Owning a foreign company: how its profits and dividends are taxed

Key rules

• Control test: Attribution starts when you and related people hold 50% or more of the company and it pays low foreign tax.
• Passive income only: Only passive income such as property, shares and financial assets is attributed; real business income is not.
• No double tax: Dividends are exempt up to the amount of profit already attributed to you.
• Foreign tax credit: Foreign tax withheld is credited, capped at the lower of tax paid and the Spanish tax on that income.

The short answer

If you are tax resident in Spain and control a foreign company that pays little tax, Spain can tax you on part of its profits every year, even if you take no money out. If the company is not caught by these rules, you are taxed only when it pays you a dividend. Either way, the income goes in your annual tax return.

When profits are attributed to you

Profits are attributed to you when both of these are true:

• You hold, alone or together with related people, 50% or more of the company's capital, equity, results or voting rights.
• The company pays foreign tax of less than 75% of the Spanish tax that would be due on the same profit.

Only passive income is attributed. That means income from property, shares, financial assets, insurance, and some services paid by related parties. Income from a real active business is left out.

The profit is added to your return for the year in which the company's own tax year ends. It is attributed up to the company's total profit, and no more.

When the rules do not apply

• The company is resident in the EU and has real economic activity, with its own staff and resources. Simply being in the EU is not enough.
• Passive income is 15% or less of the company's total income. Other thresholds can apply when passive income is lower than that.

How dividends are taxed

Dividends from a foreign company are savings income in your Spanish return. They are taxed gross, and Spain gives individuals no dividend exemption. The savings rates are in the Spanish income tax page for savings income.

If profits were already attributed to you, dividends paid later are exempt up to the amount already attributed. This stops you paying twice on the same profit.

Tax withheld abroad

Tax withheld in the company's country is credited against your Spanish tax. The credit is the lower of the foreign tax actually paid and the Spanish tax on that income.

Where a tax treaty applies, the credit is normally limited to the treaty withholding rate. If more was withheld, claim the excess back from the foreign tax authority.

What to report

Dividends and any attributed profit go in your annual income tax return (Modelo 100). The foreign shares may also need to be reported on Modelo 720 if the asset-value thresholds are met. Ask a Spanish tax adviser to check both before you file.

The decision and FAQ below walk through the two ways income can reach your return.

Choosing between options

How will your foreign company's income reach your Spanish tax return?

• Profits attributed to you each year: You hold 50% or more of the company, it pays foreign tax below 75% of the Spanish tax due, and it earns passive income such as rent or investments above the 15% threshold.

• Taxed only when dividends are paid: The company is an active business, is in the EU with real staff and resources, or falls under the attribution thresholds. You then declare dividends as savings income in your annual return, taxed at 19%, 21%, 23%, 27% or 30% depending on the amount, with foreign tax withheld credited.

If you hold 50% or more and the company's foreign tax is below 75% of the Spanish tax, its passive profits are taxed to you in the year its tax period ends.

Frequently asked questions

Does Spain tax me on profits my foreign company has not paid out?

Yes, Spain can tax you on unpaid profits of a foreign company if you hold 50% or more of it and it pays little tax abroad. The test is that its foreign tax is below 75% of the Spanish tax that would be due. Only passive income, such as rent, shares or financial assets, is attributed to you.

Does a foreign company in the EU escape these attribution rules?

Yes, an EU company escapes attribution if it has real economic activity with its own staff and resources. Income from an active business is also left out. Attribution is also skipped when passive income is 15% or less of the total.

Am I taxed twice when the company later pays a dividend?

No, dividends are exempt up to the amount of profit already attributed to you. Any dividend above that amount is taxed as savings income.

Can I get back foreign tax withheld above the treaty rate?

Yes, where a tax treaty applies, the Spanish credit is normally limited to the treaty withholding rate. You can reclaim any excess from the foreign tax authority. Ask that authority how to file the claim.