Collective investment vehicles (CIVs) were regulated in
Spain on December 26 1984 under Law 46. The Law and its
subsequent amendments created a new framework that contributed
to the success of these vehicles. By 1999 there were 2,477
collective investment vehicles holding assets representing
around 44% of the annual Spanish gross production.
CIVs are either financial institutions or real estate
investment vehicles. In turn these may either be companies or
funds. The real estate investment funds and companies as their
name would imply invest in properties which are to be leased.
The financial institutions may be either long-term or
short-term investment companies or funds. Investment companies
investing in long-term securities are called Sociedades de
Inversión Mobiliaria de Capital Fijo while those
investing in short-term securities are known as Sociedades
de Inversión Mobiliaria de Capital Variable.
Similarly investment funds are divided into Fondos de
Inversión Mobiliaria which invest in long-term
securities and Fondos de Inversión en Activos del
Mercado Monetario which invest in short-term
Investment companies have legal personality and their
capital is represented in shares. Investment funds lack legal
personality and their wealth is represented by participating
fund members. Although fund members are the actual legal owners
of the fund's assets, companies are allowed to manage the
Around 96% of investments in Spain are held by investment
Law 46 and the taxation of Spanish investment
Both investment companies and investment funds are taxable
entities for corporate income tax purposes. CIVs do not have to
distribute income or profits to the share or participation
holders. CIVs set up and ruled by Law 46 are not therefore
transparent. This applies indifferently to investment funds
despite their non-legal personality.
However, most of the European tax systems have incorporated
the see through approach to their legislation for investment
funds. Germany, Austria, the Netherlands, the UK and
Switzerland consider investment funds as transparent. Therefore
any gain or income obtained by the fund is exempt. In these
cases, dividends obtained by the fund are effectively not taxed
against the participation holder by granting a tax credit and
interest obtained by the fund is effectively taxed against the
investor at the usual rates. The aim of this transparency is to
avoid double taxation.
Other countries such as Belgium, France, Greece and
Luxembourg tax the investment funds at very low rates or even
zero rates. Italy and Portugal have special taxes on
income/gains of investment funds of up to 10%. Spain has chosen
to tax investment companies and funds as entities but the tax
rate amounts to 1%, provided that the investment vehicle falls
within the Law 46 regulations. However, resident individuals
cannot avoid double taxation entirely.
The 1% rate of financial institutions also applies to real
estate investment companies and funds which must invest in real
estate located in urban areas destined for leasing and at least
50% of the total assets must be personal homes or buildings
occupied by senior citizens and students.
Investment companies and funds are registered with the
Spanish stock market regulator, the Comisión Nacional de
Mercado de Valores (CNMV), and require much higher investment
levels than investment companies.
Taxation of non-residents investing in Spanish
collective investment vehicles
As a general rule, dividends and interest paid to
non-residents by Spanish entities and gains obtained by
non-residents from securities issued by Spanish entities are
subject to tax at a rate of 15%.
Notwithstanding the above, the taxation of the non-resident
will be different in each of the following scenarios:
- A resident in an EU Member State transfers or reimburses
quotas, shares or participations in a financial Spanish
collective investment company or fund. Any yield obtained
would be considered an exempt gain, not subject to
Please note that in this case a distribution of dividends
from the investment company or fund will be subject to 15% tax
unless the recipient can benefit from a reduced rate as per a
double taxation agreement or it can benefit from the
parent-subsidiary Directive. In practice, Spanish investment
funds do not distribute dividends although it would be possible
under our legislation.
- A resident in a state with a double taxation agreement in
effect with Spain, including the exchange information clause,
transfers or reimburses quotas, shares or participations of
an investment fund quoted in a Spanish stock exchange. Any
gain would be exempt.
- A non-resident obtains income from an investment fund to
which Law 46 does not apply. In this case, any profits
obtained by the fund will effectively be directly obtained by
the non-resident and the usual tax rules for non-residents
will apply. In other words, an investment fund which at any
point does not fulfil the requirements of Law 46 becomes
transparent. In this case, any profits obtained by the fund
are allocated to the holders. More importantly, the yield
obtained by the quota holder is no longer considered a gain
and there is no possibility to claim exemptions described in
1 and 2.
