The ETVE and the Spanish holding company: the article 21 LIS exemption

Spain is not a low-tax jurisdiction and does not claim to be. What it offers to a parent company is something else: a broad exemption on profits coming up from subsidiaries and a large network of double taxation treaties. A Spanish company that groups shareholdings, inside and outside Spain, exempts 95% of the dividends it receives from its subsidiaries and 95% of the positive income it obtains when it sells 1 of them.

With the general Corporate Income Tax rate of 25%, that leaves the effective tax bill on that dividend at 1.25%. What you buy with this is predictability: the profit of each subsidiary reaches the Spanish parent company without being fully taxed again, and from there it is reinvested, distributed or used to buy more. The money stops getting trapped in each country.

The trade-off is that none of this is automatic. There are 2 requirements that are checked dividend by dividend, 1 regarding participation and another regarding the subsidiary's taxation, and a 3rd one, the substance of the holding company, which is never checked until a tax inspection from Hacienda (the Spanish Tax Agency) arrives and then it is checked entirely.

A territorial warning before continuing: if the holding company has its tax domicile in the Basque Country or Navarre, the Corporate Income Tax applied is not the state one, but the regional regulations, which regulate their own version of the exemption. In the Canary Islands, Ceuta and Melilla the tax is the state one, but specific regimes coexist, such as the Canary Islands Special Zone or the Ceuta and Melilla bonus, which change the final result. The figures in this guide are those for the common territory.

The exemption covers 2 different types of income and most readers only have the 1st one in mind. 1: the dividends and profit shares that the holding company receives from its subsidiaries. 2: the positive income it obtains when it transfers the participation in a subsidiary, that is, the capital gain from the sale. It applies to both Spanish and foreign subsidiaries, with the same participation requirements. With a nuance that should be kept in mind from the beginning: in the sale, the 1-year holding period must be completed on the day the transfer takes place, and it cannot be completed afterwards.

Until the financial years starting in 2020 the exemption was 100%. Since the tax periods starting on 1 January 2021, 5% of the dividend or capital gain is integrated into the taxable base as management expenses of the participation, and that 5% is integrated even if the holding company has not actually had that expense. That is where the 95% you read everywhere comes from, and that is also where the 1.25% effective taxation comes from.

There is 1 strict and small exception, designed for starting companies. The 5% reduction is not applied when the dividend comes from a subsidiary incorporated after 1 January 2021, 100% directly owned since its incorporation, the company receiving it had a turnover of less than 40 million euros in the previous period and is not part of a commercial group. That treatment lasts for the tax periods ending in the 3 immediate and successive years following the incorporation of the subsidiary, and then it ends.

A practical consequence that surprises many internal advisers: as the income is not integrated into the taxable base, the tax that the subsidiary's country has withheld on that dividend is not recovered in Spain. The exemption and the deduction for international double taxation are not added together. If they withhold tax at the source, that cost is definitive, and that is why the withholding rate of the applicable treaty weighs so heavily in the design of the structure.

The 1st is about participation. The holding company must hold at least 5% of the capital or equity of the subsidiary, directly or indirectly, and have held it uninterruptedly during the 1 year prior to the day the profit becomes payable. If upon collection it has not yet reached 1 year, the exemption is not lost provided it maintains the participation for the time remaining to complete it.

The 2nd is about the subsidiary's taxation, and it only applies to non-resident ones: it must be subject to and not exempt from a foreign tax of an identical or analogous nature to the Spanish Corporate Income Tax, at a nominal rate of at least 10%. Pay attention to the word nominal: you look at the rate set by the law of the other country, not what the subsidiary ended up paying after its deductions.

That requirement is understood to be met in another way when the subsidiary resides in a country with which Spain has signed a double taxation treaty containing an exchange of information clause. It is the shortcut that resolves most European and Latin American cases, but it is advisable to check it treaty by treaty and not from memory.

In the sale of the participation the requirement is stricter than in the dividend: the minimum taxation requirement must be met in each and every one of the holding years, not just the last one. If it failed in some financial years, the exemption is not lost entirely, it is prorated. And there are exclusions that do not admit an extension: the income obtained when transferring an asset-holding entity is not exempt beyond the part corresponding to undistributed profits generated during the holding period.

The most categorical exclusion is that of non-cooperative jurisdictions. If the subsidiary resides in a country or territory classified as such, there is no exemption. The only way out is if it is a Member State of the European Union and it is proven that the incorporation and operations respond to valid economic reasons and that the entity carries out real economic activities.

And a precaution that is forgotten when looking at the treaties: the Multilateral Instrument, the MLI, has modified a good part of the bilateral treaties signed by Spain, among other things introducing a clause that denies the benefit of the treaty when obtaining it was 1 of the principal purposes of the transaction. If the data you care about is the withholding tax that the subsidiary's country or your partner's country will apply, you must look at the treaty with the MLI already applied, not the original text as it was signed.

The 1st thing to clear up is a very widespread misunderstanding: the 95% exemption on dividends and capital gains from subsidiaries is available to any Spanish company that meets the requirements, whether it is an ETVE or not. The special regime for Foreign Securities Holding Entities (ETVE) does not improve that. What it provides is 1 floor up, at the holding company's partner level.

When an ETVE distributes to a non-resident partner, without a permanent establishment in Spain, profits that come from exempt foreign income, that dividend is not considered obtained in Spanish territory. There is no Non-Resident Income Tax and there is no withholding tax. The same rule applies to the capital gain of that non-resident partner when they sell their participation in the ETVE, in the part corresponding to those exempt reserves or to the latent capital gains of the subsidiaries that meet the requirements.

