ETVE (Spanish Foreign Securities Holding Company)

By David Capitán

Investment Vehicles in Argentina

By Latinamerican Desk

ETVE (Spanish Foreign Securities Holding Company)

David Capitán

This article explains the most remarkable facts of the ETVE tax regime regulated in the Spanish Corporation Tax Law.

1. Tax Requirements

The requirements for the application of this tax regime are the following:

a) Corporate purpose: it shall include management and administration activities of securities of non-resident entities in Spain. Fulfilment of this purpose does not require the ETVE to manage or direct business activities, but merely the management and administration of the securities.

The ETVE shall be also active, provided with an organisation of personal and material resources (no minimum is required, but that the ETVE may not be a shell company) and securities shall be nominative.

b) Percentage of equity holding: the ETVE shall have a minimum (direct or indirect) 5% stake in the stockholders’ equity of the foreign entities. Notwithstanding the above, although the stake does not reach 5% of the capital, it shall be understood that the entity may apply for the ETVE regime when the purchase value of its securities within the foreign company exceeds the value of €20 million, such purchase value being kept during the whole year prior to the distribution of dividends.

The company must communicate the option to apply for the ETVE tax regime to the Tax Authorities, without being obliged to follow any other administrative procedure.

2. Tax Benefits

Tax benefits are the followings:

2.1. Taxation of foreign entities’ dividends received by the ETVE

Dividends distributed to the ETVE by its foreign subsidiaries are exempted from the Corporate Income Tax, provided that the following requirements are fulfilled:

a) The minimum 5% stake in the foreign entity’s shareholders’ equity shall have been continuously held during the year prior to the one when they are distributed, or the acquisition value should be higher than €20 million.

b) The foreign entity shall be subject and not exempted from a tax of identical or similar nature to the Spanish Corporate Income Tax at a minimum 10% tax rate and shall not be registered in a country or territory defined as a tax heaven by the Spanish regulations.

The requirement of paragraph b) is considered to be fulfilled when the foreign entity is resident in a country with which Spain has signed a Double Tax Treaty.

Basically, the exemption involves not including dividends distributed by foreign companies in the ETVE’s tax base.

This exemption does not apply if the foreign company is registered in a country or territory classified as a tax heaven.

2.2. Taxation of income derived from the sale of securities in foreign companies

The capital gain generated by the sale of securities of foreign companies which comply with the requirements in Section 1 above shall be exempted from the Corporate Income Tax.

2.3. Regime applicable to distribution of dividends taxation

Profits distributed by ETVEs charged to income and not included in the tax base will be treated as follows:

a) When the income recipient is an entity residing in Spain subject to the Corporate Income Tax, the dividends received will not entitle to any deduction for double taxation of dividends.

However, the income recipient entity may apply for a double international taxation deduction concerning taxes paid abroad which correspond to the income obtained by the company distributing the dividends.

b) When the income recipient is a resident natural person subject to the Personal Income Tax, the benefit distributed will not entitle to any deduction for double taxation of dividends.

However, in case that the exempted income received by the ETVE to which the distributed dividends are charged had been taxed abroad, the natural person shareholder may apply to the net tax payable the deduction to avoid the international double taxation provided in article 80 of the Personal Income Tax Act for such tax borne by the ETVE abroad.

A Spanish ETVE shall have its independent books in accordance with the Spanish Generally Accepted Accounting Principles regulations.

c) When the income recipient is a natural person or corporation not resident in Spain (and without a Permanent Establishment in Spain), the distributed dividend will not be considered as obtained in the Spanish territory and therefore it will not be subject to withholding tax, unless the shareholder is located in a country or territory defined as a tax heaven.

2.4. Taxation regime of other income received from subsidiaries

The remaining income that the ETVE obtains, other than dividends and capital gains from the transfer of shares of foreign companies, (for example interests), will be subject to taxation in Spain (except if protected under a DTT).

