Spanish holding company (ETVE) with US LLC

[European]

Hi all,
I've been recently reading about the taxation of a Spanish holding company (ETVE), which I did not know about.
I was wondering it this would work; I would like to hear you opinions/challenges on why not.

- Person 1 (P1) is a fiscal resident in the EU (country 1, not Spain)
- P1 sets up an ETVE in Spain and is the sole shareholder
- ETVE sets up (or buys) US LLC. ETVE is the sole shareholder
- US LLC has remote workers (1 or more). One of them might be P1. US LLC has no ETBUS and thus pays no tax in the US
- ETVE has a director in Spain (Spanish fiscal resident)
- US LLC disburses dividends to ETVE. Spain has a DTT with the US, so 5% tax is due in Spain on those dividends
- ETVE disburses dividends to P1 (no WHT), who pays the tax due for dividends in its country of residence

Full payable tax would thus be 5% in Spain (I understand the initial 100% exemption recently became 95%) plus the dividend tax in country 1

Thanks

 

[JustAnotherNomad]

Won't work, for a number of reasons.

- If the US LLC is transparent (disregarded entity), it cannot pay dividends
- In order for the US LLC to pay dividends, it would have to be taxed as a corporation, but then there would be corporate income tax in the US and/or Spain and/or the EU country where P1 resides
- With the US LLC owned by a company, there is risk of branch profit tax (not really relevant, just mentioning it)
- The US-Spain tax treaty likely has limitation on benefits clauses (treaty can only be used if the Spanish company is owned by Spanish tax residents, etc.)
- With P1 being a tax resident of another EU country, the US LLC would likely be taxable in that EU country
- The Spanish company might also be taxable in that other EU country

Overall, this cannot work as you envisioned and if you tried to set up a structure like this (which wouldn't make any sense), it is very likely that it would end in a bureaucratic nightmare, with taxes payable in all three countries, most likely more tax than if you just set up a company in your home country.

 

[Marzio]

What @JustAnotherNomad said + this would easily fall into GAAR

 

[tomboy]

Hi,

Your scenario seems to bank on the LLC not constituting a permanent establishment (PE) in the US, thus avoiding the creation of a taxable presence. However, even if the LLC is not considered a PE, the US-LLC's income might be attributed to the ETVE under the Spanish Controlled Foreign Corporation (CFC) rules (art. 15 Ley 27/2014). These rules could apply if the income of the LLC is considered passive income, which largely depends on the substance of the LLC's activities.

Further, the use of a disregarded entity like an LLC poses potential tax classification issues. A disregarded entity's classification for US tax purposes does not automatically translate to similar treatment under Spanish law. If the LLC is seen as a transparent entity under Spanish tax law, dividends would not exist as such, since income would be directly attributed to the ETVE, potentially triggering immediate taxation.

On the EU side, the case of Cadbury Schweppes set a precedent at the European Court of Justice, stating that CFC rules are contrary to the EU freedom of establishment unless they apply to "wholly artificial arrangements." Hence, substance in the US LLC becomes crucial.

In relation to the LoB (Limitation on Benefits) clause of the tax treaty, Spanish ETVEs are typically seen as “Spanish resident companies.” However, the requirement of “real and effective management” from Spain is key here. Given P1's residence in another EU country and possible involvement in the LLC's management, it could raise questions around the "real and effective management" of the ETVE.

 

[JustAnotherNomad]

@tomboy What you are missing is that the US LLCs would likely be taxable in the country where P1 is located (C1).
CFC rules aren't relevant. And if there was substance in the US, then there would be US corporate income tax + branch profit tax.

Possible situation:
C1 sees the US LLCs as opaque and decides to tax their worldwide income due to management in control in C1. Say that C1 has a 22% CIT rate. They make $1M in profit, so $220k tax.
Spain sees the US LLCs as transparent - so they attribute the income directly to the Spanish company - 25% tax, so another $250k.
The US sees the income as US sourced and applies 21% corporate income tax ($210k), as well as a branch profit tax of 15% (I believe it follows the treaty rate for dividends) - but wait, you can't use the treaty due to LoB clauses, so they impose the full 30%, $300k.
So now you've got three countries chasing you for $980k in total. Good luck trying to clear that up.
(Granted, it may be unlikely that the US would come after you as well, but the other two seem likely.)

It's just overall a very, very, very bad idea.

 

[European]

Right. So it doesn't look like a good idea

The US LLC would have active income but no substance in the US.
The ETVE would be managed from Spain, with a director and office if necessary (I understand substance requirements for the ETVE aren't fully explained in the Spanish law governing ETVEs)

@JustAnotherNomad why would the US LLC be considered local resident by C1 if it is owned by the ETVE, who is resident in (and managed from) Spain?

