Changes to Spanish law may leave UK investors on the hook for unpaid Spanish tax

This article was produced by Olswang LLP, which joined with CMS on 1 May 2017.

The Spanish Government has recently widened the powers of the Spanish tax authorities to make claims against the shareholders of a Spanish company for unpaid tax. UK shareholders in Spanish companies should review their arrangements and take advice on the possible implications of this new law.

Before the change, a shareholder in a Spanish company was potentially liable (on liquidation) for any unpaid tax of the company up to a maximum amount equal to the amount received by that shareholder on the liquidation of the company. As a result of the new law a shareholder may now be liable to contribute to the unpaid tax of the company up to a maximum amount equal to the amount of all monies received by it from the company, both on liquidation and also during the two years preceding the liquidation.

The change in the law was originally designed to counteract tax evasion and avoidance. However, the wording of the final legislation is very wide and does not require any intention to evade or avoid tax. During the debate surrounding the adoption of the law, it was suggested that payments made to shareholders by a company under contractual obligations should not be included when calculating a shareholder's maximum liability for that company's unpaid tax. However, these arguments were rejected. This means there is a real risk that the Spanish tax authorities may consider that a very wide range of payments to shareholders fall within the scope of the legislation, thereby increasing significantly the amount of a shareholder's potential liability for unpaid tax. As well as the more typical shareholder receipts, such as distributions by way of dividend and returns of capital, other payments that may fall within the scope of the legislation include:

• management fees under a management contract;
• royalties under licensing arrangements; and
• the repayment of shareholder loans.

European laws requiring mutual assistance for the recovery of taxes mean that the Spanish tax authorities will be able to ask HM Revenue & Customs to assist them in enforcing the new rules against UK taxpayers.

How to manage the risk

The new law applies to most types of Spanish company (for example Sociedad Anonima and Sociedad Limitada) and to any kind of equity investment, including asset finance joint ventures, private equity investments and group holding structures. UK investors considering acquiring shares in a Spanish company should seek advice on the applicability of the new law prior to finalising any investment structure and entering into any acquisition or shareholders' agreement. Existing investors should review their current arrangements now, to ascertain and minimise the potential impact of this new legislation, as well as considering whether any changes are required to their exit strategies.

Any information contained in this article is intended as a general review of the subjects featured and detailed specialist advice should always be taken before taking or refraining from taking any action. If you would like to discuss any of the issues raised in this article, please get in touch with your usual Olswang contact. This article was included in our Olswang Corporate Quarterly Summer 2013 publication.