- A non-resident receives income from a foreign investment
company or fund contracted through a Spanish financial
dealer. This would fall outside the scope of Spanish
- A resident in a State with a double taxation agreement in
effect with Spain, regardless of the inclusion of an
information exchange clause, transfers or reimburses shares
or quotas in a Spanish collective investment vehicle ruled by
Law 46. This gain is exempt but a significant limitation
applies. In contrast with scenario 2, if the assets of the
investment vehicle consist mainly of Spanish real estate and
the double taxation agreement allows taxation in Spain of
entities holding mainly real estate, the gain will be subject
to Spanish taxes even if the non-resident is resident in an
- A resident of a territory classified as a tax haven
obtains income or gains from an investment company or fund.
The resident will be taxed at a rate of 15%, even if the
investor may be exempt under any of the previous
In this regard, it is worth noting that there exists an
opportunity for tax havens which wish to avoid being
short-listed. The regulations associated with the reform of the
2003 Budget Law set out that any tax haven which signs an
agreement of information exchange with Spain will be
automatically excluded from the short list from the effective
date of the agreement. This provision is in line with what the
OECD offers to low taxation regimes to become more
- In any other scenario or if the recipient does not
provide a certificate of tax residency in an EU member state
or in another state with a double tax convention in effect,
any income or gain will be subject to 15% withholding
However, if the recipient is a non-resident individual who
obtains a gain from the sale or redemption of participation in
a collective investment vehicle which was acquired before 31
December 1994, the non-resident will still benefit from a
reduction on the gain of 14,28% for each year of ownership
achieved before that date. This reduction of the gain will be
considered upon assessing any withholding tax.
The withholding tax is collected by the investment company,
the management company of an investment fund, or in certain
cases the recipient will account for it. The tax is assessed as
an amount equal to 15% of the difference between sale and
Although this article aims to describe in general terms how
returns from investment companies and funds are taxed, there
are certain particular cases that are worth commenting on:
- In June the European Council set out the basis of a new
tax system for returns on savings. The new system guarantees
a flow of information between Member States or a minimum tax
on returns obtained in Austria, Belgium and Luxembourg of up
The proposed Directive will also apply to CIVs. When income
and gains are obtained from investment companies and funds
which have credits or other similar securities as more than
half their assets, returns will be treated as interest for the
purposes of the Directive and not as gains or dividends.
The Directive tries to prevent institutions and individuals
from investing in investment companies and funds in order to
avoid application of the Directive on Savings. It would be easy
to transform interest from securities into dividends and gains
obtained from collective investment vehicles that initially
were not within the scope of the Directive on Savings. Under
the draft of the Directive setting out the basis for the new
system of taxation, income from investment companies and funds
are dealt with as interest if most of their assets consist of
credits. The draft's 50% limit might be too low to achieve the
purpose of the proposed Directive but it was a political
decision taken to exclude certain investment vehicles
originating from France and Luxembourg.
- Double tax conventions may protect non-residents from the
withholding tax on returns obtained from investment funds and
companies, especially if they are dealt with as gains. Nobody
disputes that collective investment companies that enjoy
legal personality may themselves benefit from the double tax
convention if they are a resident in the corresponding state.
However, funds are transparent entities in most countries,
have no legal personality and are just a form of collective
investment. The question is whether an investment fund is a
taxable person for the purposes of a double tax
As each country has its own regulations and each double tax
convention differs, the matter should be addressed on a
case-by-case basis. However, if internal regulations or the
double tax convention do not expressly grant the status of
taxable person to a foreign investment fund, they should be
dealt with as transparent.
In Spain, it is only clear that investment funds regulated
by Law 46 are taxable persons. It might also be that other CIVs
regulated by Directive 85/611/CEE would also be given this
status although there is no clear provision to that effect. Any
other investment fund is transparent.
Effective beneficiary clauses, included in most double tax
conventions, allow states to see through entities that claim
the advantageous provisions of a double tax convention.
Considering that even in those states where investment funds
are not transparent the tax burden of the fund is very low or
nil, it is the sort of scenario where the clause might be
applied. Effectively this means that the issue of whether an
investment fund is a taxable person who may benefit directly
from the double tax convention provisions is not that relevant.
The Spanish Tax Administration may always request information
on the holders of the investment fund and deny the benefits of
the tax convention when the investment fund is used as a means
to avoid the withholding tax of the effective beneficiary.
