Fund Taxation Alert 2023-02

For Spanish tax purposes, capital gains derived from shares in Spanish listed companies are generally subject to the application of a 19% tax rate. The Spanish Non-Resident Income Tax Law provides for a domestic exemption for capital gains obtained by non-residents arising from the disposal of listed shares. To benefit from this exemption the beneficiary should be a tax resident either in the European Union or in a jurisdiction in which there is a double tax treaty in force with an exchange of information clause. The access to the exemption for investment funds remains a complex situation: a self-assessment must be done to consider if either the full exemption or the withholding tax application of 1% is possible.

As such, Luxembourg-based funds may be eligible for tax reductions on capital gains realized considering the following situations:

• 1% reduced tax rate: If the non-resident fund is comparable to a resident fund and accepted by the Spanish ax authorities, a tax exemption of 18% is conceivable for the non-resident fund based on EU law. A quarterly declaration submission is required.
• Full tax exemption: Non-resident funds may be eligible for a full exemption on capital gains derived from the transfer of shares made on a Spanish official stock exchange, provided that the fund has no permanent establishment in Spain and is protected under a tax treaty (assuming the application of such tax treaty to the specific fund can be proved under Spanish Tax legislation). This possibility must be analyzed on a case-by-case basis. In principle Luxemburg UCITS SICAVs should be eligible to benefit from this exemption. Even if the exemption is applicable, an annual declaration submission is required.

We recommend that Luxembourg-based funds review their tax compliance when they are investing in listed shares in Spain to avoid any tax leakage, considering that foreign funds must always file a return to the Spanish tax authorities, either quarterly or annually depending on the circumstances.

It is advisable for foreign funds to determine on a case-by-case basis whether they are eligible for the 1% reduced tax rate or the exemption on capital gains derived from Spain.

Failure to file tax returns in Spain can result in penalties, including a penalty of around EUR 200 per return for failing to file a NIL return in the case of a full tax exemption. Additionally, failure to assess capital gains tax when it is payable can result in penalties ranging from 50%-100% of the tax due.