Companies shall not withhold on dividend distributions if they meet the Art. 21 LIS exemption

The distribution of dividends among companies usually involves withholding obligations that impact corporate cash flow. However, regulations allow for the avoidance of this mechanism when specific participation conditions are met.

What the DGT has resolved

The Dirección General de Tributos (DGT) has clarified the treatment of dividends distributed to shareholders that are legal entities. According to the issued criteria, if the requirements established in Article 21.1 of the Corporate Income Tax Law (LIS) are met, these dividends may benefit from the exemption provided by the regulation.

To access this exemption, it is necessary to maintain a minimum participation of 5% in the capital of the distributing company; such participation must be maintained uninterruptedly during the year prior to or following the distribution. In this scenario, in accordance with Article 128.4.d) of the LIS, there is no obligation to perform withholding or to make the corresponding payment on account.

What it means for you

This resolution has a direct impact on companies that distribute profits to other shareholders that are also legal entities. If the distributing company can prove that the shareholder meets the participation threshold and the required timing, the administrative and financial burden of withholding disappears.

It is fundamental to understand that compliance with these requirements is not a mere formal declaration, but a matter of fact. This implies that the company must have the necessary documentation to prove to the Administration that the 5% participation has been maintained uninterruptedly, thereby avoiding possible contingencies in tax inspections.

What should be done

Companies operating with corporate participation structures should verify the status of their legal entity shareholders before proceeding with the distribution of dividends. It is necessary to ascertain whether the LIS criteria are met to determine whether the application of withholding is appropriate. Since proving the permanence of the participation is the responsibility of the entity, the traceability of shareholdings must be ensured to support the decision not to withhold.