Want to learn more about CFC tax in Spain? Read on for facts and info on the CFC tax legislation in Spain and the impact of recent amendments on CFC rules…
The controlled foreign company tax, commonly known as CFC tax is subject to certain specific conditions. The legislation mainly refers to foreign companies that are either controlled or owned by people of Spanish nationality. The ownership could be sole or as a partner. Under the legislation such a business entity will have a CFC tax that is 75% less than the average Spanish tax that has to be paid by local companies.
In order to understand the implication of CFC tax, it is imperative that you understand what kind of income qualifies as passive income. With respect to this particular issue, income that is derived from immovable property or the rights thereon is considered to be passive income. Dividend and interest income also comes under the same category and capital gains that are in some way or the other related to the sale of immovable property as well as financial assets, which also qualifies as passive income. Lastly all income that is derived from services that are supplied to Spanish resident individuals or corporate related parties is another form of passive income.
In order for CFC rules to apply to a certain business entity the amount of passive income that is generated by any of the four examples mentioned above need to be above a certain level. In other words as long as the passive income is below the minimum threshold the CFC rules will not apply.
Certain modifications in the CFC legislation were introduced in 2004. Following this revision these rules cannot be applied to EU resident entities. The reason for introducing this modification was to make the system seem fair as otherwise the Spanish administration would have been labeled as introducing discriminatory laws against EU companies. This could have severe consequences as such an act would be in violation of the EU treaty.
The revision introduced by the Spanish administration excluded EU subsidiaries from the CFC rules. This provided certain entry to Spanish organizations that were investing overseas as they were no longer obliged to include the profits derived by their EU subsidiaries. This was irrespective of their sources of income in the same ruling applied to the Spanish corporate income tax and potential tax optimization schemes.
In 2009 however an amendment in the Spanish quarter income tax has had a profound impact on CFC taxes. The benefits generated by the exclusion have now been undermined and EU subsidiaries are now regulated by the CFC rules are developed with the Spanish tax payer has ample amount of evidence through which he can prove that the incorporation and activity are based upon a valid economic reasons. In other words the Spanish taxpayer has to prove somehow that the income being generated from the EU subsidiaries does not fall under the category of passive income in order for him to avoid CFC taxes in Spain.