A subsidiary orders the payment. The parent company expects to receive the full dividend. And yet, the group knows that a portion of that income will be subject to tax. When it comes to withholding taxes on dividends between group companies, the challenge lies in ensuring that this tax cost does not result in a withholding that is not required by law.
In 30 seconds: the key points of this article
- General Exemption: Article 21 of the Income Tax Law (LIS) allows for an exemption to be applied to certain dividends and income derived from equity interests when the legal requirements are met.
- Exemption percentage: For tax periods beginning on or after January 1, 2021, the exemption is generally calculated based on 95% of income.
- Non-exempt amount: The remaining 5% reduces the amount of the exemption for legally recognized administrative expenses related to the investment.
- Estimated tax cost: If the receiving entity is taxed at a rate of 25%, the inclusion of 5% may result in an effective tax burden of 1.25% on the dividend.
- No withholding tax: The paying corporation does not withhold tax when the dividend falls under Article 21.1 and the requirements of Article 128.4.d) of the Corporate Income Tax Law (LIS) and Article 61.p) of its Regulations are met.
- Prior approval: The recipient entity must notify the paying entity that it meets the legal requirements and provide supporting documentation.
Since 2021, the exemption under Article 21 of Law 27/2014 on Corporate Income Tax generally applies to 95% of dividends that meet its requirements. The remaining 5% reduces the exempt amount by the amount of expenses related to the management of the equity interest.
The reduction affects the company receiving the dividend. The paying company faces a different challenge: it must decide whether to withhold the dividend and, above all, whether it can justify not doing so.
What is the difference between paying a 5% tax and withholding taxes on dividends between companies within the same group?
The mistake stems from a statement made too hastily: “If it’s taxed, it’s withheld.” That logic doesn’t hold up here. These are different obligations; they apply to different entities and are settled at different times.
- The 5% tax is assessed when the entity receiving the dividend files its corporate income tax return.
- Withholding, when applicable, is performed by the paying entity as a payment on account of the recipient’s tax liability.
For dividends covered by Article 21.1 of the Corporate Income Tax Law (LIS), the reduction of the exemption to 95% does not eliminate the withholding exception provided for in Article 128.4.d).
- Paying company: distributes the dividend without withholding tax when Article 128.4.d) of the Corporate Income Tax Law applies.
- Receiving corporation: Calculate the exemption in accordance with Article 21 and include the portion of income that is not exempt.
- Business group: Keeps the corporate and tax documentation that verifies the origin of both payments.
Both consequences can coexist within the same distribution. The money is paid in full to the parent company, and the tax liability arises later, in the parent company’s own tax return. If you are about to authorize a payment and are unsure which of the two obligations you are responsible for verifying, you can consult us about the situation before authorizing the payment.
What does Article 21 of the Corporate Income Tax Act regulate?
The fact that two companies belong to the same group explains the transaction, but it is not sufficient to make the dividend tax-exempt. The exemption under Article 21 is not granted based on the organizational structure; rather, it is granted upon meeting specific requirements that must be demonstrated.
Article 21 of Law 27/2014 makes eligibility for the exemption contingent upon meeting specific requirements regarding ownership, residency, and the nature of income, for both resident and nonresident entities.
The double taxation exemption reduces the repeated economic taxation of a profit when an entity that has already been taxed distributes it to another participating entity. Its application depends on compliance with the conditions established by law.
In general, the exemption requires a minimum direct or indirect ownership interest of 5% in the capital or equity of the entity distributing the profit.
- Ownership: Verify the direct and indirect ownership percentages of the recipient entity.
- Length of service: Verify the period during which the employee has been with the company.
- Tax Residency: Identify the tax residency of the entity distributing the dividend.
- Foreign Taxation: Review the additional requirements when the investee is not resident in Spain.
- Nature of the income: Confirm the source and classification of the distributed amount.
- Legal limitations: Rule out any provisions that exclude or restrict the exemption in this specific case.
Note: “intra-group dividend” and “dividend covered by Article 21” are not equivalent terms. The former describes a business relationship; the latter requires verification of the conditions set forth in the Corporate Income Tax Law (LIS).
