Need Spanish CFC rules? Learn more by reading ahead and find out the basics of the Spanish CFC rules...
Spanish CFC rules apply to those companies which are controlled by non-residents. It is part of legislation to control foreign companies operating in Spain. Each foreign company is subject to legislation and must follow conditions set out in these rules.
The company may be controlled in part or individually by a native Spanish person. Such a company is basically entitled to pay a lower rate of taxation than applicable on wholly owned Spanish companies. The difference in taxation rates is approximately 75% less than that applicable on an entity that is owned by a resident in Spain.
Description of Passive Income under Spanish CFC Rules
Basically there are four categories which are considered passive income under the Spanish CFC rules. The first one relates to the income generated from any service which is provided to a Spanish resident who may be either an individual or a corporation or related parties. The second one relates to capital gains which are derived from the sale of financial assets or immovable property.
The third type of income which is considered passive income is revenue generated from interest and dividend. Finally any income generated from selling immovable property and rights thereon is considered passive income under Spanish CFC rules.
Exceptions to The Spanish CFC Rules On Sources of Income
There are certain exceptions with respect to the different origins of income for example the income generated by the company controlled by Spaniards who are nonresidents and the income generated from its subsidiaries.
If the passive income in this case does not exceed the minimum benchmarks as required then the CFC rules does not apply. Furthermore if the prerequisites of the rule are met by the company and its subsidiaries then the rule is not applicable.
From the amendments made to the rule in 2004 there are now provisions to exclude certain companies from the application of this rule. This included the exclusion of European Union resident entities from the rule.
This would apply only if they were not a resident of an area considered a tax haven under Spanish law. The reason for this rule is that the Spanish administration did not want to breach any principle of the European Union treaty. Therefore, in order to comply with the rules the Spanish government introduced this modification in order to prevent anyone from pointing a finger at the Spaniards and stating that the CFC rules were discriminatory towards European Union companies.
Preventing Tax Evasion by Demanding Proof of Activity
Furthermore all the European Union subsidiaries and their affiliates are excluded from the Spanish CFC rules. This ensures that there is a great deal of certainty for any Spanish group interested in investing their resources outside of Spain in order to protection profits generated from their European Union affiliates.
However, recent amendments have minimized this level of certainty. From 2009 it is noted that the Spanish CFC rules are applicable again to only the European Union subsidiaries of Spanish Corporations.
There is a requirement in the case that a Spanish taxpayer must provide substantial proof that their incorporation and any activity conducted by the affiliate has valid economic standing and is a thriving and active business rather than being a silent operation used to siphon out money and avoid taxes.