to bind the permanent establishment. Should these persons live outside Spain, the non-resident entity is required to appoint representatives for CIT purposes in Spain. The appointment must be notified to the Tax Department within two months following the date of the appointment. Non-compliance with these obligations may result in fines being imposed ranging from 25,000 to 2,000,000 pesetas(55). Foreign companies not operating through a permanent establishment in Spain:

CIT is also levied on all Spanish source income received by foreign companies without a permanent establishment in the country. Applicable tax rates to income obtained without a permanent establishment are:
(i) The general rate applicable to dividends, interest, commissions, etc. is 25%; in the case of services, technical assistance, assembly and installation projects related to engineering contracts, and in general the carrying out of business in Spain without a permanent establishment, the 25% rate will be applied to the difference between the gross income and certain deductible expenses (personnel and materials employed or incorporated in construction or assembly);

Dividends declared by Spanish companies to their parent companies are not subject to withholding taxes provided that, among other requirements, the parent company is domiciled in any of the EC countries, the parent company holds at least 25% of the share capital of the Spanish company declaring the dividend and the shares have been held for at least two uninterrupted years(56)

(ii) the rate applicable to fees received by the parent/controlling company for back-up management services contractually regulated is 14%; the same rate applies to participations in general expenses which for these purposes are regarded as income of the parent company;

(iii) capital gains (so called increases in wealth) are subject to a flat 35% rate.

Companies are not allowed to update the acquisition cost by the application of multipliers to the original price as individuals are. They are not entitled either to certain reductions of the capital gains as individuals are from fiscal 1992 and thereafter.

From fiscal 1992, the buyers of property sold by non-resident entities in Spain are required to withhold and turn over to the Treasury the 10% of the purchase price on account of the 35% capital gains tax. This will not apply in the case of sales of property owned by individuals and that was purchased more than 20 years before the actual transfer provided no improvements have been made to it. The property will be subject to a charge or lien in case the 10% advance is not turned over to the Treasury.

(51) Article 108 Stock Exchange Act.
(52) Royal Decree-Law 7/1994, of June 20, and Royal Decree-Law 2/1995, of February 17.
(53) This important change was introduced by Law 18/1991 of June 6th, published on June 7th 1991.
(54) Article 22 of Law 29/1991 of December 16th.
(55) Non-resident entities in Spain having tax obligations at that time were given until December 31st. 1991 to make such appointments (First Transitory Provision of Law 18/1991).
(56) Article 18 of Law 29/1991 dated December 16th which transposed into Spanish law the EC Parent and Subsidiaries Directive (90/435/EEC).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstance.

For further information contact Mr. Jorge Angell, L. C. Rodrigo Abogados, Madrid (Spain). Fax: 00 341 576 6716.