The legal-tax ecosystem of technology in Spain
- Deduction of the tax quota to encourage the implementation of research, technological development and innovation projects (article 35.1 and 2 of the Corporate Tax Law – LIS)
1.1. Deductions for research and development activities (R+D).
Definition of research and development: Exploratory that seek to acquire new knowledge, materialization of products and processes, design of samples to launch new products, combination and setting up of a software to develop products, processes or new/improved services.
Base of deduction: Are the expenses for research and development [1] activities carried out in Spain, or in a member state of the EU, or of the EEA, and investments [2] in tangible and intangible assets, excluding buildings and lands, reducing subventions for the promotion of the activities, considered as income.
Percentages of deduction.
(a) 25% of the expenditure carried out during the tax year-
• If the expenses carried out during the tax period are higher than the average of the 2 previous years, it will apply 25% until said average amount and 42% over the excess.
• It shall apply an additional deduction of 17% of the amount for expenses of the staff (qualified investigators) assigned exclusively to activities of R+D.
b) 8% of the investment in tangible and intangible assets, excluding buildings and lands related to R+D activities.
The investments (goods, equipment or intangible assets) will remain in the balance of the taxpayer, excepting the justified losses of those investments.
1.2 Deduction for technology innovation activities (i)
Concept of technology innovation: Activities which produce an advanced technology to obtain new products or processes of production, or substantial improvements for those that already exist. It will include the creation of new products or processes, designs, creation of a first non-tradable prototype, and pilot projects.
Basis of deduction: The expenses of the period of technological innovation activities of [3]:
- Activities of technological diagnosis for the identification, definition and orientation of advanced technological solutions, regardless of the results.
- Industrial design and engineering of production processes.
- Acquisition of advanced technology in form of patents, licenses, «know-how» and designs. Acquisitions from related parties shall not qualify for this deduction. The basis for this concept may not exceed the amount of 1,000,000 €.
- To get the certificate of compliance with the standards of ISO 9000, or GMP´s, excluding those expenses related to the implementation of those standards.
- The basis of deduction will be reduced in the amount of grants received for the promotion of such activities and considered as income in the tax period.
Percentage of deduction: 12% of expenses incurred in the tax period.
1.3 Application and interpretation of deduction.
Taxpayers will be able to:
1. Provide a motivated report from the Ministry of Economy, Industry and Competitiveness, or from the authority assigned to it, related to the compliance of scientific and technological requirements, which will be binding for the tax administration. Thus, to claim it, the company must have a non-binding technical and economic report of the evaluation of the certified project by the accredited entity by the National Accreditation Entity (ENAC).
2. To submit enquires related to the interpretation and application of the deduction, which answer shall be binding to the Tax Administration, as well as to request to the same authority the adoption of agreed prior assessments of expenditures and investments for research and development projects and technological innovation.
3. Royalties in Double Taxation Convention (Article 12 DTC)
Definition of royalty: Paid amounts for the right of use, or the concession of the use of, among others:
• Intellectual Property: Copyrights over literary, artistic or scientific works, including films.
•Industrial Property: Patents, trademarks, designs or models, etc.
• know-how: Secret procedures or information regarding industrial, commercial or scientific experiences.
Besides, Spain reserves the right to adhere to its Conventions, another definition of royalty including the income derived from the use or transfer of industrial, commercial or scientific equipment (The reservation to the article 12, section 2, paragraph 45 [4]).
Royalty’s taxation will be different depending on whether or not exists a Double Taxation Agreement:
• If exist a Double Taxation Convention, the taxation will be exclusively in the State of residence of the licensor [5], excepting the case of the existence of a Permanent establishment in the payer´s state.
• If there is no Double Taxation Convention, the royalty will be taxed at 19% in case of residents of European Union Countries, Island, Norway or at 24% to the rest of taxpayers.
Notwithstanding, Spain has one comment over of the OECD model Convention, to allow taxation in the State of the source of limited form (10% maximum in intellectual property and up to 15% in the rest of the cases). The reason of this, is because Spain is a host country for foreign technology.
Tax Base: Full amount accrued, not being possible deduction of expenses, except in cases of provision of technical assistance.
- Taxation of Service and work contracts in the personal income tax.
When the service and work contracts are rendered by a natural person are taxed in the individual income tax and are subject to withholding (which accrues when the remuneration is paid) and it will vary according to the type of provision to perform. An opposite case would be if is an entity, in this case, the entity will be taxed under the corporate tax and it won’t be subject to the said withholding.
In some special cases, for example, if there is compensation for termination of the contract prior to its completion, these amounts could taxed as capital gain, with a fixed withholding of 19%.
5. Best “Host” Countries for technology companies
The technological Giants (Apple, Yahoo, Amazon, Twitter, Microsoft, Ebay, Google and Faceebook), based on the principle of freedom of establishment, have its own tax experts plotting strategies that allow them to pay the lowest possible taxes, using among others, the so-called “tax havens”, or simply the countries with more reasonable taxation, double taxation treaties and bilateral agreements. By such reason, this companies intend to set establish in countries with lower tax pressure such as, Ireland (12.5%), The Netherlands, Switzerland (13/15%) and Luxembourg (20-21%) that, in addition, allow them to move their benefits without almost any tax burden.
There are two major techniques which are well-known as “Double Irish” and the “Dutch sandwich”.
• The “Double Irish” consists in the creation of two subsidiary companies, one in Ireland and the other in a tax haven. The second subsidiary company would be the one which holds the intellectual property rights, which will be given for a considerably high amount of money to the Irish subsidiary company, and this will be responsible for marketing the products in the rest of the world. In this way, Ireland obtains benefits from other countries and with these benefits pays the royalties to the tax haven, leaving the lower profit in the Irish company.
• The “Dutch Sandwich” consists in the creation of two subsidiary companies, one in The Netherlands and the other one in the Netherlands Antilles. The benefits of the controlling company [6], through dividends, goes to the Dutch company which using a Convention whereby is allowed to transfer benefits to Netherlands Antilles paying only 2% of taxes and transferring these amounts to the tax haven.
Both techniques can be used together, taking advantage of the exemption that the Irish legislation provides for the movement of dividends from that country to other European States.
Due to the changeable environment of the international imposition, the countries of the G-20 have expressed their concern regarding the international standards on which bilateral treaties are based, in the sense that this standards distribute the tax burden. For this reason, the OECD has promoted, together with the G-20, the BEPS plan, an action plan on base erosion and profit shifting.
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[1] Research and development expenses: Those carried out by the taxpayer, including depreciation of the activity assets, if those are directly related to the same and are applicable to its realization, as well as, the amounts for the implementation of the activities in Spain or a Member State of the EU or the EEA, by the taxpayer, individually or in collaboration with other entities.
[2] Investments shall be deemed performed when the assets are put into operation.
[3] The same requirements as in the deduction for R+D.
[4] “Spain reserves the right to continue adhering, in their Conventions, to a definition of royalties that include incomes from the leasing of industrial, commercial or scientific equipment and containers.”
[5] The royalties, that come from a Contracting State and whose beneficial owner is a resident of another Contracting State against, may only tax in that other State. (Article 12.1 MCOCDE)