On July 9, 2021, the Spanish Official Gazette (Boletín Oficial del Estado – BOE) published a major change in Spanish law 11/2021 in relation to measures to prevent and combat tax fraud.
The law transposes Council Directive (EU) 2016/1164, laying down rules against tax avoidance practices that directly affect the functioning of the internal market, amending various tax rules and matters concerning gambling regulation. The law entails a substantial change for Spanish open-ended investment companies with variable capital (SICAVs).
Under current Spanish tax legislation, certain Spanish Undertakings for Collective Investments in Transferable Securities (UCITS) (SICAVs included) are taxed at a reduced Corporate Income Tax (CIT) rate of 1% in accordance with article 29.4.a) of the Spanish law 27/2014, of November 27, on CIT (Ley del Impuesto sobre Sociedades). This reduced CIT rate approximates an exemption, provided that certain requirements are met. As for SICAVs, due to the collective nature of the vehicle, and hence the applicability of the UCITS tax regime, the requirement is deemed to be met if the number of shareholders does not fall below 100 at any point in time.
Ultimately, Spanish SICAVs meeting the minimum shareholder threshold of 100 shareholders, previously benefited from a 1% CIT rate rather than the full rate of 25%.
Following the above mentioned change in law, it is now essential for Spanish SICAVs to meet the following cumulative requirements in addition to the 100 shareholders rule, effective January 1, 2022, in order to continue benefiting from the 1% reduced CIT rate:
- Each shareholder is required to subscribe for shares with a net asset value equal to or greater than EUR 2,500 (USD 2,700) per share, or EUR 12,500 per share in the case of compartment SICAVs.
- The shareholder number and subscription value must be met for at least three-quarters of the tax period (usually one calendar year).
The Spanish Tax Authorities (Dirección General de los Tributos, DGT) have been afforded the power to verify compliance with the updated rules under the new Anti-Fraud Law; a power that until the date of entry into force of the amendment to Spanish law was held by the Spanish Supervisory Authority (Comisión Nacional del Mercado de Valores, CNMV).
Historically, Spanish SICAVs have been used in managing large estates. By doing so, these estates concentrated a high percentage of the shareholding in one or several persons, while the rest of the shareholding was insignificant and distributed among a few shareholders.
The change in legislation aims to ensure that only UCITS benefit from the reduced rate by imposing the requirement that solely shareholders with a certain stake in a company are considered a contribution towards the minimum number required to maintain the collective nature of SICAVs. Non-UCITS, such as hedge fund companies, master feeder structures or Exchanged Traded funds (ETFs) are exempt from the new regulations.
A significant point to consider is where Spanish SICAVs are unable to meet the new conditions, a concession has been made that they may elect to be dissolved and liquidated during 2022 without additional tax impact (provided the liquidation is completed within 6 months).
As a result of the change in law, various Spanish SICAVs have relocated to other jurisdictions due to the unknown potential tax changes arising in Spain, and also to secure their legal and fiscal structure. Luxembourg has been the most prominent destination due to its advantageous tax regime.
How WTax can help you monetize tax credits
Most funds have implemented a fast-track strategy to either fully liquidate a SICAV or have a SICAV acquire units of a Collective Investment Vehicle to transfer the assets to said fund upon dissolution, or upon change of domicile, where Luxembourg currently appears to be the most predominant location.,. However, it is important to consider alternative opportunities to improve a fund’s Net Asset Value (NAV) and shareholder returns as a preliminary step before pursuing any of the above strategies.
We refer to claiming foreign withholding taxes on dividend and interest distributions. While these claims may be complex in nature, refund repayment is often a long wait due to local tax authority dependencies which can also bring about queries issued from the respective foreign tax administrations. WTax provides a service that resolves such challenges and facilitates speedy tax refunds. Through the use of our advanced technology, we are able to quickly and transparently propose the purchase and sale of claim entitlements for those withholding taxes still pending recovery, as well as facilitate the prompt payment in advance that will allow you to close those satisfied foreign tax credit entitlements, while ensuring the fulfillment of fiduciary duty to the underlying investors.
If you are currently considering the regulatory impact of your funds or would like to receive a no-obligation assessment of how you can monetize your portfolio, please contact our local representative office:
WTax, Calle Príncipe de Vergara 112, 1ª planta.28002. Madrid. Spain