An overview by Garrigues, Taxand Spain

The Spanish Directorate General of Taxes (DGT) has recently clarified that dividends and capital gains benefiting from Spain’s participation exemption are considered fully exempt under the Controlled Foreign Company (CFC) regime. This means foreign holding companies receiving such income are not required to declare it in Spain.

Nicolás Cremades Leguina and Inés Mora-Figueroa Cruz-Guzmán from our Spanish member firm Garrigues have published an examination of some of the key points, which include:

- CFC Regime Application: Income from a foreign subsidiary must be reported if taxed at less than 75% of what it would be in Spain.

- Full Exemption Status: The DGT ruled that Spain’s participation exemption, despite a 5% deemed management expense, does not compromise its full exemption status.

- Implications: Dividends and capital gains exempt in both Spain and the foreign country are treated equally (0% tax), eliminating CFC reporting obligations.

The ruling resolves controversy over the exemption’s nature and confirms its incompatibility with international double taxation relief. You can read the full overview here.