Pre-draft regulations to facilitate Spanish interest and dividend withholding tax exemptions for collective investment vehicles

The Spanish tax authorities are working on new regulations which would seriously facilitate the smooth access of a wide range of EU resident collective investment schemes, including debt funds, UCITS, AIFs or pension funds to Spanish interest and dividend WHT exemptions.

The new regulations would be most welcome inter alia for tax transparent funds. Once effective, the new regulations should also help to reduce the formal requirements burden for seeking refunds of Spanish interest and dividend WHT.

Background
Under Spanish NRIT Law, Spanish-source interest income obtained by EU residents without a permanent establishment in Spain are exempt from Spanish NRIT, subject to not earning such income through a tax haven territory. To access to the WHT exemption the non-resident entity must evidence its tax residency in an EU member State before the relevant Spanish withholding agents (e.g. Spanish borrowers if the investment was in a Spanish loans portfolio).

It is common that some of the aforementioned categories of collective investment schemes face difficulties in their EU home jurisdictions to obtain a tax residency certificate, and this often entails practical difficulties to access to the WHT exemption. The access to the WHT exemption becomes even more complex for tax transparent entities, since they need to evidence the tax residency of each of their investors to benefit from the WHT exemption. In practice many of these investment institutions end up suffering a tax leakage that erodes their investment returns in Spain.

The proposed pre-draft regulations

On 9 May 2019, the Spanish Ministry of Finance released for comments by the industry a pre-draft regulation that modifies the Spanish non-Resident Income Tax Regulation (NRIT) with a view to approve a simplified procedure for European Union (EU) pension funds, Undertakings for the Collective Investment in Transferable Securities (UCITS) and EU Alternative Investment Funds (AIFs) to access interest withholding tax (WHT) exemption on Spanish investments.

The new regulation foresees a simplified procedure for accrediting the tax residency of the aforementioned collective investment institutions that is particularly helpful for tax transparent collective investment funds (including for instance credit/debt funds investing in Spanish loans), which up to now faced a burdensome administrative charge to evidence the tax residency of all the investors within the EU member States for the purposes of the WHT exemption.

On 10 June 2019, the Spanish Ministry of Finance further released for comments by the industry a proposed modification of the third level developing regulations (a Ministerial Order) that will approve the updated tax form 210 – this is the tax form required to pay NRIT (or report any exempted income whenever there is no local withholding agent) as well as to apply for instance for interest or dividend WHT refunds –. Once updated, the 210 tax form is expected to reflect the amendments resulting from the incoming new regulation.

The proposed pre-draft regulations aim to relax/standardize the procedure of evidencing the tax residency of the aforementioned categories of collective investment institutions to facilitate the access to the interest WHT exemption, by introducing a simple Annex to be submitted together with the tax form 210 where there is no withholding agent. Where there is a withholding agent, the certificate should be provided to the latter, with a view to receive payments free of Spanish WHT.

The proposed modification of the Ministerial Order, released on 10 June, includes the relevant annexes, which are as follows:

  • Annex I - Pension funds: statement to be signed by the representative of the pension fund containing the identification of the pension fund, its ManCo and the information regarding its authorization or registration in its EU home jurisdiction. This Annex would have indefinite validity, unless the conditions of the pension fund’s registration change.
  • Annex II - non-tax transparent UCITS and AIFs: statement to be signed by the representative of the ManCo, containing the full name of the entity, the information regarding its authorization or registration in its EU jurisdiction as an UCITS or AIF and confirming that it is not considered as tax transparent. This Annex would have indefinite validity, unless the conditions of the UCITS/AIF’s registration change. 
  • Annex III - tax transparent UCITS and AIFs: statement to be signed by the representative of the ManCo, containing the full name of the entity, the information regarding its authorization or registration in its EU jurisdiction as an UCITS or AIF and confirming the percentage of investors tax resident in EU member States (in aggregate) at 31 December of the previous calendar year. This Annex will be valid for one year.

Despite the pre-draft regulations released on 9 May only foresaw the facilitation of the WHT exemption for interest income, the modifications proposed in the Ministerial Order also include a new specification applicable to dividend income. According to this modification, EU pension funds and UCITS that receive Spanish-source dividends would be entitled going forward to evidence its tax residency, not only by means of the usual tax residency certificate, but also through the following new alternative:

  • EU pension funds can evidence its tax residency for the application of dividends WHT exemption also with a statement signed by the representative of the pension fund, in line with the Annex I mentioned above. 
  • UCITS can evidence its tax residency with a certificate issued by the competent authority of its home member State, confirming that such entity meets all the requirements of EU Directive 2009/65 (e.g. an UCITS attestation).

Finally, it is also important to highlight that according to the pre-draft, going forward it should be possible to use the proposed Annexes in the context of seeking the refund of the WHT already suffered on interest income by these institutions, as from the effective date of the modifications of the Ministerial Order. According to the pre-draft, this option could be used even in respect of existing WHT refund applications currently in progress.

Tax comment

Through this proposed development, the Ministry of Finance seems to be focussing on making more attractive to invest in Spain for EU financial institutions. Despite in theory EU collective investment institutions are virtually allowed to undertake most equity or debt investments in Spain without a relevant tax leakage, the reality is that many institutions face practical difficulties while trying to access the WTH exemptions on interest or dividend income, pushing back investment plans in Spain.

With this new development a number of collective investment schemes will benefit and will find a simplified and standardized manner to access to the relevant WHT exemptions to collect the return of the investment in Spain free of any tax leakage.

Also, a number of financial institutions that are not currently seeking to recover WHT suffered in their investment due to the burdensome administrative charge have now the opportunity to obtain a tax refund in a simpler and more efficient manner for the WHT suffered during the last four years (the statute of limitations in Spain).

There is no effective guidance on when this pre-draft regulation, together with the modified Ministerial Order, will be approved. It must be noted that no cabinet has been formed to date in Spain, after the national elections that took place on 28 April. Therefore, in principle it should not be expected that the regulation is approved before Autumn. Having said that, the fact that the modifications on the Ministerial Order have been released shortly after the release of the pre-draft regulations is an indication that the Ministry of Finance is moving forward this matter rather quick.

This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.