Measures to prevent the loss of foreign investment in Spain

(Press-News.org) The theory holds that one of the best ways to attract foreign capital consists in the adoption of a reduced level of taxes in certain cases, and above all, in the provision of legal certainty. This aim of attracting foreign investment inspired the measures for the the Entidades Tenedoras de Valores Extranjeros (ETVE) or Spanish holding companies, adopted in Spain in the late 1990's and which led to the establishment of these companies in Spain by multinational companies. However, things are changing, according the head of the UC3M Research Group of Taxation and Finance Law, Juan Zornoza Pérez, who pointed out that in the last few years the Spanish Administration is revising the tax situation of these holding entities in order to limit some of their obtained profits by considering that they are committing unfair practices, which could, in fact, hurt the Spanish economy.

The holding companies have capital shares in other entities and the essential advantage that they enjoy in our country, in theory, is that when these entities distribute dividends to the holding companies, the dividends that they obtain from the foreign shareholders, they are tax exempt in Spain. Furthermore, the holding company at the same time distributes profits to non-residents shareholders in Spain, who are also tax-exempt in our country. "By doing this, the holding company income is exempt from taxes in Spain, and this prevents any kind of double imposition of taxes", Zornoza explained, who is Full Professor of Taxation and Finance Law at UC3M.

Administrative policies

In recent years, researchers from this Madrid university have observed that this change does not reflect a legal decision, but rather an Administrative policy. "There are some Administrative Court decisions that manifest the Administration's behavior, always being based on alleged situations of unfair practices", he remarked. In this sense, for example, share buying by the holding companies is almost always financed with credit, which generates expenses that are tax deductible. "In many cases", Zornoza explained, "the Spanish Administration is questioning the deduction of these expenses thereby eliminating part of the tax benefits of the holding companies as they were initially conceived, and generating an enormous level of uncertainty for foreign investors who had decided to use this formula to attract investments to Spain", he concluded.

The main suggestion made by the researchers in this respect is based on the application of the principles of Rule of Law. "This is something obvious, but it is necessary to stress this fact given the lack of understanding from which our Tax Administration suffers and on occasions our Courts as well, when it is actually an international taxation matter. What must not occur within this framework, they point out, is that the legislator establishes a system, by which certain tax benefits are obtained and then the Administration partially or totally eliminates most of all of those benefits by applying unfair practice laws in a very debatable way, and of course, very inadequately so in the international context. "If a legislature wants the interests that are paid when shares are acquired which result in exempt income to be non-deductible then what they have to do is to say so and modify the law, because as long as they do not do that, it is the duty of the Administration to respect it, in accordance with its spirit and within the framework that guarantees the legal certainty of investors", Zornoza declared. "On the contrary", he added, "we shall be witnessing a steady decline in the holding company system as this form of investment leaves Spain, thereby damaging our economy to some extent.".



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