Spain Revives Equity Capitalization Reserve as Business Tax Tool

For international tax advisers evaluating European footprints, Spain now deserves a fresh look. Spain has quietly turned a dormant tax incentive into one of Europe’s most attractive tools for businesses, especially large companies. Two legislative reforms in 2024 transformed Spain’s equity capitalization reserve from a modest tax incentive into a powerful tax allowance that can reduce effective tax rates to between 15% and 17% when strategically combined with some other tax elements (such as the participation exemption rules and the special consolidation/group tax regime)—making Spanish investment and business structures increasingly competitive at the international level.

Change to Equity Capitalization Reserve

Spain’s 2024 reform signals a long-term commitment: The changes represent a significant and enduring policy shift, designed to promote equity capitalization over the long haul.

2014 Law. Spain’s equity capitalization reserve, introduced in 2014, resembled other European “allowance for corporate equity” (ACE) mechanisms by offering entities a tax base reduction incentive for equity increases, thereby encouraging capital strengthening over debt financing. This reduction was allowed subject to the condition that the equity increase was maintained for a period of five years. Until 2024, ACE’s modest benefits went largely unnoticed and unused.

2024 Reform. In 2024, Spain fundamentally changed how capital reserves are taxed (Royal Decree-Law 4/2024 and Law 7/2024):

• Increased Tax Reduction Rate on Equity Increases: reduction rate jumped from 10% to 20% of equity increases—and reaches 30% if headcount is increased by more than 10%.
• Increased Cap on Tax Base Application: cap on tax base application doubled from 10% to 20% of taxable income.
• Reduced Mandatory Equity Maintenance Period: mandatory equity maintenance period dropped from five to three years.

For example, a large or medium-sized company with €100 million ($118 million) in taxable income that increases equity by €50 million ($59 million) and meets the 10% employment increase threshold can now reduce its tax base by €15 million ($17.7 million) (30% of €50 million). At Spain’s 25% corporate income tax rate, that’s €3.75 million ($4.3 million) in tax savings—reducing the effective rate to 21.25%. Combined with carryforward tax losses, effective tax rates can be reduced to a range between 15% and 17%.

Applicability. The reforms apply retroactively to reserves established before 2024, and the reduced three-year holding period now applies across the board.

Participation Exemption and ETVEs

The participation exemption rules are designed to eliminate double taxation for amounts already taxed at the subsidiary level. Under these rules, provided certain requirements are met, Spain allows a 95% exemption from corporate income tax on income from both foreign and domestic subsidiaries.

Spain’s tax rules are distinctive because a Spanish foreign securities holding entity (ETVE) (“Entidad de Tenencia de Valores Extranjeros”) may combine the rules for equity capitalization reserve with those for participation exemption (Art. 21 of Spanish Corporate Income Tax Law) on qualified foreign-source dividends and capital gains.

ETVEs get the following significant benefits:

• 95% exemption from corporate income tax on:
  
  • Dividends received from qualifying subsidiaries;
  • Capital gains received from the sale or disposal of qualifying subsidiary shares;
• Zero withholding tax on distributions to nonresident shareholders; and
• Spain’s 100+ tax treaties provide additional flexibility.

The 95% participation-exemption regime applies when the following requirements are met:

• Minimum 5% participation in the subsidiary’s share capital; and
• Participation must have been held for more than one year.
• A nonresident subsidiary must be subject to corporate income tax levied at a nominal tax rate not lower than 10%, a test deemed satisfied if the entity is resident in a tax treaty partner jurisdiction;

The strategic opportunity lies in combining the two set of rules for equity capitalization and corporate income tax. A Spanish holding entity can:

• Apply the equity capitalization reserve to reduce taxation on its own income (i.e., management fees, financing income, service charges to group companies). The tax allowance works well when the special consolidation tax regime is applied in this context at a group level.
• Simultaneously benefit from ETVE exemptions on dividends and capital gains from its portfolio companies.
• Distribute dividends and capital gains tax-free to nonresident shareholders.

