Spain: Potential Spanish tax consequences of “Brexit”

Spain: Potential Spanish tax consequences of “Brexit”

Initial impressions indicate that the Spanish tax implications of the UK's vote to leave the European Union will concern cross-border transactions, trade-related matters, and the structure of Spanish groups operating in the UK—until and depending on any future agreements reached by the United Kingdom with the EU and third countries.

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Background

Statistics reveal Spain currently has a “positive trade” balance with the UK, and in 2015, Spain was the UK's ninth largest customer and its eighth largest supplier.  Spain is the EU's third largest direct investor in the UK, behind France and Germany. Major industries and companies have what could be described as a firm foothold in the UK market (specifically in sectors concerning banks, infrastructure, and aviation). Statistics also indicate 15.7 million UK tourists visited Spain in 2015, making up one fifth of total visitor numbers and accounting for 1.3% of national GDP, while more than 300,000 UK nationals currently have their permanent residence in Spain, with a further half a million living in Spain on a temporary basis. UK individuals currently rank first among foreign house buyers in Spain.   

Spanish tax implications

One tax-related implication of “Brexit” will relate to the structures of Spanish groups operating in the UK, as well as to Spain-based subsidiaries and branches of UK headquartered groups—these will now have to manage their affairs in line with the existing Spain-United Kingdom income tax treaty as signed in 2013 (as well as BEPS-related anti-abuse measures). 

The UK's decision to leave the EU will affect the application of EU directives (including those concerning mergers, parent-subsidiary, interest and royalties, and automatic exchange of information). The treaty provisions instead may be triggered. For instance, the treaty provides for an exemption at source for dividends received by companies holding a stake of 10% or more in their subsidiaries. For other dividends, a 10% withholding tax applies (whereas the Parent-Subsidiary Directive calls for a percentage holding stake of at least 5% in order to qualify for the exemption provided under the directive). Likewise, under the income tax treaty provisions, interest and royalties are not taxed at source.

With “Brexit” and triggering of treaty provisions, capital gains will be subject to tax when derived from: (1) the alienation of immovable property; (2) the alienation of shares, other than shares in which there is substantial and regular trading on a stock exchange, or comparable interests, deriving more than 50% of their value directly or indirectly from immovable property; (3) the alienation of movable property forming part of the business property of a permanent establishment; or (4) the alienation of shares or other rights, which directly or indirectly entitle the owner of such shares or rights to the enjoyment of immovable property located in the other contracting state. In all other situations, the capital gains will be taxed only in the country of residence.

Value added tax (VAT), as well as customs and excise duties, are all governed directly by EU law. Therefore, the outcome of the UK referendum will affect the VAT area and the customs rules. This could lead to the levying of customs duties and indirect taxes on imports/exports, that previously did not apply and could affect trade between the UK and Spain.

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