Tax benefits of Free Investment Companies
In previous posts in our blog, we have highlighted the growing interest in Free Investment Companies (SIL), as they are flexible investment vehicles that allow investment in any type of financial asset (shares, stocks, crypto-assets, etc.), offering a minimum taxation in the Corporate Income Tax.
In today’s post, we will detail the main tax benefits that a Free Investment Company enjoys and the tax treatment that characterises them.
At what rate of taxation are Free Investment Companies (SILs) taxed?
As mentioned above, a Free Investment Company is a type of Collective Investment Institution (IIC), which, unlike other commercial companies that are generally taxed at a tax rate of 25%, is characterised by a minimum rate of 1% corporate income tax, as established in article 29.4 section a) of Law 27/2014, of 27 November, on Corporate Income Tax.
In this respect, it is important to note that, although a Free Investment Company is a type of Collective Investment Institution, like a ‘SICAV’ (Open-ended Investment Companies), the legislator is much more flexible in determining the requirements that must be met in order to be able to apply the 1% tax rate.
In particular, a Free Investment Company is not required to be owned by 100 shareholders as would be the case for a ‘SICAV’; it would be sufficient to be owned by 25 shareholders. However, the individual value of each of the units of a Free Investment Company must be at least €100,000.
What is the tax treatment that characterises a Free Investment Company (SIL)?
The taxation of Free Investment Companies is characterised by a minimum tax rate of 1% but without the option of applying other tax benefits regulated by the Tax Law, as set out in Chapter V of the Corporate Income Tax Law.
In particular, the tax treatment characterising this type of company is as follows:
- Free Investment Companies will not be entitled to the exemptions provided for in Article 21 of the regulation, in relation to the exemption on dividends, and to the exemption on positive income derived from the transfer of shares in companies in which they hold more than 5%.
- Free Investment Companies are obliged to pay corporate income tax in instalments, just like any other company.
- The rule allows the income tax result of a Free Investment Company to be refundable.
Taxation of members or unit-holders of Free Investment Companies
On the other hand, Article 53 of the Corporate Income Tax regulations also determines the taxation of the partners or participants of Free Investment Companies, provided that they are corporate taxpayers or taxpayers of Non-Resident Income Tax with a Permanent Establishment, i.e. legal entities.
Specifically, the special features regulated by Article 53 for shareholders or unitholders of Free Investment Companies are also based on the impossibility of applying the exemption of the aforementioned Article 21 on dividends distributed by Free Investment Companies and on income derived from the transfer of shares in them. Furthermore, they will not be able to apply the deductions to avoid international double taxation regulated in the Tax Law.
It is also possible that the shareholders or participants in Free Investment Companies are companies resident in tax havens. In such cases, the corporate income tax regulations establish that the positive difference between the net asset value of the shareholding at year-end and its acquisition value will be included in the tax base of the shareholders. Thus, the amount included in the tax base is considered to be the higher acquisition value.
Finally, in those cases in which the partners or participants in a Free Investment Company are individuals resident in Spanish territory, and they transfer these shares, they will be taxed in the Savings Tax Base of the Personal Income Tax (IRPF), for the capital gain or loss generated as a consequence of the transfer of these shares or participations for the difference between their acquisition value and their transfer value.
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