The internationalisation of wealth and business has made the use of foreign entities by Spanish tax residents entirely routine. International holding companies, investment vehicles, asset-holding structures and companies incorporated in jurisdictions such as the United Arab Emirates, Estonia, Luxembourg, Ireland or the United States are now an ordinary feature of many family and corporate arrangements. For the individual who relocates to Spain, often a British, American or Latin American expatriate with structures already in place, the question is not whether those entities are lawful, which as a rule they are, but how they interact with Spanish taxation once residence has been acquired.
It is at this point that one of the most significant, and most widely misunderstood, regimes in the Spanish tax system comes into play: the Controlled Foreign Company rules, known in Spain as Transparencia Fiscal Internacional (hereinafter, “TFI”), set out in article 100 of Ley 27/2014, the Corporate Income Tax Act (Impuesto sobre Sociedades, “LIS”), and in article 91 of Ley 35/2006, the Personal Income Tax Act (Impuesto sobre la Renta de las Personas Físicas, “LIRPF”). What makes the regime distinctive is that it allows the Spanish tax authorities to attribute certain income earned by the foreign entity to the resident shareholder, even where that income has never been distributed.
What the Transparencia Fiscal Internacional regime is
TFI is an attribution regime designed to neutralise the deferral of tax. Where its conditions are met, income generated by a non-resident entity controlled by a Spanish taxpayer is included in that taxpayer’s taxable base, irrespective of whether it remains retained within the company and is not paid out as a dividend. The attribution is made in the tax period that includes the date on which the non-resident entity closes its financial year, and the income is quantified in accordance with Spanish corporate income tax principles.
This is not a Spanish peculiarity. TFI is the domestic expression of Controlled Foreign Company rules (“CFC rules”), found in almost every OECD member state and reflected in Action 3 of the BEPS project. Within the European Union, CFC rules were harmonised in articles 7 and 8 of Council Directive (EU) 2016/1164 (the “ATAD Directive”), transposed into Spanish law by Ley 11/2021, of 9 July, on measures to prevent and combat tax fraud, with effect for tax periods commencing on or after 1 January 2021.
The purpose of the regime
The regime seeks to prevent a Spanish tax resident from sheltering income, in particular passive income, in entities located in low-tax territories with the sole aim of deferring or avoiding the tax that would otherwise arise in Spain. Put differently, it ensures that the mere interposition of a foreign company cannot indefinitely postpone the taxation of income which, if received directly by the individual or by a Spanish company, would be taxed at once.
The conditions that trigger TFI
As a general matter, the regime applies where three elements are present at the same time:
- Significant control. The taxpayer must hold an interest of 50 per cent or more in the capital, equity, profits or voting rights of the non-resident entity, whether alone or together with related persons or entities within the meaning of article 18 LIS. The notion of control is broader than the purely commercial one, so family groups that believe themselves to be outside the scope of article 100 LIS may in fact fall within it once the chain of direct and indirect ownership is examined.
- Low taxation. The tax of an identical or analogous nature to Spanish corporate income tax actually borne by the non-resident entity on the relevant income must be lower than 75 per cent of the tax that would have been due under Spanish rules. Taking the general 25 per cent rate as a reference, that equates to an effective tax burden below 18.75 per cent. This requirement, simple in appearance, calls for a careful income-by-income calculation rather than a mere comparison of headline rates.
- Attributable income. There must be income capable of attribution under the regime, which, as explained below, distinguishes according to whether or not the entity has a genuine organisation of human and material resources.
Which income is attributed: two distinct scenarios
The LIS provides for two modes of attribution that should not be conflated.
Attribution of total income (article 100.2 LIS). Where the non-resident entity lacks an adequate organisation of human and material resources to carry on its activity, that is, where it operates as an instrumental structure without substance, the whole of its income is attributed. The provision admits an exception where it is shown that the operations are carried out using the human and material resources of another entity within the same group, or where there is a genuine economic activity supported by sufficient substance.
Attribution of passive income (article 100.3 LIS). Where the entity does have an adequate organisation of resources, only certain categories of income are attributed, traditionally those regarded as readily mobile: income from the ownership of real estate not used in an economic activity; dividends and other income from holdings in equity, together with interest and income from the assignment of own capital to third parties; capitalisation and insurance transactions; income from industrial and intellectual property, technical assistance, movable property, image rights and the leasing of businesses; gains on the disposal of such assets; income from derivative financial instruments; and income from credit, financial, insurance and service activities carried out with related parties that add little or no economic value.
Two further points are of considerable practical importance. First, the income in article 100.3 LIS is not attributed where the sum of those amounts is below 15 per cent of the entity’s total income, save for the intra-group service income in subparagraph (i), which is attributed in full. Second, following the Ley 11/2021 reform, the former exclusion for portfolio dividends and capital gains was removed; as a result, income that may qualify for the participation exemption in article 21 LIS falls, for these purposes, within the perimeter of the regime, giving rise to the familiar 5 per cent non-deductible management cost, equivalent to a residual effective rate of 1.25 per cent.