How does the 95% general exemption work?
Just because a company pays out 100 in dividends doesn’t mean that 100 is tax-free. The law allows 95% to be exempt; the remaining 5% is subject to tax. That is the figure that matters before making any decisions.
Article 21.10 of the Income Tax Law reduces the amount of certain dividends and positive income by 5% for the purposes of calculating the exemption. The law classifies this reduction as management expenses related to equity interests.
- 95% of the dividend: it is exempt when the requirements of Article 21 are met.
- 5% of the dividend: this is not covered by the general exemption.
- Recipient entity: includes the non-exempt portion in its corporate income tax base.
The reference to 95% describes a general rule. Before applying it, you should review any exceptions, special provisions, and transitional provisions that may affect the tax period, the taxpayer, or the transaction.
How is the 5% non-exempt tax cost calculated?
1.25% is the figure everyone keeps repeating, but it only applies when the company is taxed at 25% and has no other adjustments. It is not a fixed rate established by law; it is simply the result of applying 25% to the 5% that is not exempt. If the company’s tax rate or situation changes, the figure changes.
If an entity receives a dividend of 100,000 euros, meets the requirements of Article 21, and is taxed at a rate of 25%, the general calculation would be as follows:
Calculation Example
- Dividend received: 100,000 euros.
- 95% tax-exempt portion: 95,000 euros.
- Non-exempt portion at 5%: 5,000 euros.
- 25% membership fee: 1,250 euros.
In that example, the effective tax rate on the dividend would be 1.25%. The result changes if the recipient entity applies a different tax rate, has tax loss carryforwards, is subject to additional tax adjustments, or is affected by another special provision.
Important: The cost is not realized through a withholding of 1,250 euros by the subsidiary. The receiving entity includes the non-exempt portion when calculating its own tax base and tax liability.
What did Binding Ruling V1154-21 clarify regarding withholding tax?
The 2021 reform of withholding taxes on dividends raised a question with operational implications: if the 5% was now subject to tax, was the subsidiary required to withhold it at the time of payment? The answer required distinguishing once again between exemption and withholding.
Binding Ruling V1154-21, dated April 29, 2021, analyzed the relationship between the reduction of the exemption and the withholding exemption.
The General Directorate of Taxes concluded that the reduction in the exempt amount does not preclude the application of the withholding tax exemption when the dividends fall under Article 21.1 of the Corporate Income Tax Law.
“The non-withholding is based on the nature and requirements of the dividend, not on the fact that the exemption amounts to exactly 100 percent.”
The legal basis is found in Article 128.4.d) of the LIS.
Article 61(p) of the Corporate Income Tax Regulations elaborates on the exception and adds a formal requirement: the recipient entity must notify the paying entity that the requirements are met and provide the documentation supporting them.
What information must the receiving company provide to ensure that no withholding tax is applied?
You may be right not to withhold tax, but you could still face penalties during an audit. If the company paying the dividend does not keep proof that the requirements were met, the tax authorities will treat that failure to withhold as a standard practice of the group, rather than a justified decision.
Article 61(p) of the Corporate Income Tax Regulations requires the receiving entity to notify the paying entity that the requirements of Article 21 have been met and to provide supporting documentation.
In practice, this notification is a written document signed by the administrator of the receiving company, dated prior to or on the same date as the payment, in which the receiving company declares—under its own responsibility—that it meets the requirements of Article 21. This document must identify, at a minimum: the names of the two companies and their tax identification numbers (NIF); the percentage of direct or indirect ownership interest held by the recipient company in the paying company; the date of acquisition of that ownership interest and confirmation that the one-year holding period has been met (or a commitment to complete it); the tax residence of both companies; and an express statement that the dividend falls under Article 21.1 of the Corporate Income Tax Law (LIS). There is no mandatory official form: what the regulation requires is that the paying company have this certification in its possession when it decides not to withhold tax, not that it follow a specific format.