Without the ETVE regime, that same distribution would be Spanish-source income and would be taxed by the Non-Resident Income Tax, unless the partner could rely on the European Union parent-subsidiary exemption or the applicable double taxation treaty. Both routes exist, but both have their own requirements and both are disputed in an inspection. The ETVE eliminates the discussion at the root.

2 important limits. The 1st: this rule does not apply when the partner receiving the payment resides in a country or territory classified as a non-cooperative jurisdiction. The 2nd: if the partner is a tax resident in Spain, the ETVE regime gives them nothing special and the general rules apply. A Spanish company that is a partner of the ETVE will in turn apply the 95% exemption; a resident individual will integrate the dividend into their savings income. It is the number 1 mistake of the reader: the same distribution is taxed completely differently depending on which side of the border the person receiving it is on.

In exchange, the ETVE assumes a transparency obligation: it must mention in the notes to its annual accounts the amount of exempt income and the taxes paid abroad corresponding to them, and provide its partners with the information they need to apply their own regime.

It is not an authorisation that Hacienda grants or denies, it is a communication. The option for the regime is communicated to the Tax Agency and the regime applies to the tax period ending after that communication and to all successive ones, until the waiver is communicated.

Translated to a calendar: if your financial year closes on 31 December and you communicate the option in November, that same financial year is already covered by the regime from its 1st day. What is not possible is to communicate it in March and try to apply it to the financial year that closed in December. That is why the real deadline you have is the close of the financial year, and not the date of form 200.

Before communicating there are 3 things that must be resolved. 1: the corporate purpose must include the activity of managing and administering securities representing the equity of entities not resident in Spanish territory. 2: the securities or participations representing the capital of the holding company must be registered. 3: it cannot be 1 of the excluded figures, that is, Spanish and European economic interest groupings, temporary joint ventures and asset-holding entities.

The requirement for registered securities is resolved from the origin by a limited liability company, because its shares always are. A public limited company with bearer shares must convert them first. If the company already exists and the corporate purpose must be expanded, the agreement is elevated to a public deed before a notario (Spanish notary) and registered in the Commercial Registry: that step exists and Managora coordinates it from beginning to end, just like the incorporation of the limited liability company when the holding company is created from scratch.

In parallel, the census is updated with form 036, which is where the purpose of the activity and the company's data for Corporate Income Tax purposes are recorded. And in the annual declaration, form 200, the status of foreign securities holding entity is marked and the adjustments to the accounting result required by the regime are entered.

The law requires that the activity of managing and administering the participations be carried out through the corresponding organisation of material and human resources. It does not set a number of employees, nor office square metres, nor a minimum budget. That is exactly what makes the requirement the most debated of the regime and the one that generates the most files.

What is looked at in an inspection is who decides, where it is decided and with what. A board of directors that actually meets in Spain and leaves minutes of the investment and divestment decisions. Someone with real capacity and dedication to manage the portfolio, whether an employee or a remunerated director. A place from which to work. Accounting, contracts and documentation that explain why it was bought, why it was sold and who agreed to it.

What the regime does not support is the opposite pattern: domicile in a third party's office, no personnel expenses, no minutes with content, and a director who resides and decides outside Spain. There the discussion is no longer just about the ETVE regime, but about where the effective place of management of the company is.

The problem does not stay in Spain either. Without substance, the subsidiary's country can deny the application of the treaty and the reduced withholding tax on the dividend it pays you, relying precisely on the anti-abuse clause that the MLI has introduced in that treaty. Substance is not a whim of the Spanish inspector: it is what sustains the whole chain.

There is a collateral effect that should be foreseen. A holding company with real resources usually provides services to its subsidiaries, finances them or charges them for management. All of those are related-party transactions: they must be valued at market price, documented and, once the thresholds are exceeded, declared in form 232, which is submitted in the month following the 10 months after the end of the tax period and has no extension. If your financial year closes on 31 December, that is from 1 to 30 November of the following year; if it closes on another date, the submission month is different. With counterparties resident in non-cooperative jurisdictions it is declared without any threshold.

The change that breaks the most structures this year is the end of the €20,000,000 transitional regime. Until 2020, whoever did not reach 5% could apply the exemption if the acquisition value of the participation exceeded €20,000,000. That threshold disappeared for new acquisitions and a 5-year transitional regime was left for participations already bought, which covered the tax periods starting in 2021, 2022, 2023, 2024 and 2025. In the financial years starting on 1 January 2026 it is no longer possible: either you reach 5% or there is no exemption.

If your holding company lives off a participation that is large in euros but small in percentage, this affects you fully and the time to reorganise it was yesterday. The way out usually involves reinforcing the participation up to 5% or reviewing how that dividend is channelled, and each option has accounting and cash flow consequences that should be calculated before moving anything.

The 2nd front is Ley 7/2024 del Impuesto Complementario (Law 7/2024 on the Complementary Tax), which transposes the so-called Pillar 2 into Spain and has been in force since 22 December 2024. Its idea is simple: multinational groups and large-scale national groups must bear a minimum effective taxation of 15% in each jurisdiction, and if they fall below they pay the difference. The entry threshold is a consolidated turnover of 750 million euros.

For a holding company that belongs to a group of that size, the 1.25% effective rate of article 21 ceases to be the final result: it enters into the calculation of the group's effective taxation in Spain and can end up generating complementary tax. For a family holding company, for a medium-sized group or for an investment structure that does not reach the threshold, the Complementary Tax does not apply and the exemption works exactly as described in this guide.

The reporting machinery for that tax is already approved: Orden HAC/1198/2025, de 21 de octubre (Order HAC/1198/2025, of 21 October), created form 240 for communication by the reporting entity, form 241 for the informative declaration and form 242 for self-assessment. They are not forms for the ordinary holding company, they are forms for groups that exceed the threshold, but it is advisable to know they exist before the 1st requirement arrives.