Dividend exemption: participation requirements and the 70% income threshold

The application of the dividend exemption provided for in Corporate Tax (IS) requires strict compliance with participation conditions and the nature of the investee entity's income. A recent binding ruling from the Dirección General de Tributos (DGT) has clarified the scope of these requirements, especially regarding complex group structures.

What the DGT has ruled

For a company to benefit from the exemption under Article 21.1.a) of the Corporate Tax Law (LIS), it must maintain a minimum participation of 5% on an uninterrupted basis. However, the ruling introduces a determining nuance when the investee entity acts as the parent company of a group.

The DGT establishes that if the investee entity derives more than 70% of its income from dividends or capital income, the taxpayer must verify that the minimum participation requirement is also met in the group's indirect entities. Conversely, if the investee entity does not exceed this 70% passive income threshold, it is not necessary to analyze the indirect participation in the subsidiaries of the directly held company.

In cases where the investee entities are non-residents, the criteria indicate that the minimum taxation requirement must be met or, failing that, a double taxation treaty must exist.

What this means for you

This criterion has direct relevance for holding companies receiving dividends from subsidiaries, both resident and non-resident. Corporate structure management must consider whether the entity receiving the dividend is a company that generates mostly passive income.

If the investee company is a "holding of holdings" with a high percentage of capital income, the burden of proof regarding the chain of participation becomes more demanding. It is not enough to prove direct participation; one must also ensure the traceability of the minimum percentage throughout the entire chain of command to avoid losing the right to the exemption.

What should be done

It is necessary to evaluate the composition of the income of the investee entities to determine if they exceed the 70% passive income threshold. In international structures, the application of double taxation treaties or compliance with minimum taxation standards must be verified to ensure the correct application of Corporate Tax regulations. Each corporate structure must be analyzed individually to determine its compliance with the LIS.