How Controlled Foreign Corporation Rules Look Around the World: Spain

February 4, 2020

Because of globalization and international commerce some countries have adopted Controlled Foreign Corporation (CFC) rules to reduce the effects of tax deferral. Spain, which incorporated its CFC regime in its tax laws in 1995, is part of the European Union (EU) and has followed its standards to adapt the CFC regime to EU requirements contained in the Anti-Tax Avoidance Directive (ATAD). The country has also adapted its rules based on some of the recommendations made by the OECD.

Shareholding requirement for the control determination in Spain

Under Spanish legislation a foreign company is considered a CFC if 50 percent or more of its share of capital, equity, profits, or voting rights is controlled directly or indirectly by Spanish shareholders.

The control test is combined with the jurisdictional approach. A foreign company is considered a CFC if the corporate income tax paid by that company is less than 75 percent of the tax that would have been paid in Spain.

What is the type of income that is taxable: all income or just passive income?

The rules in Spain only apply tax to CFCs on passive income. This includes sales and services income where the foreign entity does not add significant value to the service. This can include insurance activities, leasing, and financial activities. The mentioned activities constitute CFC income even if the activities are not performed with Spanish counterparties, or where no economic activity is deemed to take place.

Several categories of income are considered CFC income that is taxable to the parent. Basically, passive income is income that is earned from activities where the investor is not actively involved, it can comprehend very different sources, and it does not require much of a structure as it occurs with active business activities. That is the reason why CFC in many cases has been designed not to punish active business activities but all other activities that produce passive income.

Applicability of the rules

The Spanish legislation contains two different ways in which CFC rules apply. First, a Global CFC regulation applies when a foreign company does not have what the Spanish legislation considers an adequate structure (human resources and material operations) unless it can be justified that there is a specific reason for the existence of the foreign company. If the purpose of the foreign company is not demonstrated and there is not material evidence of its existence, all the income derived from its operations must be included in the tax base of the Spanish parent company.

Second, the rules apply once it is determined that a foreign company complies with the CFC rules but the application of the Global CFC regulation is not possible. In such cases, passive income obtained by the CFC is taxable to the parent.

The income obtained by a foreign subsidiary will not be included as CFC income in the parent company if over 50 percent of the gross income obtained by the nonresident company due to lending, insurance, or financial services comes from non-related companies.

Also, if the total amount of CFC income corresponding to one of the categories considered as CFC income is less than 15 percent of the total income, there is no CFC income inclusion in the parent company. Income that comes from derivative financial instruments is always includable as CFC income. Income that constitutes a nontaxable expense for a Spanish shareholder, produced by a CFC, is also excluded from CFC income. Dividends and profits are not included as CFC income.

Planned modifications for the CFC regime

Regarding ATAD, in 2018 the Spanish Ministry of Taxation included necessary changes in the anti-tax evasion bill proposal. In the bill, the CFC rules are expanded so that the participation exemption contained in the Spanish regime would not apply in cases where a foreign permanent establishment is considered a CFC.

Holding companies owning more than 5 percent in subsidiaries during more than one year will also be subject to CFC rules even when they have material resources to manage the participation and not qualify as companies, merely holding assets.

The Spanish legislation contains two safe harbor provisions for the application of CFC rules. The first is for EU companies that perform economic activities in Spain and are incorporated with valid economic reasons (the economic substance rule). The second consists of a safe harbor for EU-regulated collective investment vehicles that are not taxed as CFCs.


The CFC legislation in Spain is not as complicated as it is in some other countries, and it is aligned with the standards recommended by the OECD. The Spanish rules have evolved in a way that the rules are designed to comply with the EU principles not to interrupt the functioning of the Union and its single market. The active business exception for the application of the rules is a modification included in the Spanish regime as a consequence of the European Union single market and all the freedoms provided by the Union.

Note: This is one of nine posts which describe how CFC rules work in the United States, China, Spain, Germany, Colombia, France, Netherlands, Japan, and the United Kingdom. A longer discussion of the history of CFC rules and more details on these countries can be found here.

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The tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates.