Spanish Holding Company: ETVE in Spain
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Spanish Holding Company: ETVE in Spain

ETVE Regime: Entities Holding Foreign Securities in Spain

In 1995, Spain introduced the ETVE regime, standing for “Entidades de Tenencia de Valores Extranjeros,” fundamentally changing the framework regulating holding companies. However, few people are aware of the tax advantages of an ETVE holding company in Spain: this comprehensive guide delves into the intricacies of the International Spanish Holding structure, with a particular focus on the ETVE tax regime, what it is and its advantages.

close up on the hands of two investors discussing forming an etve holding company in spain

What is an ETVE holding company in Spain?

An ETVE, or Entidades de Tenencia de Valores Extranjeros (International Investment Company) is a Spanish resident company specifically designed to act as a holding company for international business ventures.

Established under the 1995 Spanish Corporate Tax Act, ETVEs in Spain serve as a strategic vehicle for investments, particularly in Latin America, thanks to Spain’s extensive double tax treaty network. The ETVE structure complies with all EU and OCDE criteria, making it an attractive option for EU capital investments by non-EU companies. Businesses and investors often opt for ETVEs due to their tax-efficient nature, which allows for optimized capital allocation and reduced fiscal liabilities.

Most of the companies that choose this regime set up their holding company in Spain using a limited liability company (Sociedad Limitada) with minimum share capital: providing the holding company with a high share capital, in fact, is not necessary because its main activity will consist in managing investments in foreign companies and receiving dividends from them. The only requirement to be part of this tax regime is that the holding company in Spain shall own a minimum share of the foreign company’s share capital of at least 5% or a share which amounts to more than 20 million euros.

ETVE tax regime in Spain

The ETVE regime in Spain is a particularly advantageous tax regime, introduced in 1995 to encourage international investment.

One of the most salient features of the spanish ETVE regime is the exemption on qualified foreign-source dividends and capital gains. It’s important to note that while dividends distributed by the ETVE to non-resident shareholders are generally not subject to withholding tax in Spain, there is an exemption on 95% of the base, meaning corporate income tax at 25% is applied on the remaining 5% of received dividends or capital gains.

The ETVE structure also benefits from the Parent-Subsidiary Directive, allowing for a 0% withholding tax on dividends received from subsidiaries resident in other European Union countries. This comprehensive tax regime makes the ETVE a highly efficient structure for both receiving income and distributing it to foreign entities.

At Lawants, our expert lawyers can help you apply for the ETVE regime in Spain, to optimize your company’s international taxes. Contact us today, we will provide you with tailored assistance and legal support for your investment in Spain.

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Benefits of an ETVE holding company in Spain

The advantages of establishing an ETVE holding company in Spain are numerous, making it an attractive option for international businesses:

  • When a Spanish holding company, known as an ‘Entidad de Tenencia de Valores Extranjeros’ (ETVE), receives dividends from its subsidiaries, these dividends are nearly fully exempt from taxation, being taxed at an effective rate of just 1.24%. Thus, they have a minimal impact on the calculation of the company’s tax base.
  • Further, an ETVE benefits from a nearly total exemption from corporate tax on dividends and capital gains that are derived from shares in other companies, paying only a nominal 1.24% tax rate on these profits.
  • The ETVE regime in Spain is highly beneficial for international businesses, particularly those investing in Latam, due to Spain’s extensive network of double tax treaties. This eliminates the risk of double taxation on profits.
  • Total exemption of dividends distributed by the holding company to non-resident shareholders regardless of where they live (except for tax havens).
  • The Holding company in Spain need not necessarily have as sole corporate object the ownership and management and/or administration of the shares in foreign companies (i.e. it is possible for the Spanish company itself to act both as a holding company in Spain and as an operating company).
  • The ETVE in Spain offers asset protection and risk management benefits, allowing companies to better control their overseas investments. Being located in a country within the European Union adds another layer of regulatory stability and access to EU markets
  • Shareholders can decide at any time whether they want to benefit from the Spanish holding tax regime (ETVE) or not.

However, it is important to highlight the special requirements established by Spanish laws. Specifically, these laws mandate that the ETVE must maintain a genuine establishment in Spain that is dedicated to managing its participations in other companies. This requirement underscores the commitment to meaningful economic presence and active management, not just a legal entity or “paper company”.

How does a spanish ETVE holding company work?

An ETVE holding company in Spain operates as a regular Spanish resident company, subject to Spanish Corporate Tax rules on its domestic trading income. However, it enjoys special exemptions on qualified foreign-source dividends and capital gains.

To avail of these benefits, the ETVE must disclose and notify its structure to the Spanish tax authorities. While formal authorization is not required, this communication is a mandatory step. The ETVE can engage in other business activities in addition to its holding functions, offering operational flexibility.

The shares of the ETVE must be nominative, ensuring that shareholders are easily identifiable at all times. This structure allows the ETVE to serve as an efficient vehicle for channeling capital investments, particularly towards Latin America, while also providing a tax-efficient exit route for EU capital investments by non-EU companies. Overall, the ETVE structure offers a balanced combination of regulatory compliance and tax benefits.

Taxation of a spanish holding company

How does the taxation of an ETVE in Spain work specifically? As we have seen, a Spanish ETVE holding company is subject to the country’s Corporate Income Tax Act, specifically Articles 116-119, which outline the tax regime applicable to these entities.

