Tax advantages of making investments through SCRs or venture capital companies

The investment industry is continuously growing in Spain and gaining more and more weight. In our recent publications, we have tried to explain the main characteristics of some investment vehicles such as the Free Investment Companies or Closed-Ended Investment Companies (SICC). Along the same lines, in this article we are going to analyse the tax advantages of investing through SCRs or venture capital companies.

Venture capital companies ( SCR) are public limited companies whose main corporate purpose is the acquisition of temporary holdings in the capital of non-financial enterprises which, at the time of the acquisition of the holding, are not listed on the first market of the stock exchange or any other equivalent regulated market in the EU or other OECD member countries.

Generally, these companies will be taxed under the general corporate income tax regime, but with a number of special features that can provide significant tax benefits to both the company itself and its investors.

Tax incentives for Venture Capital Companies

How are capital gains obtained by SCR taxed?

Firstly, it will be necessary to analyse whether the company meets the requirements set out in Article 21 of the LIS for the application of the double taxation exemption regime.

If these requirements are met, the general regime will be applied without any speciality. In other words, you will be able to enjoy the 95% exemption on the positive income generated on the transfer of the shares.

In the same way, the negative income that could be generated by these transfers would not be included in the IS taxable base under the same conditions as the rest of the IS taxpayers.

If the above requirements for applying the double taxation exemption regime are not met, the special feature of the special tax regime for SCRs comes into play, namely that they may benefit from an exemption of 99% of the positive income obtained from these transactions , provided that the transfer takes place from the beginning of the second year of holding computed from the time of acquisition or delisting and up to and including the fifteenth year.

In certain exceptional cases and under the conditions established by regulations, an extension of the latter period shall be allowed, up to and including the twentieth year.

On the other hand, the 99% partial exemption does not apply to transfers made in the first year and from the fifteenth year onwards, i.e. the whole of the income obtained is included in the tax base.

Notwithstanding the above, this exemption shall not apply where:

1. The acquirer is resident in a country or territory qualified as a tax haven.
2. The acquiring person or entity is related to the venture capital organisation, unless it is another venture capital organisation, in which case the latter shall be subrogated to the value and acquisition date of the transferring entity.
3. The securities transferred were acquired from a person or entity related to the venture capital organisation.

How are dividends received by the SCR taxed?

It applies a 95% exemption regime to dividends received by these entities from investee companies, regardless of the percentage of ownership and the length of time the shares or holdings have been held, provided that the other requirements of Article 21.1 of the LIS are met.

Tax Incentives for Venture Capital Company Investors

How are dividends distributed by SCRs taxed?

The tax treatment of such income will depend on the nature of the partner:

• If the shareholder is a legal entity or a non-resident with an EP in Spanish territory, they will be entitled to apply the 95% exemption of art. 21.1 of the LIS, regardless of the percentage of shareholding that the shareholder has in them and the length of time they have held the shares, provided that the rest of the requirements are met.

• If the partner is a non-resident without an EP: The income will not be considered as obtained in Spanish territory unless it is obtained through a country or territory classified as a tax haven.

• If the shareholder is a resident individual: There is no speciality and therefore the dividend will be taxed for personal income tax purposes and will be included in the taxpayer’s savings tax base.

How are capital gains obtained on the transfer or redemption of shares in SCRs taxed?

The tax treatment of this income will also depend on the nature of the partner:

• If the shareholder is a legal entity or a non-resident with an EP in Spanish territory, they can enjoy the 95% exemption of art. 21.3 of the LIS, regardless of the percentage of shareholding the shareholder has in them and the length of time they have held those shares, as long as the rest of the requirements are met.

• If the partner is a non-resident without an EP: The income will not be considered to be obtained in Spanish territory unless it is obtained through a country or territory classified as a tax haven.

• If the shareholder is a resident individual: There is no speciality and, therefore, the capital gain will be taxed for personal income tax purposes and included in the taxpayer’s savings tax base.

Advantages with regard to compliance with the requirements for accessing the tax benefits of Family Businesses

Finally, it is also worth mentioning the compatibility of this type of vehicle with the fulfilment of the necessary requirements to access the tax benefits established by the Spanish Tax System for Family Businesses, such as the exemption of the shares for IP or ITSGF purposes, or the reduction of the taxable base in the ISD.

Conditions for accessing the tax benefits of the Family Business: activity not related to the management of real estate or movable assets.

One of the necessary conditions for the application of these incentives is that the activity carried out by the entity does not consist of the management of movable or immovable assets.

An entity is deemed to manage movable or immovable assets and therefore not to be engaged in an economic activity if for more than 90 days of the financial year more than half of its assets consist of securities or are not used for economic activities.

It should be recalled that a particular feature of the investment policies of SCRs is that they are obliged to allocate their funds to investment in certain assets, known as the mandatory ratio, which must represent at least 60%.

Returning to the above requirement, the IP rule identifies a number of securities or non-affected assets that will not count as movable assets, including, most notably:

• Those held to comply with legal and regulatory obligations.

• Those that grant at least 5% of the voting rights in the investee and are held for the purpose of directing and managing the holding provided that, for this purpose, the corresponding organisation of material and human resources is in place and the investee carries out an economic activity ( holding companies).

Consequently, securities that form part of the mandatory investment ratio will not be counted in SCRs , as they are held to comply with legal obligations required by Law 22/2014.

For this reason, to the extent that the SCR’s mandatory investment ratio reaches 60% and is completely covered by the participation in investee entities that comply with the provisions of articles 13 and 14 of the LSCR, it can be understood that the SCR does not have as its main activity the management of movable assets and can access the tax advantages of the Family Business.

The rest of the invested assets will make up the free disposal coefficient and this may be considered as affected for the purposes of applying the aforementioned tax benefits, provided that the requirements established in the regulations are met. However, the determination of its scope will require a study of each specific case.

Do you need advice? Access our areas related to the tax advantages of investing through venture capital companies (SCRs).

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