How do I declare foreign investment in my startup?

As many of you may know or want to know, declaring the investment of foreign partners in your ‘Spanish’ company involves a series of legal and fiscal steps.

The reality is that Spain attracts not only tourism but also foreign investment due to its geographical location, popularity, quality of life and industrial and commercial diversity.

Here are the steps and obligations that you and your foreign partners must comply with in order to correctly declare foreign investments (also understood as investments made by Spanish nationals resident abroad):

Steps to declare foreign investments

1. Obtaining a Foreigners’ Identification Number (NIE):

• • Foreign partners must obtain a NIE (Número de Identificación Extranjero), which is necessary for any legal procedure in Spain. The procedure to obtain the NIE can be carried out in the following ways:
    • In person in Spain by the applicant himself/herself.
    • Through a representative in Spain (requires an apostilled power of attorney and, in most cases, translated into Spanish).
    • In person at the Spanish consulates and embassies located in the applicant’s country of residence.
  • If the investment is made through a foreign company, we must also obtain the Tax Identification Number of the foreign company from the Spanish Tax Agency.

2. Registration in the Foreign Investment Register:

• • Initial declaration: The foreign investment must be declared to the Foreign Investment Register of the Ministry of Industry, Trade and Tourism. This registration is carried out through the Directorate General for International Trade and Investments, and is not binding for the Spanish Tax Agency.
  • Form D-1A: For investments in unlisted Spanish companies. This form must be filed within the month following the formalisation of the investment. Its presentation is essential for its registration in the Mercantile Register.

3. Notary’s office and Commercial Register:

• • The investment and the amendment of the company’s articles of association (if necessary) must be formalised before a notary and registered in the Mercantile Register.

4. Tax obligations:

In relation to the tax and legal obligations that would arise for tax residents in Spain or in other countries who hold shares/shareholdings in Spanish companies, the tax implications vary according to national laws and double taxation treaties signed between Spain and the shareholder’s country of residence.

This document sets out the legal and tax obligations arising for Spanish resident investors in Spanish companies, as well as any reporting obligations that may exist for investors resident in Spain and in other countries.

• • Personal Income Tax (IRPF): You must include in your annual income tax return any gains or losses derived from holding shares, whether from dividends received or from the sale of shares. Dividends received from Spanish companies are subject to withholding taxes in Spain (progressive tax rates between 19% and 28% apply if the recipient is resident in Spain.

However, if the investor is a foreign resident and Spain has signed a Double Taxation Avoidance Agreement with the country in question, withholding tax is withheld at a rate of between 10 and 15%.

This withholding can be offset against the tax paid in the shareholder’s country of residence, according to double taxation treaties, as a credit to avoid double taxation.

• • Wealth Tax: In some autonomous communities in Spain, Wealth Tax may be applied (in others it is subsidised, as it is an autonomous community tax). This tax return should reflect, among other things, the value corresponding to the investor’s shareholding in the Spanish company. Obligation to file a Wealth Tax return and pay wealth tax if the investor’s total assets (real estate, securities, bank accounts, deposits) amount to 600,000/700,000 euros.
  • Temporary Solidarity Tax for the Very Rich: Obligation to file the tax from an investor’s total assets of more than 3,000,000 euros. The amount of wealth tax paid would be deducted from the amount payable.

For residents in other countries who own shares in Spanish companies:

• • Tax declaration in country of residence: Shareholders are likely to be required to declare income generated by holding shares in Spanish companies in their country of residence, in accordance with national tax laws.
  • Withholding tax: Dividends received from Spanish companies may be subject to withholding tax in Spain. If there is a double taxation treaty, the shareholder may be able to benefit from a reduced withholding tax or even avoid it altogether.

Those obligations that the investor’s country of residence provides for in relation to the holding of foreign securities of unlisted companies.

In the case of incorporation, capital increase, merger, spin-off, transfer of the effective place of management or registered office and contributions by shareholders to replace losses of a Spanish company by both tax resident investors in Spain and those resident abroad, the company must file Form 600 for Transfer Tax and Stamp Duty (Impuesto sobre Transmisiones Patrimoniales y Actos Jurídicos Documentados, modalidad de Operaciones Societarias), declaring the value of the total investment, being subject to and exempt from taxation and reporting each of the investments made.

5. Compliance with money laundering regulations:

• • Investments must comply with regulations on the prevention of money laundering and terrorist financing. This implies the obligation to identify the origin of the funds and to declare any suspicious transactions.

6. Corporate rights and obligations:

• • Foreign shareholders have the same rights and obligations as domestic shareholders, including voting rights at shareholders’ meetings, the right to receive dividends and the obligation to comply with the articles of association and board decisions.

7. Investment reporting:

• • In some cases, foreign shareholders may be required to provide additional information on their investments and involvement in the management of the company.

In conclusion, declaring the investment of foreign partners in a Spanish company requires detailed knowledge of the applicable legal and tax procedures. Obtaining the NIE, registration in the Foreign Investment Register, formalisation before a notary and compliance with tax obligations are essential steps to ensure that investments are made correctly. It is also crucial to take into account anti-money laundering regulations and the rights and obligations of the partners.

For more information on how to manage foreign investments in Spain, write to us at contacto@metricson.com and we will help you.

Article by:

José Pérez-Fuster

Senior tax manager

jose.perezfuster@metricson.com

About Metricson

Metricson is a pioneering law firm providing legal services to innovative and technology companies. Since its inception in 2009, it has advised more than 1,400 companies from 14 different countries, including startups, investors, large corporations, universities, institutions and governments.

If you would like to contact us for any aspect of tax advice, please do not hesitate to write to us at contact@metricson.com. We look forward to talking to you!