In this article, we will focus on holding companies, analyzing practical issues, understanding the usefulness of this type of company, and the risks that may arise from their incorrect use.
It is enough to say that the holding company is a key tool in modern business planning. It allows for centralized management, asset protection, facilitation of business succession, and optimization of taxation within corporate groups. This entity has gained significant relevance both nationally and internationally due to its versatility in organizing complex business structures.
In Spain, the tax advantages associated with holding companies can be very attractive, but they also attract special scrutiny from the Tax Administration. The application of tax benefits is conditioned on the existence of real economic substance justifying the holding’s existence and its operations.
This article aims to provide a comprehensive overview of their regulation in Spain, with special attention to tax benefits, the concept of economic substance, recent case law and administrative doctrine, and best practices for safe and effective implementation.
Legal framework of the holding company
In Spain, the holding company does not have specific regulation as a corporate type, but operates under the general framework of commercial and tax legislation. It can take various corporate forms provided in the
Royal Legislative Decree 1/2010, of July 2, approving the revised text of the Capital Companies Act (LSC), the most common forms being the Public Limited Company (S.A.) and the Limited Liability Company (S.L.).
On the tax side, the
Corporate Tax Law 27/2014 (LIS) regulates the tax benefits applicable to entities managing shares in other companies. Notably, those in Article 21, regarding partial exemption on dividends and capital gains.
The main objective of a holding company is the ownership and management of shares in other companies, acting as the head of a corporate group. For this, it is essential that this management is not merely formal but exercised actively and documented.
Tax benefits: Exemption on taxation of dividends and capital gains from holdings (Art. 21 LIS)
One of the main incentives for setting up a holding company in Spain is the exemption regime on dividends and capital gains generated from the transfer of shares, regulated in Article 21 of the LIS.
Since
Law 11/2020, the exemption is 95%, meaning that 5% of dividends or capital gains is considered a non-deductible expense, resulting in an effective taxation of approximately 1.25% if the general rate of 25% applies. This limitation aims to ensure that holding entities bear a minimum fiscal management cost.
Requirements to apply the 95% exemption:
- The shareholding must be at least 5% of the capital or its acquisition value must exceed 20 million euros (only applicable if acquired before 2021).
- The shareholding must have been held for at least one year.
- The investee company must be subject to a foreign tax similar to the Spanish Corporate Tax, with a nominal rate of at least 10%.
Basque and Navarrese Regional Regime: In these territories, the exemption remains 100%, as they have not adopted the limitation introduced by the 2021 General State Budget Law.
Recent case law and doctrine:
- Binding Ruling V1845-24: Reaffirms that compliance with the requirements of Art. 21 LIS is necessary, especially significant and continuous ownership.
- TEAC 04/22/2024 (Procedure 00-06452-2022): Determines that abusive use of the exemption regime, without real economic substance, may be considered simulation.
Risks of lacking “economic substance” and conflicts in applying the rule
One of the main risks for a holding company is that the Tax Agency classifies the structure as artificial, alleging lack of economic substance. Such interpretation can lead to denial of tax benefits and income imputation.
Legal basis:
- Article 15 of the General Tax Law: establishes that no tax effects will be granted to operations made solely to obtain undue tax advantages.
- Article 21 LIS (final paragraph): introduces an anti-abuse clause requiring valid economic reasons to apply the exemption.
Case law and doctrine:
• STS 603/2021: Requires the holding to carry out effective activity over its investees.
• STS 2897/2021: States that mere tax savings do not justify exemption application.
• TEAC Resolution 09/28/2022: Denies exemption due to lack of material and personal means.
Economic substance: Recommendations for proof
To avoid tax contingencies, it is essential to provide the holding company with sufficient economic substance. Some concrete actions and real examples that help demonstrate such substance are:
- Establish an effective physical headquarters: having an actual office (not a virtual address) where group management and coordination functions are carried out.
Example: renting a professional office where the management team holds meetings, keeps documentation, and manages group operations. - Hire personnel and have material resources: employing full-time or part-time staff to perform tasks related to group accounting, financial monitoring, management reports, etc.
Example: hiring a financial or administrative director exclusively for the holding. - Prepare periodic group management reports: justifying with documentation that the holding makes strategic decisions, participates in budgeting, and conducts internal audits.
