It is one of the most controversial tax measures of this year. The Government approved in the General State Budgets of 2021 a reform in the Corporation Tax that limits the 100% exemption in the repatriation of dividends . As of this year, this practice becomes 95% exempt. Spain thus enters the club of the other seven countries that tax the repatriation of dividends. The other 19 European OECD economies fully exempt the taxpayer from this tax.
The countries have two major problems of reserve requirements in their national and international tax regulations to implement this measure. On the one hand, a Constitutional problem , since it could generate double taxation. On the other hand, it also affects the freedom of movement of capital .
Of the 27 European OECD countries, 19 employ a fully territorial tax system, exempting all foreign-sourced dividends and capital gains from national taxes. In the remaining eight countries, such income is partially exempt from internal taxes. No European OECD country has a global tax system. How much do these financial practices cost in each country?
Of the eight countries with a partially territorial tax system , only Ireland fully taxes foreign-sourced dividend income while, at the same time, fully exempts foreign-sourced capital gains income. The opposite is the case in Poland.
The country fully taxes foreign source capital gains income and fully exempts foreign source dividends. The remaining six countries have partial exemptions for both foreign-sourced dividends and capital gains income, although Slovenia allows a 95% exemption on dividend income, but only a 47.5% exemption on earnings from capital.
Many countries treat foreign-source income differently depending on the country in which it was earned. For example, many states restrict their territorial systems based on a “black list” of countries that do not meet certain requirements . This is the case of Spain. However, among the countries of the European Union it is common to restrict the exemption from participation to the member states of the EU or the European Economic Area.
Legal reserve problems
“Obviously, restricting a technical, non-social, exemption generates double taxation, if the lost can never be recovered or, at least, undermines the principle of taxable capacity if what is done is to prevent it at a time but later recovery is allowed” , explains Esaú Alarcón, partner of Gibernau Asesores.
“Although there are European countries that apply something similar, it has these two problems of constitutional fit and, not least, it also has a problem of restricting the free movement of capital, which is a freedom included in the Treaty of the European Union,” he adds .
The dean of the College of Economists of Valencia, Juan José Enríquez, valued the impact of this measure when it was studied in the failed Budgets of 2019. The economist then requested a transitional regime, since he estimates that with this reduction in the exemption in dividends and the capital gains obtained by Spanish subsidiaries abroad would be taxed at an effective rate of 1.25% (obtained by multiplying 5% of the income of the company in question by a rate of 25% which is the rate, the nominal rate).
The majority of States grant a 100% discount on these acts to avoid double taxation
Thus, if the subsidiary distributed this dividend to the highest companies in the group’s pyramid and these in turn did it too, until they reached the parent company, a higher company than a higher company paying that 1.25% until they ended up in the parent company. , there would be a cascading effect, which would end up being taxed at 5%.
The annual collection report of the Tax Agency shows that the double taxation exemption is the item that most affects the calculation of the corporate tax base and, therefore, the one that contributes the most in large companies to the large difference between the effective rate (6.14%) and the nominal rate (25%).
The collection figures reveal that the companies recorded a positive accounting result of 198,202 million euros during 2016 , the last year with available data. Of this amount, the companies were deducted 105,332 million for dividends and benefits received from their subsidiaries in other countries to avoid double taxation.
At the end of 2019, many companies chose to advance the payment of dividends to December with the intention of avoiding the tax increase agreed then in the budget pact signed by PSOE and Podemos and after the announcements that a new Government of both formations could raise taxes. The companies thus wanted to avoid a possible taxation of 5% of the dividends repatriated from abroad, with which the Executive estimates that it could collect 1,776 million in a year.
Given the change and according to data from the Tax Agency, in 2018 the second installment payment of Corporation Tax grew by 37.4% in the consolidated groups. According to the collection reports, the companies, anticipating this reform, paid the Treasury 23,958 million in advance payments, of which 13,509 million came from the consolidated groups, most of the Ibex 35 companies.
Delve into the gap
This trend of taxing profits that are produced outside the country does not end with this limit to exemptions. The G7 global minimum tax – signed by Germany, Canada, the United States, France, Italy, Japan and the United Kingdom – increases tensions between large and small European economies. The measure is signed by the three major European powers: Germany, France and Italy. They are the same economies that limit the exemption to repatriate dividends or capital gains.
Small economies resist because they believe it succeeds in attracting investment
These measures have opened up more tensions between European partners. Ireland and Hungary are currently leading the response to the G7. Irish Finance Minister Paschal Donohoe has warned that Ireland will defy the G7 decision and “fight” to maintain its 12.5% Corporate Tax rate. Donohoe spoke with Janet Yellen, the United States Secretary of the Treasury.
The Irishman told the Biden Administration that “there is still a role for legitimate tax competition, particularly for smaller economies.” Donohoe hopes that other countries will join his request and challenge the G7 decision. “We need to be able to use fiscal policy as a legitimate way to offset the advantages of scale,” he says.