Should the distribution of dividends be anticipated before 31 December 2020?

In recent weeks the Spanish Congress has been processing the General State Budget Project for 2021, the main tax news of which we have included in a recently published Newsletter.

We consider it appropriate to draw the attention of both companies and individuals to those specific modifications that this Project introduces and which may significantly increase the direct taxation of dividends and income derived from participation in companies.

– Firstly, in the area of corporate income tax, the Bill limits to 95% the current full exemption enjoyed in Spain by dividends and capital gains deriving from holdings of at least 5% in other national or foreign companies, or deriving from a holding with an acquisition value of more than 20 million euros.

The draft State Budget Law for 2021 amends Article 21 of the Corporate Income Tax Law so that the amount that will be exempt as of 1 January 2021 will be 95% of the dividend or positive income obtained from transfers, instead of the 100% currently applicable. This means that, in general, dividends or capital gains on the transfer of holdings of at least 5% will be subject to effective taxation at 1.25% (the 5% not exempted by the 25% tax rate).

In the case of “chains of companies” this minimum taxation of dividends will be accumulated successively for each distribution of dividends, since the proposed rule makes no provision for limiting such cumulative taxation. This minimum taxation will also apply within consolidated tax groups.

The possibility of applying the exemption to dividends and capital gains deriving from holdings of less than 5% but with an acquisition value of more than ?20 million is also abolished in future, although holdings acquired before 01/01/2021 in this situation may continue to be exempt at 95% until 2025.

– In the area of personal income tax, the draft Budget Law for 2021 contains an increase in the maximum marginal rates applicable to the highest income, both in the general base and in the base for personal income tax savings.

Specifically, with regard to the taxable base for savings, where dividends and profits from the transfer of shares in companies are to be taxed, the rate applicable from 200,000 euros is increased by 3 points, bringing the taxable base to 26% (until now the maximum rate was 23%).

Since the measures described could make the taxation of income derived from shareholdings in companies considerably more expensive from 1 January 2021, we would like to advise companies and individuals in the situations described above to analyse the potential impact of this and to plan well in advance of 31 December 2020, where appropriate, actions that could minimise them, such as maximising dividend distributions (for example and among other measures, including reserves generated in years prior to 2020 or distributing on account of dividends generated in 2020), anticipating the transfer of shares with profits, or even undertaking restructuring to avoid the existence of chains of companies. We believe that many of these measures will require the preparation and formalisation of certain corporate agreements by 31 December 2020.

For any additional clarification or to obtain further information on the possible measures to be adopted in your specific case, please do not hesitate to contact Antonio López Poza and/or Angel Valdés, who will be happy to assist you.