Example: minutes of board meetings showing decisions on investments, subsidiary financing, or dividend policies. - Demonstrate operational relationships with subsidiaries: signing management, coordination, or direction service contracts between the holding and its investees.
Example: the holding charges subsidiaries for financial management and international expansion strategy services. - Maintain an autonomous accounting and administrative structure: keeping its own accounting, tax filings, and corporate books, separately and independently from subsidiaries.
Example: contracting an exclusive external manager for the holding and separate tax filings. - Economically justify its existence: demonstrating that the holding’s creation responds to legitimate reorganization, generational succession, or decision-making efficiency.
Example: reorganizing several industrial subsidiaries under one holding to facilitate eventual sale or merger with a third party.
These actions reinforce the image that the holding company is not an empty or instrumental entity but a key and real piece within a corporate group.
Change of tax residence of the shareholder: Implications
When the owner of a holding company moves their tax residence outside Spain, several implications must be analyzed:
a) Exit tax (Art. 95 bis LIRPF):
- Applies if the shareholder owns more than 25% and the value exceeds €1,000,000.
- Tax is levied on the latent capital gain of shares as if they were sold before the move.
- Moves to EU or EEA countries: If the move is to a member state of the European Union or the European Economic Area, and certain information and investment maintenance requirements are met, the tax payment can be deferred for 10 years.
- Temporary relocations for work reasons: If the move is temporary for work reasons and certain conditions are met, a deferral of tax payment can be requested.
b) Taxation of dividends:
- The Spanish holding will apply a 19% withholding on dividends distributed to the new resident.
- This withholding may be reduced according to the applicable Double Taxation Treaty (DTT).
c) Additional tax risks:
- If the move is only apparent or not justified with personal and economic reasons, it may be considered tax avoidance.
- The Tax Agency may apply the anti-abuse clause and deny exemptions or tax benefits.
Risks Regarding Dividend Exemption
When making a contribution of shares to a holding company, the voluntary reserves generated by the investee entity before such contribution are not part of the profits obtained during the holding period of the shares by the holding company. Therefore, dividends distributed charged to these previous reserves do not meet the holding period requirement established in article 21 of the LIS, and consequently, cannot benefit from the double taxation exemption.
Recommendations
- Identify the origin of the reserves: It is essential to analyze the temporal origin of the reserves intended to be distributed as dividends, in order to determine if they meet the requirements for the exemption application.
- Tax planning: Before making contributions to a holding company, it is advisable to review the situation of accumulated reserves in the investee entities and consider the tax implications of their future distribution.
- Specialized advice: Given the complexity of the regulations and possible administrative interpretations, we recommend you contact us for assistance.
In summary, for dividends distributed by an investee entity to its holding company to benefit from the double taxation exemption, it is essential that the reserves from which they come were generated during the period in which the holding company held the shares, complying with the requirements established in the LIS.
Differences Between a Holding Company of a Corporate Group and a Holding Company of an Individual Shareholder
If for any reason you have reached this point without clearly understanding the difference between the Holding Company of a corporate group and the Holding Company that an individual shareholder may have established, it is important to clarify the difference between two main models of holding companies:
- Holding company of a corporate group: Created to be the head of a group of operating companies. The holding coordinates, directs, and manages all companies in the group. The shareholders are usually other companies, not individuals. This model aims for operational efficiency, asset protection, and tax optimization within a business conglomerate.
- Holding company of an individual shareholder: Here, an individual forms a holding company to channel their business or asset investments. Instead of directly owning various companies or assets, the shareholder controls the holding company, which in turn holds the shares. This model allows:
- Optimization of dividend and capital gain taxation.
- Facilitation of asset succession.
- Improvement of protection against business risks.
Main differences:
- In a corporate group, the holding manages operating subsidiaries as a whole.
- In the personal structure, the holding protects and organizes the assets of an individual.
Both schemes must demonstrate real economic substance to avoid tax contingencies.
Conclusions
The holding company is a lawful and effective structure in business planning, allowing tax optimization, group organization, and asset protection. However, its tax legitimacy depends on being based on a real and justified activity.
Recent doctrine and case law emphasize the need to provide these companies with sufficient economic substance, both at the structural and functional level. That is, they should not be mere passive holding vehicles.
If you want to contact us, do not hesitate to write to us at contacto@metricson.com. We look forward to talking with you to help!
Article written by:
Lawyer – Tax and M&A
jose.perezfuster@metricson.com
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