Before giving the order to the bank: if the company making the payment does not yet have that signed document and its supporting paperwork, the prudent decision is not to order the payment until it is received. Reconstructing the communication afterward, once the transaction has already been carried out, is precisely what an audit would interpret as a routine practice rather than a well-documented decision. If you have any doubts about whether your document includes all the required information, it’s best to review it with your tax advisor before making the transfer.
The distribution file should make it possible to verify, at a minimum, the following items:
- Identity: Information about the entity receiving the dividend.
- Ownership: direct and indirect percentage ownership in the paying entity.
- Date of acquisition: the date on which the ownership interest was acquired.
- Holding period: compliance with or a commitment to complete the statutory period.
- Tax residency: the residency of the paying and receiving entities.
- Foreign Ownership: Additional Requirements Applicable When Nonresident Entities Are Involved.
- Shareholders’ Agreement: Approval of the Dividend Distribution.
- Payment: due date, gross amount, and bank statement.
- Communication: Statement by the recipient regarding compliance with Article 21.
- Supporting documents: diplomas, certificates, records, and other relevant evidence.
The risk arises when failure to retain records becomes a habit and attempts are made to reconstruct the evidence later. A belated email or an organizational chart is no substitute for timely communication and a consistent record.
Are you going to distribute dividends within the group?
Before ordering the payment, it is advisable to review the ownership interest, the holding period, the corporate agreement, and the required notification to apply the exemption from withholding tax.
What happens with Form 123 when there is no withholding?
It is correct not to report a nonexistent withholding. However, treating all formal obligations as fulfilled based on that assumption could create another problem.
Form 123 is used to report and pay certain withholding taxes and estimated payments on income from capital assets and other sources of income.
When a dividend falls under Article 21.1 and the exception in Article 128.4.d) applies, the paying entity does not withhold tax. Consequently, there is no tax liability corresponding to that payment that must be reported on Form 123.
- Other income: Verify whether the company has paid any other amounts subject to withholding tax during the period.
- Frequency: Verify whether the applicable filing is monthly or quarterly.
- Current instructions: Review the criteria for tax returns with no income or negative income.
- Reconciliation: Ensuring consistency between accounting records, corporate resolutions, and tax returns.
What’s going on with Form 193?
Form 193 cannot be completed by simply checking whether there was any income. The reporting requirement has its own specific provisions and must be reviewed in accordance with the instructions for that tax year.
Form 193 is an annual informational return related to certain types of income subject to withholding or payment on account, as well as other types of income subject to reporting requirements in accordance with applicable regulations and instructions.
In practice, the general rule is as follows: a dividend exempt from withholding tax under Article 128.4.d) does not give rise to a tax liability, but it may still be a reportable transaction for informational purposes. In other words, “not withholding” and “not reporting” are not the same thing: the dividend may still need to be reported on Form 193 using the code designated for dividends that are exempt or not subject to withholding, even if the amount withheld field is left blank. That is why it is not enough to conclude, “I do not withhold, therefore I do not report.”
Formal note: The specific code and the requirement to report the dividend depend on the instructions in Form 193 in effect during the fiscal year in which the payment is made, which the Tax Agency may modify each year. Before filing the annual summary, confirm with your advisor which code applies to the current fiscal year: this is an area where the criteria change more frequently than the underlying rule.
How does this rule affect a holding company?
Having a holding company at the head of the group does not automatically mean that dividends are tax-free. Each dividend that the holding company receives must, in and of itself, meet the requirements of Article 21; it is not enough for the structure to simply exist.
A holding company can facilitate group management, the reinvestment of profits, the entry of investors, business succession, or future corporate transactions. None of these functions, on its own, alters the tax treatment of each dividend.
Dividends distributed by a subsidiary to a holding company may qualify under Article 21 when the holding company meets the requirements regarding ownership interest, holding period, and other legal conditions.
- Paying subsidiary: It may distribute the dividend without withholding tax if the provisions of Articles 21.1, 128.4.d), and 61.p) are met.
- Receiving holding company: Calculate the exemption based on 95% of the dividend, unless otherwise specified or subject to special provisions.
- Corporate Income Tax: The holding company includes the non-exempt portion in its own tax return.
