Why do we recommend a capital increase / decrease rather than operating with a loan in those cases were a Dutch company invests in property in Spain being the shareholder of a Spanish company that executes the investment?
Given the situation of the value of money in the Eurozone many of our clients find not clever to keep their savings in bank account deposits. As it is well known the interest rates are negative at this point in time and though they may increase, it does not look like it will be much in the next years.
So, what to do with the savings?
It is something very common here in Costa del sol, in the last five years or perhaps more to purchase an old property – a well located villa if possible – and then refurbish it to produce interesting rental incomes or sell once it has been renovated. Unfortunately, there are not many pieces of land available to develop new property in the most desired locations in Costa del Sol hence the decision to purchase or villas or apartment in the best locations to proceed as explained.
So, which is the most tax efficient way to do it?
In the case of our Dutch clients (note that this strategy is interesting for any type of clients, even locals) the more common way of executing this strategy is using their private holdings. Their BV local company will incorporate a Spanish limited liability company, injecting the necessary funds to purchase, refurbish and sale taking advantage of three important benefits:
- Benefit on the 15% corporations tax for new companies for the first 2 tax years.
- Benefit in the reduced Transfer tax in Andalusia when purchasing property (land or independent parking are not eligible for this option) leaving it in a 2% with the obligation to resale in 5 years time (ideally before the end of the second tax year as seen at pint A) before). The usual transfer tax in Andalusia is 8% up to 400.000,00 €, 9% between 400.000,00 € and 700.000,00 € and 10% above 700.000,00 €.
- Benefit in the very favourable treaty to avoid double taxation signed between Spain and The Netherlands.
But how to inject the necessary capital? What is the best and safest way of doing this, why not using a simple loan from the mother company to the freshly incorporated Spanish company?
We think that the best way to do it is increasing capital, selling, reducing capital and the liquidate the company. I will describe her how we do it for out Dutch clients.
The reason to proceed as said is mainly to avoid any possibility of discussions with the local authorities, together with the fact that proceeding as suggested provides a far easier and safer managing of the investment in respect of taxes for both the Spanish company and for the Dutch company. I will further explain below in bullet points.
- The loan must be documented in a public deed by all means. The loan with no mortgage has as costs notary fees and lawyer’s fees. No stamp duty it required in occasional loans (dead below about licenses to lending entities).
- In case it is not documented the Tax Office will presume that it is an ordinaryloan subject to market conditions: market interest + monthly payments.
- The loan can be of two types: ordinary and participative.
- Participative loans: The payment of interestsis linked to the result of the business that is the reason why the money is lent. The business has to be described as such at the loan deed. In this type of loans if business goes wrong the lender can loose the capital lent (totally or partially) and can no receive interests since the agreed business did not produce any profits.
- Interests: in both loan type, the minimum interest possible is the legal interest, today the 3%. These types of operations between the shareholder and the company are called.
- The loan refund is free of taxes as long it does not include any interests.
How are interests taxed?
The interests are taxable or could be taxed in both countries though what is paid in one country, is locally a tax credit that could be used in the second country.
The tax rate is 19% if the interests earned in Spain when the lender is a tax resident in the EU. However, due to the treaty to avoid double taxation with The Netherlands the taxation of interests is done in Spain and could not be above the 10%. Note that there are no right to deduct any expenses on the setting up of the loan.
The payment of interests is a cost for the company and an income for the partner / shareholder. The statutes of limitations are 4 years in general but in some matters related to companies could be 10 years. This is the case of expenses declared at the corporation’s tax. The Tax office can check the deductible expenses declared in the corporate tax from the 10 years in the past (even if the company is liquidated in which case the director, usually also the company liquidator, will be liable for the payment of any possible tax bill requiring a higher payment of any corporation’s tax).
The income as a result of the payment of interest payable from the company to the shareholder should be declared by the shareholder in Spain filling a from number 210 (income tax for non-residents).
The payment of the taxes on the interests earned by the shareholder is done by the company through a withholding on the amount paid. This amount withheld is cashed directly with the Tax Office. However, if the shareholder is resident in the EU the payment of interests is free from withholding tax.
Operations between the company and the shareholder – related-party or intragroup transactions – are specially audited by the Spanish tax office. It is required to declare them in a special form (232). However, if the total of the interests earned that year is below 250.000 € and less than the 50% of the business generated by the borrower it is not legally required to pay interests. This is not applicable if the business is considered as one of the 4 “specific operations” that exclude the exemption before (i.e shareholder domiciled in tax heaven, transfer or property, etc)
Note that in cases of loan to companies, when the lender is no resident all the particulars must be clearly included at the companies’ tax from (201) including a certificate of tax residency.
Can a company freely lend money in Spain?
The matter is not easy. In principle, companies are not allowed to freely lend money in Spain. The bank of Spain must license those companies which intend to lend money in Spain as their trading activity. However, there are no restrictions if the loans are done occasionally.
Let’s put the case that a company is shareholder of several companies lending moneys to all of them. In this case it could be understood that the shareholder is not acting occasionally but regularly. Under this scenariothe lending activity has to be authorized by the Bank of Spain. In the same way, if a shareholder makes several loans to the same company it could also be understood as a regular activity rather than an occasional one.
Please note that when the loan is guaranteed with a mortgage the costs will increase with stamp duty (approx. a 1,8% of the amount lent) and a higher bill form the notary. Local authorities will only allow one loan with mortgage per year to non-licensed companies. Note this is to a rule but merely my personal appreciation of what may be no considered as on-going loans. This usually is detected by the CIF of the lender at the mortgage deed that the Land register has to check when registering the mortgage deed in order to report to the bank of Spain.
Conclusion: lending money can lead to a discussion with local authorities in may aspects.
This is the natural way to do business: the shareholder injects enough capital to a local company who invests that capital in the business agreed (in case of multiple shareholders a Joint venture agreement is executed).
The capital increase deed to execute is free of taxes. The costs associated to it are legal – administrative costs: Notary, companies’ house and Lawyers.
The capital reduction has the same costs and is also tax-free. Note that there could be legal restrictions to reduce capital in case the specific company has debts.
Once the business is completed the capital reduction can be done to refund the shareholder the capital injected. This operation is tax-free as said.
Once the capital has been refunded any excess given to the shareholder will be treated as a dividend. This operation is usually done after the payment of taxes or making a provision for the payment when legally required (I refer to the corporation’s tax)
The dividends paid to non-resident entities are subject to tax in Spain. The general rate is 15%. However due to the treaty to avoid double taxation with The Netherlands:
- It will be the 10% if the beneficiary of the dividends holds more than 50% of the shares at the Spanish company or has several companies that hold at least 25% of the shares form the Spanish company.
- It will be the 5% if the beneficiary of the dividends is not required to pay tax (income tax exempted) in the Netherlands for those dividends received.
The payment of dividends is done through a withholding from the payer. There are no deductions allowed to the payment of dividends. It will be required to attach to the tax form where the dividends are paid a certificate of tax residence from the beneficiary company.
For all these reasons, we believe is far safer and easier (and perhaps cheaper if the Dutch company is illegible for a 5% payment, something to be confirmed with local tax advisors in The Netherlands) to increase and decrease capital rather than to operate with loans.
We would be pleased to assist you in any matter related with this post.
Jose F. Criado Sanchez
Abogado – Lawyer | Criado & Kraus