International Taxation

Horizontal Tax Unity

The Special Tax Consolidation System is solely in regard to corporate taxes and basically consists in a series of companies forming a group to pay taxes collectively, instead of each one individually.

In principle, this system is characterised by the existence of one controlling company and several controlled companies. In this case, since the controlling company does not reside in Spain, and the Special Tax Consolidation System is only applicable to resident companies, the non-resident controlling company must designate one of the controlled companies as controlling company of the Tax Group in Spain.  

Whenever new companies or shares of at least 75% of the capital stock of companies residing in Spain are acquired, said companies shall mandatorily be included within the Scope of Consolidation on the fiscal year following their acquisition. Companies acquired by incorporation will be included within the Scope of Consolidation during the fiscal year of their incorporation.

The Tax Base on Corporate Tax is what determines the Tax Group. It is determined by the sum of the individual tax bases of each of the companies forming the Group, adding and deducting any relevant transactions among the Tax Group companies.

Notwithstanding the above, the 1 million Euro tax deductibility limit for net financial expenses applies to the Group, not to each company. In addition, reduction of the tax base for creation of a capital reserve fund will also apply to the Group.

Italy: Tax relocation abroad (Esterovestizione) and control of foreign companies

According to recent decisions from Italian courts, it would seem that the legal status of the esterovestizione, or relocation abroad of Italian companies, is beginning to find agreeable terms which should have been granted to it some time ago.

The status of esterovestizione shall be limited to instances where there is an abuse of the right of establishment, in other words, a fictitious location of the fiscal residence of a company abroad when it is verified that the company has not been transferred, or when the transaction entails setting up a legal structure that does not represent a genuine, economic reality (a wholly artificial arrangement).

Undoubtedly, in the case of controlled foreign corporations, the registered office of its management cannot be the exclusive criterion of verification.

Nevertheless, the new Spanish regulation on the Board of Directors makes it possible to entrust management in Spanish people and to introduce effective mechanisms of control from the Parent company.