A new law in Spain establishes a regime that goes beyond pure tax incentives, and could represent Spain's entry into the race to be the jurisdiction with most favourable taxation for debt issues.
Law 19/2003, on a New Regime for Capital Transfers, International Economic Transactions and Prevention of Money Laundering came into force on July 4 and its main focus is on tax.
The new law includes an Additional Disposition, (Disposición Adicional segunda - AD 2nd ) to Law 13/1985 establishing the outlines and the tax regime for preference shares (participaciones preferentes - PPs). This is a concept alluded to for the first time in article 7 of Law 13/1985 (as amended by Law 44/2002), that enumerates the different components of the net equity of credit institutions (instituciones de crédito). PPs are one of these components.
PPs must fulfill the following requirements to be eligible for the tax benefits:
PPs must be issued by a credit institution or by a legal entity, residing either in Spain or in the EU (excepting tax havens), provided that its voting rights fully correspond, either directly or indirectly, to a credit institution controlling a group or subgroup of credit institutions and whose exclusive corporate purpose and activity would be to issue PPs. The group or subgroup of credit institutions must be capable of providing consolidated accounts.
When the debt is issued by an affiliate, the financial resources obtained must be deposited in the controlling credit institution or in another company belonging to its group, and the deposit can only be used, once the issue and administration expenses have been deducted, for the compensation of losses or for the general restructuring of the controlloing entity or of its consolidated group, once all the reserves have been consumed and the outstanding capital has been reduced to zero.
PPs are entitled to the perception of a pre-established remuneration of a non-cumulative kind, which will always be dependent on the existence of distributable profits in the controlling entity or in the consolidated group or subgroup.
No voting rights are allocated to PPs unless this has been established as a exception.
PPs do not grant preferential subscription rights in regards to new issues. They are in principle perpetual, but may be amortized after five years with authorization from the Bank of Spain.
PPs will be quoted in official secondary markets, will not exceed 30% of net equity of the relevant issuer´s group and in the case of winding up or of other similar cases in which a specific order of priority of credit recovering is established by the law, the position of PPs holders will be subordinated to the remaining creditors, even to the subordinated ones and prior to the shareholders or to the quota-participants. PPs will only be entitled to recover nominal value plus accrued remunerations pending payment.
It is also important to point out that the new regime is applicable to other neighbour financing instruments. AD 2nd refers as well in its numbers 5 and 6 to "debt instruments" issued by entities whose sole corporate purpose is precisely the issue of these participations and instruments, and "other debt instruments" issued by Spanish or EU resident entities whose voting rights would fully, directly or indirectly, correspond to listed companies which are not credit institutions. In this last case, there is no need to obtain specific authorization for the advance amortization, in the same manner that the 30% limit does not apply.
The tax regime refers both to the issuer and to the investors. In the case of the issuer, the main features are the following:
- the remuneration agreed will be deductible in the corporate income tax of the issuing entity;
- the operations arising from the issue of PPs will be exempt from the applicable transfer tax; and
- if a deposit has been constituted, the income derived from it is exempt as well.
For Spanish tax resident individual investors, the regime presents aspects like the treatment of the income arising from the PPs, which are taxwise treated as proceeds obtained from the cession to third parties of capital of their own (as any income derived from debt instruments). This treatment will apply even in the case of transfer of PPs (no capital gains tax will be requested). In the particular case of non-residents without permanent establishment, the exemption for the relevant non-resident income tax will be equivalent to that of the public debt.
There are many issues still to be clarified in the legal regime, such as the functioning of the deposit and the strictness that will apply to the social purpose of the vehicle. The position of the holders with regard to the issuer can also create difficulties in relation to other creditors, but no doubt this new opportunity will be thoroughly used by Spanish banks, among others, because it provides a certainty that the reform lacked before.
Furthermore, the range of debt instruments that will be affected by the new tax measures and the information obligations associated to them will require further clarification, which we hope will be available soon, when this new provision is developed through regulations.