3. Formal Tax Obligations

This tax regime has the following formal obligations:

3.1. ETVE formal obligations

The formal obligations that the ETVE shall fulfil are set out in art. 108.3 CITL:

• To specify in the annual accounts’ memorandum the income amount that has been exempted by application of the special regime and the taxes paid abroad.

• To make available to the shareholder the necessary information in order to be able to comply with tax obligations.

3.2. Accounting and annual accounts

A Spanish ETVE shall have its independent books in accordance with the Spanish Generally Accepted Accounting Principles (hereinafter, GAAP) regulations.

There is also an obligation to register every year the company’s accounts and the Annual Accounts with the Company Registry, filling out the specific form issued by the Spanish Company Registry.

3.3. Corporate Income Tax

The ETVE shall fill out income tax returns each year after its incorporation.

The term for filling out the CIT returns is six months plus twenty five days after the ETVE financial year termination.

3.4. Transfer Pricing Obligations

The controlled transactions must be documented certifying that these transactions have been carried out at a fair market value using one of the five methods regulated on the CITL.

Such documentation for each financial year should be prepared before the deadline for filling the CIT return.

Investment Vehicles in Argentina

Latinamerican Desk

Under the recent political y regulatory changes, Argentina has become an attractive destination for the establishment of international investments. During the first semester of the year 2016, the Direct Foreign Investment (IED) reached USD 1,304 millions, which equals all investments received during the whole year 2015, pursuant to the Argentinean informative portal INFOBAE.

The principal investment corporate vehicles used by Foreign Investors to carry out their businesses in Argentina are the Joint Stock Company, the Limited Liability Company and, to a lesser extent, the establishment of Subsidiaries.

Briefly below we will refer to the legal structure of the Joint Stock Company and the Limited Liability Company under the General Companies Act (Act Nº 19.550).

1. The Joint Stock Company (Sociedad Anónima)

(i) Structure

In accordance with the Argentinean Law, the Joint Stock Company (or "SA") is a legal person in which the shareholders’ liability is limited to their capital investments. Its stock capital is represented by registered shares, which may be divided into different classes, according to the special political o economic rights assigned thereto in the bylaws. The stock capital must be totally subscribed upon incorporation of the company and concurrently all the contributions in kind and at least 25% of the monetary ones must be made (the balance must be fully paid within a maximum term of two years). Even if the minimum stock capital of a Joint Stock Company pursuant to the LGS is of AR$ 100,000, we must take into account that the same must be sufficient for the development of the corporate purpose.

A minimum of two shareholders is required to regularly incorporate a SA and although the LGS does not establish a minimum share percentage, the Public Registry of Commerce of the City of Buenos Aires has adopted a restrictive criterion in relation to the capital distribution among shareholders, establishing that a distribution where the controlling shareholder holds 95% of the shares and the non-controlling one 5% of the shares, is admissible.

We must remind that Sole-Shareholder Joint Stock Companies (SAU) were recently accorded by the LGS, but since they are subject to specific legal requirements and strict control mechanisms by the Public Registry of Commerce resulting from higher costs of registration and maintenance, they are not commonly used by foreign investors in their development stage.

(ii) Management

Management of the SA is assigned to one or more directors, which may be either shareholders or not, for consecutive periods of up to three years, but they may be re-elected indefinitely. We must remind that the majority of the management members must be permanent residents in Argentina

Directors of a SA (including the non-resident ones) must be registered as self-employees before the Tax Authority and must pay to the social security system the relevant contributions on a monthly basis.

The board of directors of a SA operates collegiately and its decisions must be taken by the absolute majority of its members. Liability of the board members under certain circumstances is joint and several to shareholders, the company and third parties. Notwithstanding this, the director that took part in or was aware of the detrimental deliberation or resolution shall be exempted from any liability, if such director gives written evidence of its protest and gives notice thereto to the examiner before its liability is notified to the board, the examiners, the meeting, the competent authority or the legal action is exercised.