- Documentation: Both companies retain agreements, correspondence, and evidence of the treatment applied.
When nonresident entities are involved, the analysis must also include domestic regulations, double taxation treaties, European Union law where applicable, and the applicable anti-abuse rules.
“The holding company directs the flow of profits within the group; the exemption requires demonstrating that this flow meets every legal condition.”
When might there be no withholding tax on dividend distributions?
Withholding taxes on dividends between group companies become clear when both obligations are listed in separate columns: what happens at the recipient company and what the paying company must do.
SettingTreatment at the receiving facilityPayor WithholdingWhat to CheckMinimum ownership of 5% and requirements metA general exemption of 95%, unless otherwise specified or a special provision applies.No withholding tax is applied if the requirements of Article 128.4.d) of the Income Tax Law and Article 61.p) of the Regulations are met.Ownership interest, shareholding, nature of income, disclosure, and supporting documents.Dividend from a resident subsidiary to a resident holding companyThe holding company generally includes the 5% non-exempt portion.No withholding tax is applied when the dividend falls under Article 21.1 and compliance is demonstrated.Role of the holding company, percentage, length of service, articles of incorporation, disclosure, and accounting treatment.Stake of less than 5%The exemption under Article 21 does not apply due to the general participation requirement.There may be an obligation to withhold, unless another legal exception applies.Identity and residence of the recipient, tax regime, and withholding rate.Holding held for less than one yearThe exemption may depend on maintaining the ownership interest until the end of the term.Non-retention requires the ability to maintain compliance with the requirements.Date of acquisition, enforceability, and subsequent maintenance.Dividend from a nonresident entityThe exemption depends on the specific requirements for foreign ownership.Spanish regulations, withholding tax, and applicable international instruments must be analyzed.Residency, foreign taxation, tax treaties, European regulations, and anti-abuse rules.Dividend to a resident individualIt is subject to personal income tax under the rules governing the savings base.There is a general withholding requirement.Residence, recipient status, current percentage, and reporting requirements.Dividend Without Sufficient DocumentationThe treatment of the material depends on whether the requirements are actually met.A lack of evidence increases the risk of regularization.Communication, certificates, diplomas, record books, agreements, and payment tracking.
The table summarizes general scenarios. The conclusion must be adapted to the entities’ place of residence, the nature of the interest, and the regulations in effect on the date of distribution.
Checklist: What Should Be Reviewed Before Distributing Dividends Within the Group?
A dividend distribution may be properly approved at the shareholders’ meeting and yet still be inadequately documented for tax purposes. Before making the payment, it is advisable to verify two things at the same time: that the requirements for the exemption are met and that the necessary corporate, accounting, and tax documentation supporting the distribution exists in both companies.
Essential Documentation and Verifications
- Percentage of ownership: Calculate direct and indirect ownership stakes and verify compliance with the legal threshold.
- Holding period: Identify the date of acquisition and verify whether the required holding period has been met or will be met.
- Nature of the income: Confirm that the distributed amount falls under Article 21.
- Tax Residency: Review the additional requirements when nonresident entities are involved.
- Corporate resolution: to verify the existence of distributable profits and properly approve their distribution.
- Notification: Submit the declaration of compliance with the requirements and supporting documentation to the paying agency.
- Accounting: Record the transaction consistently in both companies.
- Corporate Income Tax: Calculate the exemption and the non-exempt portion for the receiving entity.
- Form 123: Confirm that the specific dividend is not subject to withholding tax and review other income for the period.
- Form 193: Review the current instructions and guidance.
- International Operations: Analyze withholding taxes, tax treaties, European regulations, and anti-abuse rules.
The file must be closed before payment is made. If it is prepared afterward, when an audit or discrepancy has already arisen, each document appears to have been created retroactively to justify the decision; if prepared beforehand, it demonstrates that the decision was made correctly.
What risks are involved in applying the non-withholding rule without reviewing the requirements?
Many standardization efforts begin with a familiar phrase: “We’ve always done it this way.” The problem is usually not just the rule itself, but the lack of a record to support it.
