Capital gains are exempt whenever the assets referred in items (v.1), (v.2) and (v.3) remain in the possession of the seller during more than 15, 10 or 20 years respectively.

The purchase cost is made up of a number of items (real price paid, investments and improvements made in the assets and expenses and taxes paid by the buyer, if any). The difference between the purchase cost and the sale price agreed by the parties (or the "market" value should this be higher), reduced as indicated above, is the taxable base.

There are special rules for establishing the capital gains. The main ones concern listed and unlisted shares. Capital gains deriving from the sale of listed shares or participations in companies are established by the difference between the acquisition cost and the transfer price as determined by the relevant quotation on the closing date or the price agreed between the parties if such price were higher.

Capital gains deriving from the sale of unlisted shares or participations in companies are established by the difference between the acquisition cost and the price effectively received by seller. If such price is not deemed to be at arms' length, the Tax Authorities will take as transfer price the highest of the following: (i) the book value, as it results from the latest balance sheet approved; and (ii) the value resulting from the capitalization at the rate of 12.5% of the average profits made in the last three fiscal years.

The buyers of property sold by non-residents in Spain are required to withhold and turn over to the Treasury the 10% of the purchase price on account of the 35% capital gains tax. This does not apply in the case of sales of property that was purchased more than 20 years before the actual transfer provided no improvements have been made to it. The property will be subject to a charge or lien in case the 10% advance is not turned over to the Treasury.

(vi) proceeds from reinsurance transactions: 4%.
Income received by non-resident individuals operating without a permanent establishment in the country is not deemed to be Spanish source income and, therefore, is not subject to PIT in the following cases:
i) Interest, dividends and capital gains or losses deriving from securities issued in Spain by individuals or companies without residence and permanent establishment in Spain;
ii) Interest and capital gains deriving from Debt issued by the Spanish State;
iii) Interest and capital gains deriving from movable property (e.g., shares, bonds, etc.) received by individuals with residence in any EC country. This benefit does not apply to capital gains stemming from sales of shares, participations or other rights in a Spanish company or entity in the following cases:

(iii.1) if the assets of such company, juridical person or entity consists principally, directly or indirectly, of immovable property located in Spain;
(iii.2) if the tax payer has held 25% or more of the share capital of such company, juridical person or entity within the period of 12 months prior to sale.

The foregoing does not apply to interest or capital gains deriving from Spanish public Debt and movable property obtained by individuals through countries or territories which by regulation are deemed to be tax havens (see list in footnote 44).

Non-residents are also required to appoint representatives for PIT purposes in Spain. The appointment must be notified to the Tax Department within two months following the date of the appointment. Non-compliance with these obligations may result in fines being imposed ranging from 25,000 to 2,000,000 pesetas (see footnote 55). Operating in Spain through a permanent establishment.
Subject to certain exceptions, PIT is also levied on all Spanish source income received by non-resident individuals who operate by means of a permanent establishment in the country. This will include any foreign source income that could be ascribed to the permanent establishment. Non-residents are also subject to Wealth Tax as explained above (see

For the fiscal year 1991 and thereafter, any income received by non-resident individuals by means of a permanent establishment in Spain, as defined above, is subject to PIT at the flat rate of 35%(59). In this event such individual must keep accounting books and is entitled to apply the general fiscal regime in order to determine his net taxable income.

From fiscal 1992 and thereafter, in addition to PIT at the rate of 35% on income and capital gains, the actual transfer of profits outside Spain is subject to an additional 25% withholding tax. Though it is not clear yet whether individuals are eligible for this benefit, the additional 25% withholding tax would not apply to transfers made by permanent establishments (including branches) belonging to individuals domiciled in the European Economic Community(60).

For PIT purposes, the representatives of the permanent establishment in Spain are those appearing in the Commercial Register or those authorised to bind the permanent establishment. Should these persons live outside Spain, the non-resident is required to appoint representatives for PIT purposes in Spain. The appointment must be notified to the Tax Department within two months following the date of the appointment. Non-compliance with these obligations may result in fines being imposed ranging from 25,000 to 2,000,000 pesetas (see footnote 55).