(iii) Examination

The SA Bylaws may provide for the appointment of one or more examiners, which must be lawyers or public accountants domiciled in Argentina. The function of the examiners is to control that the acts carried out or the resolutions adopted by the Board respect the regulations in force and the SA Bylaws.

The LGS sets forth that the SA is obliged to designate examiners, only if the SA: 1) makes a public offer of its shares or debentures; 2) has a stock capital higher than AR$ 10,000,000 3) is of mixed economy (with governmental share); 4) carries out capitalization transactions, savings or any other form requiring public money or securities with promises of benefits or future profits; 5) operates concessions or public services; 6) is a controlling or controlled company of another company subject to taxation pursuant to the points above. 7) is a Sole-Shareholder Joint Stock Company. If the SA is included in any of these cases, except for point 2), an odd number of auditors must be appointed by the Board of Directors, which shall form a body called Examining Commission. With respect to point 2) the appointment of one Principal Examiner and one Deputy Examiner shall be sufficient.

(iv) Dividends

The SA may distribute dividends or the payment of interest to shareholders only if they are realized and liquid profits corresponding to a balance sheet of the financial year regularly prepared and approved.

(v) Registration with the Public Registry of Commerce (RPC)

The SA must be registered with the RPC of its registered offices. For such purposes, the Bylaws must be submitted to the RPC for their approval, prior publication in the Official Gazette notifying the incorporation of the new SA and its basic information.

2. The Limited Liability Company (Sociedad de Responsabilidad Limitada)

(i) Structure

The Limited Liability Company (or SRL) is a legal person independent from its partners in which their liability is limited, as in the SA, to its capital investments. A minimum of two partners and a maximum of fifty is required to incorporate a SRL.

The stock capital is represented by stakes, all of which must have the same value. As for the S.A., upon their incorporation, the SRL stock capital must be fully subscribed and concurrently all the contributions in kind and at least 25% of the monetary contributions must be made, which shall be completed within a term of two years. The SRL are not obliged to have a minimum stock capital of AR$ 100,000, but there is the obligation that the same is proportional to its corporate purpose.

(ii) Management

The SRL management is assigned to one or more managers, which may be either partners or not. Their mandate may be established for a definite or indefinite term. As for the directors of the SA, the majority of the managers must be Argentinean residents and must be registered with the Tax Authority as self-employees.

The managers’ liability is eminently of a financial nature and they shall be liable to partners, the company and even third parties for any breach of their legal obligations and/or infringement of the bylaws by their damaging actions. The main difference in respect to the SA directors is that managers’ liability shall not be joint and several, unless expressly provided in the partners’ agreement that the management actions shall be collegiate. In this sense, if the collegiate management of the SRL is not provided, if several managers acted in the same acts leading to liability, the Judge may establish the part that may correspond to each one in the damages relief, considering their personal actions.

(iii) Registration with the Public Registry of Commerce (RPC)

As for the SA, for their regular operation, the SRL must be registered with the RPC of their registered offices.

(v) Reporting obligation

Contrary to the SA, the SRL with stock capital lower than AR$ 10,000,000 is not obliged to submit to the Public Registry of Commerce its annual accounting statements.

(vi) Dividends

As for the SA, there are not limitations for the SRL to pay dividends, provided that the same result from realized and liquid profits corresponding to a balance sheet of the financial year regularly prepared and approved.

3. Registration of Foreign Shareholders

As stated in the introduction, foreign investors may validly incorporate companies in Argentina. When the investor is a Legal Person, for the purposes or incorporating or holding any interest in an Argentinean company, such investor must be registered with the Public Registry of Commerce, appointing a legal representative and submitting the corporate and financial documentation that allows to certify that the investor company is duly registered with the Public Registry of Commerce of the jurisdiction of origin and that the same effectively develops its principal activity abroad.

* With the collaboration of the law firm Leonhardt & Dietl.