The escape clause for EU entities
The regime does not apply where the non-resident entity, or the permanent establishment, is resident or located in another Member State of the European Union or in the European Economic Area, provided the taxpayer demonstrates that it carries on economic activities, or where it is a collective investment undertaking governed by Directive 2009/65/EC. This is set out in article 100.15 LIS (formerly subparagraph 16, renumbered by Ley 11/2021), which after the reform removed the reference to “valid economic reasons” and extended the clause to the European Economic Area.
This safeguard is the domestic transposition of the case law of the Court of Justice of the European Union in Cadbury Schweppes (judgment of 12 September 2006, C-196/04), under which CFC rules may restrict freedom of establishment only where they target wholly artificial arrangements devoid of economic reality. Within the European Union, therefore, the demonstration of genuine economic activity is the pivot on which the disapplication of the regime turns.
Economic substance: the real battleground
The decisive factor in current tax audits is not the legal form of the structure but its substance. The authorities examine where decisions are in fact taken, who actually runs the business, whether there are employees and offices, what economic functions are performed and who truly bears the business risks. The extension of the regime to foreign permanent establishments, introduced by Ley 11/2021 in article 100.1 LIS, reinforces this functional approach.
For the international client the lesson is clear: a company properly incorporated in a reputable jurisdiction offers, in itself, no protection against TFI. What affords protection is substance, namely the alignment between the entity’s operational reality and its formal configuration, properly documented.
Who is particularly exposed
The regime bears with particular force on profiles that lie at the heart of the international community settled in Spain. On the one hand, expatriates with connections to the United Kingdom, the United States or Latin America who relocate their tax residence to Spain while retaining pre-existing structures, whether US LLCs, British companies or holdings in low-tax jurisdictions, without reconsidering their treatment through a Spanish lens. On the other, digital entrepreneurs, investment managers, traders and content creators who operate through foreign companies while remaining resident in Spain. In both cases, the accumulation of financial or portfolio income without a solid operating activity places the structure squarely within the focus of the tax inspectorate.
An unprecedented control environment
The international landscape has changed radically. The mechanisms for the automatic exchange of financial information (the Common Reporting Standard, “CRS”, and, within the European Union, the successive Directives on administrative cooperation, “DAC”), beneficial ownership registers and cooperation between tax administrations have sharply reduced the opacity of cross-border structures. For the taxpayer with US connections, FATCA adds a further channel of information. The Spanish tax authorities now have a degree of access to banking, corporate and beneficial ownership information that is incomparably greater than a decade ago.
To this must be added the regime’s own reporting obligations. Together with the corporate income tax or personal income tax return, the taxpayer must provide information on the non-resident entity, its name and registered office, its balance sheet and profit and loss account, the amount of the positive income attributed and evidence of the taxes paid, all without prejudice to the interaction of the regime with the obligations to report assets and rights held abroad and, where relevant, with wealth taxation.
Preventive, not reactive, planning
In an environment of intensifying scrutiny, the analysis of each international structure must precede the audit rather than respond to it. Sound planning requires reviewing the chain of ownership and the satisfaction of the control threshold, calculating the effective tax burden borne by the entity on an income-by-income basis, assessing whether sufficient economic substance exists and, above all, documenting it contemporaneously, as well as confirming the availability of the EU escape clause and the interaction with the applicable double tax treaties. The difference between a material tax exposure and a fully defensible structure lies, almost invariably, in the quality of the prior analysis and of its supporting evidence.
Frequently asked questions
What are Spain’s CFC rules / the Transparencia Fiscal Internacional? They are a regime that requires a Spanish tax resident to include in their taxable base certain income earned by a non-resident entity they control, even where it has not been distributed, when that entity bears a low tax burden. The rules are set out in article 100 LIS and article 91 LIRPF.
When does the regime apply? Where three conditions are met: an interest of 50 per cent or more in the non-resident entity; an effective tax burden on that entity below 75 per cent of what would arise in Spain (that is, below 18.75 per cent on the general rate); and the existence of income attributable under the regime.
Which income is attributed? The whole of the entity’s income is attributed where it lacks human and material resources (article 100.2 LIS), and only passive income (dividends, interest, royalties, real estate income, capital gains and low-value-added transactions with related parties, among others) where the entity does have substance (article 100.3 LIS).
Are EU companies excluded? They may be. Article 100.15 LIS exempts entities resident in the European Union or the European Economic Area provided it is shown that they carry on economic activities, or where they are harmonised collective investment undertakings. Here too, evidence of substance is decisive.
How does it affect an expatriate relocating to Spain? Acquiring Spanish tax residence brings the individual’s foreign structures within the reach of TFI. They should be reviewed before the move, weighing control, effective taxation and substance, in order to avoid unexpected attributions in the first year of residence.
This publication is for general information purposes only and does not constitute legal or tax advice. The application of the regime depends on the specific circumstances of each taxpayer and on the legislation in force at the relevant time.