5.3 Double Taxation Treaties.

Transactions entered into by foreign investors may fall within the scope of one of the various agreements signed by Spain to avoid double taxation. As a general rule the effect of such bilateral treaties is to reduce the tax burden substantially. Spain has concluded and ratified agreements to avoid double taxation with the following countries: Australia, Austria, Belgium, Brazil, Bulgaria, Canada, Czechoslovakia, Denmark, Ecuador (pending ratification), Finland, France, Germany, Hungary, India, Ireland, Italy, Japan, Luxembourg, Mexico, Morocco, Norway, People's Republic of China, Poland, Portugal, Romania, Sweden, Switzerland, The Netherlands, The United Kingdom, The United States of America, Tunisia and the USSR. There are agreements to avoid double taxation on income arising from shipping with Argentina, Chile, Ireland and South Africa.


The regulation of technology agreements between a non-resident and a Spanish resident are entirely liberalized from 1 February 1992. All the currency transfers to be made in accordance with the relevant agreement are subject to the general exchange control regulations (see section 3.6 above).


In accordance with EC priorities on regional policy, Spain has introduced special legislation on regional incentives which provides for Government aid to enterprises being established in specific areas to develop projects included in any of the economic sectors that have been classified as worthy of subsidy (61).

These financial governmental aids consist of:
a) Full subsidies for duly approved investment projects.
b) Subsidized interest on loans.
c) Subsidized repayment on loans.
d) Up to a 50% rebate on the Social Security rates payable by the entrepreneur for those jobs approved and created during a maximum period of two years.

There are three categories of zones: (i) economic development zones (there are four subzones classified according to their level of development: Type I, Type II, Type III and Type IV); (ii) declining industrialized zones; and (iii) special zones. Generally speaking, the subsidies for economic development zones and for declining industrialized zones may reach 50% and 75% of the investment project's cost respectively.

The Government aids outlined above may be co-financed by European structural funds (European Regional Development Fund, European Investment Bank, European Social Fund, etc.) if, and when, all the EC regional rules are met. There is a cap to the total subsidy which may be obtained by combining different aids.

There are also other incentives for fostering industrial activity and incentives for specific industrial sectors.

As to EC competition policy any aids granted by a Member State or through State resources in any form whatsoever which are not based on EC and Spain's regional priorities (as described above) and which distort or threaten to distort competition by favouring certain enterprises for the production of certain goods shall to the extent they affect trade between Member States, be incompatible with the Common Market. Therefore, Spain, in cooperation with the EC Commission, must keep under constant review all the existing Spanish system of aids and no Spanish authority may grant unilaterally such aids without the previous consent of the Commission.


Without prejudice to EC competition rules (namely Articles 85 and 86 of the Treaty of Rome) that are also applicable in Spain, there are national competition rules that have been laid down to preserve and protect free competition in the Spanish market. Generally, these rules follow the EC criteria: those agreements, accords, decisions or actions which impede, restrict or alter free competition in all or part of the national market are prohibited and shall be null and void unless they are explicitly authorised in the circumstances envisaged by law; similarly block exemptions are available as established by Governmental regulation. Individual exemptions are also available on a case by case basis as requested by the interested parties. Fines and penalties may be imposed in the event of infringement of the competition rules.

The national competition rules may also be applicable to any project or operation leading to the concentration of undertakings or to the acquisition of a controlling interest in one or more undertakings by another person, undertaking or group of undertakings, which affects or may affect the Spanish market, particularly when they create or strengthen a dominant position, in the following events: (i) where the market share after the merger in the Spanish market or in a substantial part thereof of a certain product or service equals or exceeds 25%; or (ii) where the aggregate Spanish-wide turnover of all the companies involved in the concentration or acquisition in the latest fiscal year is more than 20,000 million pesetas(62).

(59) Law 17/1991 of May 27th on Urgent Fiscal Measures, published on May 28th, art. 2. two.
(60) Article 22 of Law 29/1991 of December 16th.
(61) Law 50/1985 of December 27th, published on January 3, 1986, regulated by the Royal Decree 1535/1987 of December 11th, published on December 15, 1987, in addition to other Royal Decrees that set out the declining industrialized zones and the economic development zones.
(62) Article 14 Competition Defence Law No 16/1989 of 17 July, published on 18 July 1989, and Royal Decree 1080/1992, of September 11, published on October 27, 1992.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstance.

For further information contact Mr. Jorge Angell, L. C. Rodrigo Abogados, Madrid (Spain), Fax: 010 341 576 6716 or enter text search 'L C Rodrigo Abogados' and 'Business Monitor'.