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New anti-avoidance measures effective 1 January 2007
Bill on anti-avoidance tax measures. The Spanish Government approved a Bill on anti-avoidance tax measures that will affect various taxes. The Bill is undergoing passage through the Spanish Parliament during these days together with the forthcoming legislation reforming income taxes (please see below).
The most significant proposals are as follows:
- The transfer pricing rules will be modified so as to (i) require the taxpayer to keep the corresponding documentation; (iii) somehow expand on the concept of "related entity"; (iv) amend the regulations on APAs; (iv) confirm the TNM method as an acceptable secondary method; (v) expressly regulate a secondary adjustment; and (vi) a penalty regime.
- Modifications will be made in the nonresident income tax area with respect to residents of countries classed as tax havens who obtain income or hold assets in Spain.
- The rules on transactions with related parties will be defined in a more precise way from a value added tax standpoint.
- New measures will be introduced for transfers of shares in real estate companies in the transfer tax area.
Although earlier versions of the Bill contained other internationally-oriented measures, they have not been included in the final version. However, it cannot be ruled out that they may be introduced in the passage of the Bill through the Spanish Parliament or in the forthcoming legislation reforming corporate income tax.
Tax reform under way
On 10 March 2006, the Government approved the Tax Reform Bill. It has been laid before the Lower House of Parliament for debate. The Law should come into force on 1 January 2007.
The main reforms envisaged are as follows:
a) Personal income tax
- The maximum marginal rate is reduced by two percentage points, to 43 percent, and the scale will have four tax brackets, instead of five.
- All saving-related income will be taxed at a flat rate of 18 percent.
b) Corporate income tax
- The standard corporate income tax rate will gradually be reduced from 35 percent to 30 percent between 2007 and 2011, as will the rate for SMEs, which will fall from 30 percent to 25 percent.
- At the same time, all tax credits (except those relating to domestic and international double taxation) will be progressively phased out until there are almost none as from 2011. In particular, the R&D tax credit will be reduced more slowly than the rest of the tax credits and will be eliminated effective 2012, rather than 2011.
The tax credit for investments to establish companies abroad, which served as an incentive for internationalization applicable to investments in foreign companies that were not tax resident in the European Union, and which consisted of a temporary deduction from the taxpayer's tax base of the amount of the investment made, subject to certain limits, is eliminated effective 1 January 2007.
c) Nonresident income tax
The principal changes in this tax relate to tax rates. A distinction can be drawn between the rates applicable to income and/or gains obtained through a permanent establishment and those applicable to income and/or gains obtained other than through a permanent establishment.
- Income and/or gains obtained through a permanent establishment:
First of all, consistent with the reduction established for corporate income tax, the tax rate applicable to permanent establishments is reduced in the same proportion, namely, one percentage point per year from 2007 through 2011, to leave the rate applicable on or after 1 January 2011 standing at 30%.
Second, the same reduction (one percentage point per year) applies to permanent establishments engaging in oil and gas research and exploitation, which will be taxed at 35% from 2011 onwards (currently 40%)
Lastly, branch profit tax is increased by 3 percentage points to 18% (up from 15% at present).
- Income and/or gains obtained other than through a permanent establishment:
First, the standard tax rate (applicable, inter alia, to royalties, unless the reduced rate of 10% for certain EU payees applies) has been reduced by one percentage point to 24%, thus bringing it into line with the minimum rate applicable to the general component of taxable income for personal income tax purposes.
Second, the tax rate applicable to capital gains obtained by nonresidents has also been reduced to 18% (down from the current 35%), irrespective of their residence or of the type of asset transferred, so that it is also placed on the same footing as the rate applicable to resident individuals.
The third modification is an increase in the tax rate applicable to dividends and interest, which will now be taxed at 18%. It should be emphasised that this is the same tax rate as the rate applying to dividends derived by individuals resident in Spain.
Fourth, the withholding tax on transfers of real estate situated in Spain by nonresidents other than through a permanent establishment has been modified. At present, the purchaser is obliged to withhold and pay over to the tax authorities 5% of the sale price on account of the final tax liability of the nonresident seller; in the Bill this is reduced to only 3%.