(3 min read)
In this article we explain Spain’s long standing uncertainty around classifying foreign entities as Entities in Income Attribution (EAR) for tax purposes. It summarizes the 2020 DGT Resolution that sets the criteria for when a foreign vehicle is considered fiscally transparent and clarifies its application only to taxable events after February 13, 2020. The piece highlights remaining gaps—such as how to evidence attributed income and align accounting standards—making practical compliance challenging. This matters for foreign investors, fund managers, and Spanish taxpayers with interests in transparent entities. They should assess each structure carefully, gather proper documentation, and seek expert tax and financial analysis to apply the EAR regime safely and efficiently.
In the world of foreign investment in Spain, especially in relation to foreign funds, there has traditionally been an aspect of enormous legal uncertainty, which was which entities incorporated abroad should be considered as Entities in Income Attribution ("EAR") or, more colloquially, fiscally transparent.
In relation to this aspect, in 2020, the Directorate General of Taxation ("DGT") published its Resolution of 6 February 2020 on the consideration of certain vehicles incorporated abroad as entities under the income attribution regime (the "EAR Resolution"), which sought to clarify this classification.
In the EAR Resolution, now fully in force, the DGT concludes that the basic characteristics that a foreign entity must meet in order to be considered an EAR for Spanish purposes are the following:
a) The foreign entity must not be a taxpayer of income tax in its State of incorporation.
b) The income generated by the entity must be attributed for tax purposes to its partners or participants in accordance with the legislation of the State of incorporation, who are the ones who pay tax on such income. The attribution in this sense must occur by the mere fact of obtaining the income by the entity, that is, without the need for the income to have been distributed by the entity itself to its partners or participants.
c) Finally, the income obtained by the entity and attributed to its partners or participants must preserve, in accordance with the legislation of the State of incorporation, the nature of the activity or the source from which it comes for each partner or participant.
The EAR Resolution also establishes a specific temporal framework that limits its effects with respect to taxable events accrued from the date of its publication, that is, after February 13, 2020.
In terms of protecting legal certainty, the attempt to give taxpayers a tool that gives them greater legal certainty in such a poorly regulated and controversial matter is indeed commendable. However, the EAR Resolution, in addition to raising the usual doubts about its legality derived from the arrogation of legislative powers by the DGT, left certain unknowns still unresolved, such as the relevance of other characteristics that had been considered in the past, such as the legal personality and the corporate purpose of the foreign entity.
To these doubts is added another fundamental one, of a practical nature, which is how the attribution of income of these entities should be carried out, and, in this sense, what evidence is necessary in this regard, all taking into account that our regulations are enormously austere when it comes to regulating the application of the EAR regime itself (e.g. is it necessary to homogenize results under Spanish accounting and tax criteria, or under the criteria of the legislation of the State of incorporation of the entity? To evidence the imputed income, an ad hoc certificate must be issued by the EAR, can the US K-1 models be used, must the annual accounts of the underlying entities, if any...?).
In conclusion, although the attempt to provide legal certainty to an issue as complex and controversial as the one mentioned was good news, the EAR Resolution left several questions that remain unresolved, without also offering the long-awaited practical solutions.
In this context, a rigorous analysis of the application of the EAR regime on a case-by-case basis remains indispensable. In this sense, Addleshaw Goddard's Tax Department in Madrid has the necessary equipment (including a specific financial analysis subdepartment) and experience to help any Spanish taxpayer when it comes to defining and executing an action plan that allows the application of the EAR regime in a safe and reasonable but at the same time practical manner.
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