If the paying company does not withhold tax and subsequently cannot prove that the exemption applies, the tax authorities may challenge the treatment and impose the corresponding tax consequences.
- Unpaid withholding: demand for payment of the amount that should have been withheld when the exception did not apply.
- Late-payment interest: calculation of interest on adjusted amounts.
- Penalties: May be imposed when the legal requirements for liability are met.
- Reporting errors: inconsistencies in Forms 123 and 193 or in other tax returns.
- Accounting discrepancies: a lack of consistency between corporate resolutions, payments, and records.
- Review of the exemption: verification of the percentage, ownership, residency, or nature of the income.
Taxation and withholding should be reviewed separately
When it comes to withholding taxes on dividends between companies within a group, “a 5% tax applies” and “no withholding tax is applied between companies” are useful shortcuts—until they replace actual analysis. Both statements may be correct, but outside their specific contexts, they can lead the group to make the wrong decision.
The recipient entity must certify that the dividend falls under Article 21. The paying entity must have on file the notification and the documents supporting the withholding exemption. Subsequently, each company must record the transaction in its accounting records and tax returns.
“The prudent decision is neither to always withhold payment nor to stop withholding it out of habit: it is to close the case before ordering payment.”
The decision on whether or not to withhold tax is made well before the payment is ordered. At that point, it is still possible to review ownership interest, length of service, residency, the articles of incorporation, regulatory filings, and the processing of Forms 123 and 193. Once the dividend has been paid, correcting any of these issues is much more difficult.
Are you going to distribute dividends among companies in the group?
Before making the payment, we review whether Article 21 applies, whether the subsidiary can justify not withholding tax, and whether the corporate and tax records tell the same story.
Frequently Asked Questions About Dividends Among Group Companies
These answers outline the general criteria. Each distribution must be reviewed in light of the specific corporate and tax information for that particular case.
Are dividends between group companies subject to withholding tax?
Withholding tax on dividends between group companies is not applied when the dividend falls under Article 21.1 of the Corporate Income Tax Law (LIS), the requirements are met, and the receiving entity notifies the paying entity of this and provides proof thereof. Belonging to the same group does not automatically exempt the payment from withholding tax. If any requirement is not met, the general rules applicable to the payment must be analyzed.
What has changed in Article 21 since 2021 regarding withholding taxes on dividends?
For tax periods beginning on or after January 1, 2021, the amount of certain dividends and positive income is generally reduced by 5% for the purpose of calculating the exemption. The general exemption has thus been reduced from 100% to 95%. Any exceptions or special provisions that may affect the transaction should be reviewed.
Does the 5% non-exempt portion require withholding?
No. The 5% non-exempt portion affects the calculation of corporate income tax for the recipient entity. The payer’s withholding obligation is determined separately and does not apply when Article 128.4.d) of the Corporate Income Tax Law (LIS) is applicable and the regulatory requirements are met.
Does the 95% exemption apply automatically to any intra-group dividend?
No, it does not apply automatically. The recipient entity must meet the requirements of Article 21, including the minimum ownership percentage and the holding period. Foreign holdings and certain special cases require additional verification.
What is the minimum ownership requirement under Article 21?
Article 21 generally requires a minimum direct or indirect ownership interest of 5% in the capital or equity of the entity distributing the dividend. The percentage must be calculated based on the actual ownership structure.
How long must the ownership interest be maintained?
Generally speaking, the holding must have been maintained continuously during the year preceding the date on which the dividend becomes payable. If that period has not yet elapsed, it may be completed by maintaining the holding for the necessary period thereafter. Compliance must be documented, and specific requirements may apply depending on the transaction.
What is the effective tax rate on the non-exempt 5%?
The effective tax rate would be 1.25% of the dividend when the recipient entity is taxed at 25% and no other adjustments apply. The result changes if the tax rate or the company’s tax circumstances are different. The 1.25% rate is not a standalone statutory rate.
Who bears the 5% tax cost?
The recipient entity bears the cost when settling its corporate income tax. The paying entity does not deduct that cost through withholding when the legal exception applies. These two obligations must be analyzed separately.
