The New Equity Entities in Spanish Corporate Tax Law

The new Spanish Corporate income tax, that will come into force with the so-called “Tax Reform”, includes the concept of “Equity entities” to which attention must be paid.

These are entities that do not develop any economic activity according to the Law. They have the disadvantage of being subject to limitations in the application of certain Corporate tax reliefs. The concept in not new, as it is already ruled in Spanish Net Worth tax regulations. However, the definition in Corporate tax Law has its particular features.

Subject to the text that is finally approved, let’s see which are their main characteristics.

✔ More than half of the assets of these entities is formed by shares or is not affected to any economic activity, as there is not any organization of human or material resources to do so.

Companies engaged in real estate renting activities are deemed to have such organization when they have one full-time employee with labour contract, (the rule does not require any premise).

✔ It is expected that the analysis of the asset’s composition takes into account the average of the company’s quarterly balances, (or of the consolidated group, if the company is a dominating entity).

To compute the asset’s composition, cash or credit rights deriving from the transfer of assets or shares affected shall be excluded, (but limited to those generated in the same fiscal year and the two preceding ones).

Besides, shares granting a 5% interest and owned for a minimum period of one year shall not be taken into account either, providing the appropriate organization to manage the subsidiary exists.

✔ The importance of this concept relies on the fact that certain Corporate tax reliefs are limited, such as the special tax system from Small-sized companies, the Spanish holding companies system, the possibility to offset pending tax losses is limited when their shares are transferred as well as the dividend double tax exemption and they can not be subject to the reduced Corporate income tax rate of 15% applying to newly-formed entities.

It will be, therefore, of major importance to verify whether any company can be qualified as an equity entity and how much it is affected by these limitations.