 

[JustAnotherNomad]

@European I give you a very simple example.
Imagine that a rich Saudi sheikh (no taxes in KSA!) registered a company in the BVI (no tax in the BVI!) and under this company, the sheikh rents a restaurant in Italy, serving Saudi food. He hires some Italians to run the place.
Why would there be Italian taxes?! The company is registered in the BVI! It's owned by a guy in KSA! How is this possible?! That's what you're asking.

Taxes are mostly about where work is done and where decisions are taken.
Italy doesn't give two shits about the rules of the BVI or KSA - the company is doing business on Italian soil, so Italy can decide how they want to tax the company.
The same will happen with your "US" LLC in C1.

If P1 takes decisions for the LLC in C1, or regularly performs work for the LLC in C1, then there is pretty much always also tax in C1, under C1's own rules (exceptions are mostly third-world countries that either don't care or don't enforce their own rules).
If there is no other staff working for the LLC, then P1 being tax resident in C1 will automatically lead to the LLC being taxable in C1. This is the case in basically all high-tax countries.
"But but... I never work from home, I only work for the LLC while traveling" - doesn't matter, travel doesn't count, C1 will still say that the company is managed from C1 and thus taxable in C1.

In some cases, the right for a country to tax a foreign-registered company (or foreign person) can be restricted under a tax treaty.
But certainly not if you run your "US" LLC from C1. It doesn't matter who owns it, see my BVI/KSA example above. Except that it will be an even stronger argument for the LLC to be taxed in C1 if P1 also owns the company owning the LLC.

It would be a very clear case. They wouldn't even have to consider the ownership of the company. The LLC would clearly be taxable in C1.

 

[tomboy]

@JustAnotherNomad, your example vividly illustrates the point about how taxes are often associated with where work is done and decisions are made. And you're absolutely correct that, from a tax perspective, the place of decision-making and value-creation are key factors to determine where a business should be taxed.

I understand your point about a resident of C1 taking decisions or performing work for the US LLC, thus creating a taxable presence in C1. It seems that we are dealing with the concept of a "permanent establishment" (PE) here. If a PE is created in C1, the profits attributable to this PE would indeed be taxed in C1.

However, this also raises an interesting issue. Typically, to create a PE, you need a fixed place of business in that country, or an agent acting on your behalf in that country. If P1 is merely an employee of the US LLC, and not acting as an agent of the US LLC in C1, it might not necessarily create a PE. Would you agree with this, or do you see the employment relationship as irrelevant for these purposes?

Another point to consider is whether the applicable tax treaty (if any) between the US and C1 would change this outcome. Many tax treaties have a definition of PE that may differ slightly from the domestic law definition, and this could potentially provide relief.

And finally, on your point about C1 having the right to tax a foreign-registered company, I certainly agree. This is a crucial consideration. However, the application of the domestic laws of C1 and the relevant tax treaty may limit this right.

 

[JustAnotherNomad]

However, this also raises an interesting issue. Typically, to create a PE, you need a fixed place of business in that country, or an agent acting on your behalf in that country. If P1 is merely an employee of the US LLC, and not acting as an agent of the US LLC in C1, it might not necessarily create a PE. Would you agree with this, or do you see the employment relationship as irrelevant for these purposes?

No, it's completely irrelevant. Who manages the LLC, who works for the LLC, where is that work performed? "Nobody manages it, there is no employee!" Obviously that's bulls**t.
It's like hiring a nominee director for $250 a year and claiming you didn't work for the company, he did! Tax authorities care about facts, not some formal stuff on paper.

Who makes the decisions for the US LLC? Is it the manager of the Spanish company? Then the LLC's income would probably be taxed as regular income of the Spanish company (definitely not as dividend income/capital gains). But that would mean you'd have to prove that you're not involved in the company at all - and all you would gain if you succeed would be that the company would have to pay the Spanish corporate income tax, which is high.

Likewise, a company typically is considered tax resident in the country where it's managed and controlled. No need to even consider PE rules if the company is managed and controlled there.
You'd have to prove that you're not actively managing the company. They will simply claim you did and then it's up to you to prove they're wrong.

Another point to consider is whether the applicable tax treaty (if any) between the US and C1 would change this outcome. Many tax treaties have a definition of PE that may differ slightly from the domestic law definition, and this could potentially provide relief.

On what basis would you have access to a US tax treaty?! That's not how tax treaties work.

And finally, on your point about C1 having the right to tax a foreign-registered company, I certainly agree. This is a crucial consideration. However, the application of the domestic laws of C1 and the relevant tax treaty may limit this right.

There is no applicable treaty. Maybe a C1-Spain treaty could be relevant, but probably only insofar as it would assign the right to tax the Spanish company to C1, so at least there wouldn't be any tax in Spain, or at least not very much.