Taxation, a planning factor in internationalized companies

In a socio-economic context like the current one, defined by the internationalization of business activity and the liberalizing trend of capital and people movements, international taxation acquires great importance when considering any business outside our country.

Undoubtedly, the study of international taxation transcends the realm of export operations, becoming intimately linked to a company's internationalization process. Commercial or productive investments abroad find taxation to be a far more decisive factor than in the realm of exports.

If any Spanish businessperson is concerned about the taxation of their operations within the country, why wouldn't they also be concerned about their operations abroad? The problem arises when they are unaware of the basic tax regulations of the country of origin of the investments, such as tax rates or the ways in which dividends from a subsidiary can be repatriated.

When analyzing taxation in the destination country of the investment, José Palacios, partner at Garrigues and head of international tax at the firm, suggests considering the different investment vehicles—subsidiaries, branches, etc.—and the type of presence to be established. Furthermore, the taxation of investment returns in Spain must be taken into account. In this regard, "income from investments abroad can be repatriated via dividends, through the sale of the business or activity itself, or through fees or royalties received," says Palacios; "however, any deductions for investments abroad can only be applied when they increase export activity," he adds.

Income from foreign investments can be taxed under two different regimes in Spain. The first applies generally and includes all types of foreign income, regardless of its source. The taxable base is calculated by adding the income earned in Spain to this foreign income, and then deducting the taxes paid in the country of origin up to the maximum Spanish tax rate, which is 35%. "Thus, if 28% was paid at source, that will be the maximum deductible amount; if 39% was paid, only 35% will be deductible," explains José Palacios.

On the other hand, for income derived from dividends, capital gains, or profits from branches or subsidiaries, a tax exemption system is established that allows amounts originating abroad to be excluded from taxable income in Spain, provided two conditions are met: that taxes have been paid abroad and that the income's origin is related to a business activity. Unlike the general system, this option will be used when the income comes from countries with a tax system similar to Spain's. Countries that joined the European Union in 2004 have this system. "We're not talking about similar percentage rates, but rather similar tax concepts," says José Palacios of Garrigues. While this tax exemption option has been available since 1996, it has been regulated by law since 2000, with all the advantages of simplified procedures that this entails for businesses.

There are two basic types of deductions: the deduction for foreign activities (DAEX) and the general deduction for investments abroad. The former is the most commonly used by businesses and consists of a deduction from the tax liability equivalent to 25% of the investment made in the capital of a subsidiary or branch abroad. However, the company must demonstrate that this investment has increased the parent company's export volume.

For its part, the General Deduction for investments abroad is not compatible with the above and cannot be used for investments in European Union countries to avoid unfair competition between companies.

The employer must also consider the taxation of their employees outside of Spain. The taxation of expatriates can become an important factor when negotiating terms. "Contrary to what it might seem, companies often agree on a net salary with the employee, with the company covering the expatriate's taxes; in these situations, choosing the most appropriate tax framework can result in significant savings for the company," says Palacios. A key element to consider regarding expatriate income is the duration of the employment relationship. For long periods, and provided that tax residency is maintained in Spain, the concept of an "Expatriation Allowance" may apply. This corresponds to the difference paid for working abroad and is not subject to taxation. It is also common to send consultants or advisors to carry out specific projects. In this case of Temporary Stays Abroad, and with a limit of salary increases of up to €60.000 per year over the previous salary, these amounts are exempt because they correspond to work performed abroad.

The existence of double taxation treaties between countries can greatly facilitate matters for international businesses. Although general Spanish legislation already regulates the avoidance of double taxation, the main objective of these treaties is the same: to prevent double taxation. However, since all taxation is carried out at the source, the treaties usually establish limitations and exceptions. "Perhaps the most important element of double taxation treaties is everything related to their legal certainty regarding the definition of the taxable event, exemptions, tax rates, etc., and the non-discrimination against national taxpayers," says Palacios.

The exporters' regime

It is advantageous for businesses to register for the exporters' tax regime, as they will be entitled to a refund of any outstanding balance at the end of each tax period, up to the limit resulting from applying the general tax rate to the total amount of the aforementioned transactions during that period. "Ultimately, by filing form 330 (monthly) instead of form 300 (quarterly), refunds are processed more efficiently," says Félix Quintana, CEO of Quintana y Asociados.

Businesses that, during the immediately preceding calendar year or during the current calendar year, have carried out exempt operations with a total amount exceeding 120.202,42 euros may qualify for the exporters' regime.

Regarding the documentation required to exercise the right to a refund, Quintana explains, "Taxpayers must register in the Register of Exporters and Other Economic Operators at the offices of the State Tax Administration Agency by submitting form 0.37, indicating their request for inclusion in this scheme." They must also submit the Single Administrative Documents (SADs) related to their exports. "That is, a list of all invoices issued from January 1st until the end of the month in which the amount exceeds €120.202,42," says Luis Ayala of the Regional Confederation of Business Owners of Aragon (CREA). A duly completed form from the bank where the refund is to be deposited must also be submitted.

Applications for inclusion in or removal from this scheme must be submitted in January of the year in which the change is to take effect. However, if the transaction volume exceeds the threshold in the current year, applications must be submitted between the day after the threshold is exceeded and the last day of the filing period for the corresponding tax return.