What did Binding Ruling V1154-21 clarify regarding withholding taxes on dividends within the same group?
Ruling V1154-21 clarified that the reduction of the exemption to 95% does not eliminate the withholding exception applicable to dividends covered by Article 21.1. The conclusion depends on whether the legal requirements are met and documented.
What must the receiving company provide to the paying company?
The receiving company must certify that the requirements of Article 21 are met and provide the supporting documents. The documentation should verify, among other things, the identity, the percentage of ownership, and the period of ownership.
Must the dividend without withholding tax be reported on Form 123?
There is no withholding tax applicable to that dividend that must be reported on Form 123 when the exception applies. The company must verify whether other transactions during the period still require the filing of the form. It must also review the current instructions for the tax year.
Must the dividend be reported on Form 193?
The treatment must be reviewed in accordance with the current instructions for Form 193 and the list of reportable transactions. The absence of withholding tax does not automatically mean that any reporting obligation is eliminated. It is advisable to reconcile the form with the accounting records and corporate resolutions.
Can a subsidiary pay dividends to a holding company without withholding tax?
Yes, provided that the dividend falls under Article 21.1, the holding company meets the requirements, and provides the subsidiary with the required notice and documentation. The holding company must subsequently calculate the exempt portion and the non-exempt portion for its corporate income tax purposes.
What happens if the ownership interest is less than 5%?
The general exemption under Article 21 does not apply because the minimum percentage has not been met. The paying entity must assess the withholding obligation and the tax treatment applicable to the recipient. Other rules may apply depending on the nature and residence of the parties.
What about dividends from abroad?
Foreign dividends require verification of the specific requirements of Article 21, the withholding tax applied at source, the double taxation treaty, and, where applicable, European regulations. The outcome depends on the countries involved, the entities, and the characteristics of the transaction.
What documentation should be kept?
You should keep the partnership agreement, proof of ownership, dates of acquisition, the notice to apply for the withholding exemption, supporting documents, accounting records, and bank statements. The tax analysis performed should also be filed.
When should you review the dividend distribution with a tax advisor?
The review should be conducted before approving or paying the dividend in cases involving indirect holdings, nonresident entities, recent acquisitions, reorganizations, uncertainties regarding tax models, or incomplete documentation. A preliminary review allows for corrections to be made to the transaction before obligations arise that are difficult to reverse.
Glossary: Key Concepts Related to the Distribution and Withholding of Dividends Within the Group
- Article 21 of the Corporate Income Tax Law (LIS): a provision of Law 27/2014 on Corporate Income Tax that governs the exemption for dividends and capital gains arising from the transfer of shares. For tax periods beginning on or after January 1, 2021, the exemption generally applies to 95% of the income, with a 5% reduction for non-deductible management expenses, provided that the legally established requirements are met.
- Holding company: a parent company that holds an interest in one or more subsidiaries. The parent company centralizes ownership or strategic management of the group, while the subsidiaries continue to conduct their respective business activities.
- Double taxation exemption: a corporate income tax mechanism that reduces the repeated economic taxation of a profit when an entity that has already been taxed distributes it to another participating entity, provided that the conditions established by law are met.
- Form 123: A return used to report and pay certain withholdings and estimated tax payments on income from securities and other sources of income.
- Form 193: Annual informational return regarding certain types of income subject to withholding or payment on account, and other types of income subject to reporting in accordance with applicable regulations and instructions.
Legal and Doctrinal References
Taxation and withholding obligations must always be verified against official regulations and up-to-date administrative guidelines.
- Law 27/2014, of November 27, on Corporate Income Tax. Articles 21 and 128, concerning the exemption on dividends and withholding taxes and payments on account.
- Royal Decree 634/2015, of July 10. Article 61(p), regarding the withholding exemption and the reporting requirements for the receiving entity.
- General Tax Directorate. Binding Ruling V1154-21, dated April 29, 2021.
This article on withholding taxes on dividends between companies within the same group is for informational purposes only and does not constitute personalized tax advice. The application of the exemption, the absence of withholding, and the formal obligations depend on the circumstances of each transaction and the regulations in effect at any given time.
