Spain: Spanish SICAVs take flight to Luxembourg

Certain Spanish Undertakings for Collective Investments in Transferable Securities (UCITS) – so-called Sociedades de Inversión de Capital Variable or SICAVs – which are widely used by wealthy individuals and families to channel their savings, are now encountering tax problems in order to continue benefiting from the existing exemption regime on dividends and capital gains.

These problems follow after announcements made by the main political parties in the country to toughen the conditions for applying such tax regimes, and the risks of relocating those savings to Luxembourg where they could benefit from a privileged tax regime (similar to that which applies today to SICAVs in Spain) which cannot be penalised by the use of controlled foreign company (CFC) rules in Spain.

Current Spanish tax regime applicable to SICAVs

Under current Spanish tax legislation, Spanish UCITS (SICAVs included) are taxed at a reduced Corporate Income Tax (CIT) rate of one per cent, which almost amounts to an exemption, provided that certain requirements are met. As for SICAVs, the collective nature of the vehicle, and hence the applicability of the UCITS tax regime, is deemed to be met if the number of shareholders is not lower than 100 at any stage. UCITS are not transparent entities from a tax perspective, nor are they subject to distribute their earnings periodically to their quotaholders/shareholders. On the contrary, they are CIT payers, while their shareholders will only be taxed when they actually receive dividends from their shares in the SICAVs, or when they obtain capital gains derived from the transfer of such shares.^[1]

Therefore, the special tax regime applicable to all UCITS (SICAVs included) involves only the removal of a third level of taxation on the income obtained through these investment vehicles. Further, UCITS have been regarded for decades as the most suitable savings vehicle for Spaniards, as the tax regime allows the deferral of taxation at UCITS and quotaholder levels if the above-mentioned conditions are met.

• There is serious legal uncertainty today regarding SICAVs because of greater tax pressures in Spain.
• There is a plan to move SICAVs to Luxembourg, which will have negative consequences for Spain.
• It would be advisable to link the privileged tax regime to collective investment undertakings of the open-ended type as regulated by the UCITS Directive.

SICAVs as the preferred investment vehicle for wealthy individuals and families

As mentioned above, SICAVs are widely used by wealthy individuals and families to channel their savings. These Spanish UCITS have always received media attention for being seen as an instrument, at least in appearance, whose real purpose is obtaining tax savings outside the genuine object (collective investment) of these companies. In addition, the possible existence of abuse of the law in the use of SICAVs is discussed when the interests in them belong almost entirely to the members of a single family.

Current situation for SICAVs in Spain

There is considerable legal uncertainty in Spain today regarding SICAVs, mainly due to the fact that the main political parties in the country have all made announcements that the conditions for SICAVs should be tougher to be able to benefit from the special tax regime applicable to these entities.

As a result of this situation, Spanish SICAVs are planning to move to other jurisdictions for fear of greater tax pressures in Spain and also with the aim of finding more legal certainty.

Luxembourg has been chosen as the best destination, because its tax regime is very advantageous. Luxembourg Specialised Investment Funds (SIFs) are taxed at a 0.01 per cent CIT rate on its net assets – which ultimately means that a third level of taxation is negligible. Also, a minimum number of shareholders is not required, unlike under the Spanish legislation, and especially because Luxembourg offers more legal certainty and stability than Spain. The transfer to Luxembourg is usually done through a merger with a Luxembourg fund, company or other similar avenue. Mergers are cheaper and, for this reason, it is the option that is being most widely used.

No application of the Spanish CFC rules to EU UCITS

Another factor encouraging this flight of Spanish SICAVs to Luxembourg is that, according to a recent amendment of the Spanish Law, CFC rules do not apply to EU UCITS, i.e. collective investment undertakings governed by Directive 2009/65/EC of the European Parliament and of the Council, of 13 July 2009, on the co-ordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities, incorporated and domiciled in an EU member state. This new measure makes sense and complies with the fundamental freedoms of the Treaty on the Functioning of the European Union. It would be discriminatory and go against the free movement of capital to require tax transparency for EU UCITS when it is not required with regard to Spanish collective investment undertakings.

In addition, the inapplicability of the CFC rules to EU UCITS has been strengthened by the proposal for a Directive, of 28 January 2016, laying down rules against tax avoidance practices that directly affect the functioning of the internal market (the so-called Anti-Tax Avoidance Directive). According to this proposal, CFC rules should exclude financial undertakings from their scope where those are tax resident in the Union, including permanent establishments of such undertakings situated in the EU. This is because the scope for a legitimate application of CFC rules within the Union should be limited to artificial situations without economic substance, which would imply that the heavily regulated financial sector would be unlikely to be captured by those rules.

Negative consequences arising from the relocation of SICAVs

The relocation of Spanish SICAVs in other jurisdictions would bring negative consequences which should be factored in before new legislation is issued on this matter. Briefly, they are mainly the following three:

1. Loss of tax collection that will occur at the level of the SICAV (such a loss will be small but it will be a loss in any case).
2. Loss of business for lawyers, auditors, notaries, registrars and management companies assisting Spanish SICAVs, with the resulting indirect loss of tax collections for the Spanish Inland Revenue.
3. The new management companies which are hired in Luxembourg will not have among their priorities investing in assets (shares, corporate bonds, public debt, etc.) located in Spain.

Final remarks

In order to avoid Spanish SICAVs taking flight to Luxembourg (or to somewhere else within the EU) with the resulting negative consequences mentioned above, it would be advisable to link the privileged tax regime to collective investment undertakings of the open-ended type as regulated by the EU Directive on the harmonisations of the EU UCITS, removing the very old requirement for the 100 shareholders mentioned above, which triggered so much controversy in Spain in the preceding decades. In fact, SICAVs’ shares are listed on the Mercado Alternativo Bursátil or MAB (Spain’s multilateral trading system), which demonstrates the open-ended nature of these vehicles regardless of their number of shareholders.

This article is part of our latest edition of Credit Funds INSIGHT. To download a PDF of the full publication, please click here.

_{Notes
[1] Capital gains taxation is deferred when all the sales proceeds are reinvested in another UCI TS qualifying for the tax regime.}