Holding structures play a central role in international tax planning. They enable corporate groups to manage shareholdings efficiently, distribute profits in a tax-efficient manner and avoid double taxation.

For many years, Spain has been an attractive location for international holding companies thanks to the implementation of the EU Parent-Subsidiary Directive and the national ETVE regime (Entidad de Tenencia de Valores Extranjeros).
However, these two systems are not identical, and ETVE status is by no means necessary in order to benefit from the tax exemption available within the EU.

The EU Parent-Subsidiary Directive (Directive 2011/96/EU) governs the tax-exempt distribution of dividends between associated EU companies and is implemented in Spain through Article 14.1(h) of the Non-Resident Income Tax Law (IRNR – Impuesto sobre la Renta de no Residentes).

This article explains when this provision is sufficient, when the ETVE regime may be advantageous and which tax benefits Spain offers in an international context.

1. Implementation of the EU Parent-Subsidiary Directive in Spanish Law: Tax Exemption within the European Union

The implementation of the Parent-Subsidiary Directive through Article 14 of the IRNR is intended to prevent profits within a corporate group from being taxed more than once – first at the level of the subsidiary and again at the level of the parent company.

Spain has implemented the Parent-Subsidiary Directive through Article 14.1(h) of the IRNR and, subject to certain requirements, provides for an exemption from withholding tax for shareholdings of at least 5%.

Accordingly, within the European Union, dividends distributed between EU companies should not be subject to double taxation and, where the relevant requirements are met, the source state may not generally levy withholding tax on such distributions.

Requirements for the exemption in Spain:

1. The parent company holds at least 5% of the capital of the subsidiary.
2. The shareholding has been held for at least one year.
3. Both companies are tax resident in EU Member States and are subject to corporate income tax.
4. The structure is not a mere letterbox arrangement and has sufficient economic substance.

Tax Treatment between Spain and Germany:

In Spain: Withholding Tax

Where a Spanish subsidiary distributes dividends to a German parent company, no Spanish withholding tax applies under Article 14.1(h) IRNR, provided that the relevant requirements are met.
Spain has even extended the scope of the EU Parent-Subsidiary Directive in favour of taxpayers by granting the exemption for shareholdings of at least 5% (instead of the 10% provided for in the EU Directive), provided that the shareholding has been held for at least one year.

In Germany: Corporate Income Tax

Where the German parent company receives a dividend from Spain, 95% of this income is tax-exempt under Section 8b of the German Corporate Income Tax Act (KStG).
The remaining 5% is not taxed as a dividend but is deemed, on a lump-sum basis, to constitute non-deductible business expenses.
This is purely a technical tax adjustment and does not constitute taxation of the dividend itself.

Result:
The combination of 0% withholding tax in Spain and the 95% exemption in Germany means that profit distributions between the two countries are effectively almost tax-neutral.

Note:
Article 14.1(h) IRNR relates exclusively to Spanish withholding tax and implements the EU Parent-Subsidiary Directive.
The domestic participation exemption in Spain (95%) applicable to dividend income for corporate income tax purposes is, by contrast, governed by Article 21 LIS (Ley del Impuesto sobre Sociedades).

2. The ETVE Regime: Spain’s Special Regime for International Holding Companies

The ETVE (Entidad de Tenencia de Valores Extranjeros) is a special Spanish tax regime governed by Articles 107–110 LIS.

It was introduced to establish Spain as an attractive holding company location for global corporate structures, particularly for shareholdings in companies located in third countries (e.g. Latin America, the United States or Switzerland).

Requirements for an ETVE:

• Corporate purpose: management of shareholdings in foreign companies.
• Substance: own human and material resources (no mere letterbox companies).
• Notification requirement: notification of the application of the ETVE regime to the Spanish Tax Agency (AEAT).
• Minimum shareholding: 5% and a holding period of one year.