Finally, the internal foreign-controlled company (CFC) rules
should also be considered in structuring an investment in
Spanish collective investment vehicles as they are taxed at a
1% corporate income tax rate.
Tax on foreign investment funds investing in Spanish
Foreign investment funds that own real estate in Spain will
become a transparent taxable person for the purposes of the
non-residents income tax if their activities constitute a
Real estate income can be taxed as investment income or as
business income. Income obtained by foreign investment funds
would normally be taxed gross at a 25% tax rate. However,
provided that sufficient presence is established in Spain, the
investment fund might be taxed as a taxable person performing
business activities and in this case only net income is taxed
at a 35% tax rate.
As a transparent taxable person for the purpose of the
non-residents income tax, the fund has its own tax obligations
such as filing an annual self-assessment in representation of
all non-resident fund holders. However, the fund shall prove
that any of the non-resident holders may benefit from a double
tax convention in order to apply a reduced rate.
A special case applies to German open investment funds.
These funds cannot hold assets in German law and therefore all
its assets are held by the management company in its name. In
this case, the Spanish administration overrides the trust
agreement between the fund and its management company and,
thus, is dealt with as stated above.
Spanish residents' income from foreign collective
investment companies and funds
As described before, gains generally receive more tax
advantages than income in the Spanish tax system. This explains
why the Spanish investment funds do not distribute dividends to
Returns obtained by Spanish individuals and entities from
foreign collective investment institutions regulated by
Directive 85/611/CEE, incorporated and domiciled in another EU
member state, and registered with the CNMV for the purposes of
being distributed to Spanish nationals would be considered
either dividends or gains.
In the case of individuals, dividends will be taxed at the
marginal rate but gains on assets held for more than a year
will only be taxed at 15%. In addition, gains on assets owned
before December 31 1994 can benefit from the above referred
reduction of 14.28 % for each year of ownership achieved by
that date. Corporations will be taxed at the general tax
As of January 1 2003, there has been a major development in
the tax system applicable to earnings obtained from collective
investment institutions although it is only effective for
Spanish resident individuals. It also has big implications for
subscribers of EU foreign investment funds.
The new legislation sets out that earnings obtained by
resident individuals on the reimbursement of investment fund
participations, as well as in the transfer of shares in
investment companies with more than 500 partners, (as long as
the participating partner has not held more than 5% of the
company capital within the previous 12 months) will not be
computed for income tax purposes when the proceeds obtained in
the reimbursement or transfer are reinvested in the
participations or shares of another collective investment
institution. The new shares and participations will keep the
value and acquisition date of the shares or participations
transmitted or reimbursed.
The tax postponement is also applicable to partners or
participants in collective investment institutions regulated by
Directive 85/611/CEE, incorporated and domiciled in any member
state of the European Union and registered with the CNMV as
long as: (i) entities registered with the CNMV carry out the
commercialization; (ii) the above-mentioned limits on the
number of partners and the proportion of capital is respected
in each commercialized sub-fund.
No withholding tax shall be applied to the earnings obtained
when the tax postponement is applicable.
Special rules also apply to Spanish resident individuals and
companies holding participation in collective investment
institutions incorporated in tax havens. The difference between
the market value and the acquisition value of the participation
shall be allocated to the Spanish resident. The acquisition
value is increased by the amount of previous allocations. The
Spanish legislation presumes this difference to be 15% of the
acquisition value. Luxembourg funds ruled by Directive
85/611/CEE are not included in these provisions.
Returns obtained from investment funds not regulated by the
Directive 85/611/CEE might not be treated as gains or
dividends. Spanish internal legislation might treat them as
interest income although it will depend on the type of income
received and the double-tax agreement in force, if any.
Returns on hedge funds are normally considered gains for tax
purposes and they will be taxed as described above. However,
certain hedge investments aimed at covering business risks
might be dealt with as business income.
Capital investment will continue to aim at investment funds,
especially those not attracted by the proposed Savings
Directive. Spanish investment vehicles regulated by Law 46 and
European collective investment institutions within the scope of
Directive 85/611/CEE will benefit from an advantageous tax
regime in Spain and in other EU Member States. Certainly, a
uniform tax treatment of the funds within the EU will help to
avoid capital investment flow due to tax motives. However,
uniformity will not occur in the near future.