While the ETVE is liable for taxation in Spain, it enjoys certain exemptions and benefits under this Act. The company is subject to the standard Corporate Income Tax rate on its domestic trading income. However, it can apply for a full participation exemption on qualifying investment income, such as dividends and capital gains, from non-resident entities.

This exemption is contingent on meeting specific criteria, including the nature of the income earned by the non-resident entities and the tax system to which they are subject. The option to avail of this special tax regime must be communicated to the Ministry of Finance and will apply from the tax period ending after this communication. Therefore, while a Spanish ETVE holding company is not entirely exempt from taxation, it can significantly reduce its tax liability through strategic planning and compliance with the Corporate Income Tax Act.

lawyers reviewing the documents for an etve in spain

How to set up an ETVE Holding Company in Spain

Forming an ETVE Holding Company in Spain involves a series of steps designed to ensure compliance with legal and tax requirements.

  • The first step is to register the company name with the Central Commercial Registry.
  • Following this, the company must draft its Articles of Association, which should specify that one of its corporate purposes is the management and administration of shares in non-resident companies.
  • The next step is to open a bank account in the name of the company and deposit the minimum initial capital, which is currently set at €3,000.
  • Once the capital is deposited, a public deed of incorporation must be executed before a notary.
  • Subsequently, the company must obtain its Tax Identification Number (NIF) and register for Corporate Income Tax.
  • The final step involves registering the company with the Social Security System.

It is crucial to communicate the option to apply for the ETVE regime to the Ministry of Finance, as this will determine the company’s eligibility for tax benefits. By following these steps meticulously, one can successfully establish an ETVE Holding Company in Spain.

To know more about company formation in Spain, you can read our article on the types of business structures in Spain.

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Who can register an ETVE in Spain?

The opportunity to register an ETVE in Spain is open to both resident and non-resident individuals, as well as legal entities. The key requirement is the intent to manage and administer shares of companies not resident in Spain.

It is essential that the registering entity possesses the material and personal resources necessary to carry out this activity effectively. Therefore, the ETVE structure is particularly suitable for investors and businesses looking to optimize their international tax position while benefiting from Spain’s extensive network of double taxation treaties.

Legal and tax requirements for spanish holding companies

To establish an ETVE holding company in Spain, there are several legal and tax requirements that must be met. Firstly, the company must have a Valid Economic Reason for its establishment, implying that it should conduct genuine economic activities and not be artificially created solely for tax optimization purposes.

Secondly, the concept of ‘Substance‘ is crucial. The company must have a real and significant presence, meaning it should have operational activities, resources, personnel, and commercial activities that attest to its existence as an effective commercial entity. A mere ’empty shell’ created just for tax reasons will not suffice.

Thirdly, the company must be the Effective Beneficiary of the dividends received, meaning it should have the right to control and utilize the dividends, rather than merely acting as an intermediary for transferring these dividends to another entity.

In terms of formal requirements, the company must register with the competent Ministry, allowing the Spanish Tax Agency (AEAT) to monitor companies intending to benefit from the ETVE regime. The AEAT also checks if the company meets formal requirements such as renting an office and employing at least one staff member. Failure to meet these criteria will result in the denial of the ETVE regime application.

handshake between a lawyer and an entrepreneur after setting up an etve holding company in Spain

Taxation requirements for ETVE holding companies in Spain

To qualify for a full participation exemption on investment income derived from dividends or capital gains, an ETVE holding company in Spain must meet several stringent requirements:

  • The income earned by the non-resident entities, from which dividends and capital gains are paid, must be derived from business activities conducted outside Spain. The company’s principal activity should not be the management of movable or immovable property.
  • The ETVE must hold a minimum of 5% in the equity of the non-resident entity, or the acquisition value of the holding must exceed 6 million euros. Additionally, the ETVE must have the corresponding organization of material and personal resources to manage and administer securities representing the equity of entities not resident in Spanish territory.
  • The securities representing the participation in the ETVE must be registered, ensuring that shareholders are easily identifiable at all times. Shares issued to the bearer are not allowed.
  • The non-resident entity must be subject to, and not exempt from, a tax system similar to Spain’s corporate tax system. This requirement is considered fulfilled if the foreign company is resident in a country that has signed a double tax treaty with Spain and includes an information exchange clause.

Failure to meet any of these requirements could result in the denial of the full participation exemption, thereby subjecting the ETVE to standard corporate income tax rates on its qualifying investment income.

Conclusion

The tax advantages of a holding company in Spain, known as an ‘Entidad de Tenencia de Valores Extranjeros’ (ETVE), stand out uniquely among its European counterparts. Firstly, the ETVE regime ensures more cost-effective and transparent corporate management. Secondly, despite the purchase or sale of shares being carried out through public deeds, these transactions are not registered in the Mercantile Registry. This provision enables shareholders to maintain confidentiality concerning their identity, ensuring it doesn’t appear in the company registration at the Chamber of Commerce. Lastly, the ETVE structure facilitates international business operations, as the company isn’t obligated to pay taxes on dividends, except for a nominal 1.24% rate, allowing for competitive functionality in global markets.

For businesses contemplating the formation of an ETVE holding company in Spain, due diligence and expert consultation are indispensable. Lawants, S.L. specializes in providing comprehensive legal, fiscal, and accounting services to both national and international clients. Our team of seasoned professionals can guide you through every step of the process, ensuring that your ETVE holding company is not only compliant but also optimized for your specific business needs.

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Read More… from Tax Consultancy

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