Tax advantages:

• Dividends and gains from foreign shareholdings benefit from the Spanish participation exemption (Article 21 LIS, 95% exemption).
• Distributions by an ETVE to non-resident shareholders (including those outside the EU) are not considered to be Spanish-source income in the cases provided for by law and are therefore not subject to Spanish withholding tax (Article 108 LIS).
• No Spanish withholding tax is levied on such distributions even where the recipient is resident in a third country, subject to the statutory exclusions, in particular those relating to non-cooperative jurisdictions (Article 108.2 LIS).

Only profits derived from foreign sources (“dividendos de fuente extranjera”) benefit from this specific treatment. Spanish domestic profits of the ETVE do not fall within this exemption.

The ETVE regime is therefore particularly suitable for international corporate groups seeking to channel profits from Latin America, Asia or the United States through Spain in a tax-efficient manner.

3. Article 14.1(h) IRNR or ETVE: Which Regime Applies?

Whether Article 14.1(h) IRNR or the Spanish ETVE regime applies essentially depends on where the associated companies are resident and where the profits are distributed.

As a general rule:

• Within the European Union, Article 14 IRNR provides for an exemption from Spanish withholding tax, provided that the relevant requirements are met.

• Where third countries (e.g. Switzerland, the United States or countries in Latin America) are involved, the ETVE regime (Articles 107–110 LIS) may become particularly relevant.

4. Practical Example

Case A – Within the EU:

A Spanish S.L. distributes profits to its German parent company (GmbH).
No withholding tax applies in Spain and 95% of the dividend is tax-exempt in Germany.

Case B – Global Holding Structure:

Structure:
A Spanish ETVE S.L. holds operating companies in Mexico, Chile and Colombia.
The shareholder of the ETVE is an investor resident in Switzerland.

Distribution:

• The Latin American subsidiaries distribute their profits to the Spanish ETVE.

• The ETVE pools the profits and subsequently distributes them to the Swiss shareholder.

Tax treatment:

• Latin America → Spain: dividends benefit from the Spanish participation exemption (Article 21 LIS).

• Spain → Switzerland: no Spanish withholding tax applies in the cases covered by Article 108 LIS for ETVEs.

• Switzerland: taxation in accordance with the applicable domestic tax law.

Result:

The structure allows profits to be channelled through Spain in a tax-efficient manner while avoiding double taxation, provided that all applicable legal requirements are met.

Economic Substance Remains Essential

Both the Parent-Subsidiary Directive and the Spanish ETVE regime are subject to national and European anti-abuse rules. Mere letterbox companies or artificial arrangements lacking economic substance may be excluded from the available tax benefits. In particular, the general anti-abuse provisions of Spanish tax law and the requirements of the Anti-Tax Avoidance Directive (ATAD) must be taken into account.

Conclusion

A Spanish holding company may distribute dividends to a German parent company without Spanish withholding tax even without ETVE status, provided that the applicable legal requirements are met.

The ETVE regime is, however, an additional special instrument under Spanish tax law that allows profits from international shareholdings, including non-EU investments, to be pooled and distributed through Spain in a tax-efficient manner. The purpose of the regime is to facilitate international holding structures and attract foreign investment, rather than to exempt domestic profits from Spanish taxation. It is therefore an international holding regime and not a general tax privilege applicable to all profits.

Spain thus combines the advantages of the EU tax framework with specific instruments for international tax structuring, making it one of Europe's strategically attractive locations for holding companies.

As lawyers, tax advisors and a registered PAE, our firm will be pleased to assist you in analysing your specific situation, carrying out the relevant administrative procedures and preparing and filing the necessary tax returns. Further information about our services for self-employed professionals and businesses can be found in the section Companies.

If you are interested in our services or have specific questions regarding this topic, please do not hesitate to contact us by email or telephone.

Author:

Lisa Wörfel
Tax Advisor
info@sspartners.es
Tel: (+34) 951 12 13 06
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