Plot twist in relation to the personal income tax treatment of EFT?
A recent ruling by the Directorate-General of Taxes (“DGT”) reopens the debate regarding the personal income tax treatment of listed investment funds, known as exchange trade funds (“ETF”) and the particular aspects that must be taken into account in each case, given their specific regulation. The main distinguishing feature of ETFs with respect to “traditional” investment funds is precisely their status as listed.
In general, where the applicable requirements are met, the reinvestment deferral regime (non-taxation) applies for personal income tax purposes in cases of transfers between accounts of holdings and shares in collective investment undertakings regulated in Spanish legislation, and withholdings are made from the capital gains that finally materialize. However, Spanish ETFs (whether they are the origin, destination, or both, of the reinvestment) are expressly excluded from this tax deferral and withholding treatment.
Furthermore, the law specifies that this regime for transfers of funds between accounts and the withholding obligation also apply to foreign collective investment undertakings that are harmonized (subject to the UCITS Directive), formed and domiciled in a Member State of the European Union (except tax havens) registered with the Spanish National Securities Market Commission and commercialized by entities registered with that body.
In 2006, the DGT (ruling V0713-06) held that a foreign ETF marketed in Spain through its trading on the Spanish stock market was also excluded from the deferral and withholding obligation. This view was justified by the specific manner in which this product is marketed in Spain.
However, in order to dissipate any doubts there might be in this regard, in 2016, 10 years later, the DGT, in its ruling V4596-16, ratified that reasoning but this time more conclusively, placing the focus on exactly the opposite side, that is, foreign ETFs can be subject to the deferral regime and, thus, their gains can be subject to withholdings. Resuming its argument, the DGT bases this interpretation on the specific manner in which foreign ETFs are sold in Spain. In the case of the ruling, the DGT, cautiously assuming that the rest of requirements are strictly met, used two keys and nuances to defend the application of the regime of transfers and the withholding obligation: the foreign ETFs were not listed on the Spanish stock market (but rather on other European stock markets) and the entities that marketed them in Spain participated directly in the securities holding structure (which can commonly occur through umbrella accounts). Whether a novelty or a simple confirmation of criterion, what is certain is that this DGT ruling, with all its nuances, will be of interest to investors.
Garrigues Tax Department