This combination creates a dual-layer efficiency unavailable in pure participation exemption regimes. The capitalization reserve rewards the holding company’s own equity strengthening while ETVE handles portfolio income—a tax-efficient accumulation plus tax-transparent repatriation.

Consider a large company or multinational enterprise establishing a Spanish holding company to manage European operations. By capitalizing €50 million ($59 million) annually through retained earnings, the structure achieves sub-22% effective rates on Spanish-source income while getting 95% ETVE tax exemptions on subsidiary dividends and disposals. The three-year maintenance period aligns well with typical investment horizons, and Spain’s extensive treaty network adds flexibility that newer holding jurisdictions lack.

Large Companies and MNEs Groups

Traditional EU holding jurisdictions typically lack comparable incentives for equity capitalization reserve, relying instead on participation exemption regimes designed primarily to eliminate economic double taxation on portfolio income. Many such structures depend on mechanisms that sweep income through with minimal local taxation—an approach increasingly vulnerable to anti-avoidance rules, substance requirements, and heightened scrutiny under BEPS frameworks and EU state aid investigations.

Spain offers something different: meaningful tax benefits tied to real economic decisions. The equity capitalization reserve explicitly rewards equity strengthening—increasingly relevant as entities rebuild balance sheets in a higher interest rate environment where debt costs have surged.

The employment-linked enhancement (up to 30%) appeals to multinationals facing stakeholder pressure around job creation and Environmental, Social, and Governance considerations.

Spain’s economic substance matters too. As the Eurozone’s fourth-largest economy with robust industrial and services sectors, Spain provides genuine business rationale that’s critical under Pillar Two’s substance-based carve-outs and global anti-avoidance rules. Spain isn’t engineering artificial tax competition—it’s a major economy offering competitive incentives for genuine capital deployment.

Pillar Two Considerations

The capitalization equity reserve reduces covered taxes under the OECD’s 15% global minimum tax framework, but Spain’s 25% headline corporate income tax rate provides a substantial cushion. Groups with meaningful Spanish operations (i.e., equity investment, employees, tangible assets) should comfortably exceed the 15% threshold even after applying the reserve, especially given Pillar Two’s substance-based carve-outs for payroll and tangible assets.

This contrasts with aggressive structures in jurisdictions approaching 15%, where Pillar Two top-up taxes may eliminate residual advantages. Spain offers material tax efficiency without Pillar Two risk —a sweet spot in the post-BEPS landscape.

Practical Steps for Large Companies and MNEs

Three actions merit immediate consideration:

• Model Spanish Structures Against Current Arrangements. Tax teams should quantify combined ETVE and capitalization reserve benefits against existing holding structures. Factor in comparative substance requirements, potential anti-avoidance exposure, and operational flexibility. Look beyond pure rate arbitrage to restructuring optionality and regulatory trajectory.
• Integrate Employment Planning. The 30% reduction for headcount increases above 10% represents significant value—potentially €750,000 additional annual savings on a €50 million equity increase. Groups planning European expansion or shared services centers should evaluate Spain strategically, recognizing that workforce investment delivers both tax and operational benefits.
• Prepare Robust Documentation. Spanish tax authorities’ approach on economic substance when dealing with the application of anti-abuse rules should be taken into account in any tax planning involving the application of domestic or treaty tax allowances. Transfer pricing policies must demonstrate genuine Spanish management, governance structures must reflect real strategic control, and decision-making protocols must evidence active holding company functions. This isn’t compliance theater—it’s competitive advantage as authorities globally scrutinize arrangements lacking operational underpinning.

Looking Ahead

Spain’s reforms reflect sophisticated tax policy: targeted incentives for behaviors (equity strengthening, employment creation, long-term capital deployment) that align with European objectives while delivering material tax efficiency. As traditional holding jurisdictions face headwinds and Pillar Two constrains pure rate competition, jurisdictions offering meaningful incentives for genuine substance will differentiate.

Spain has positioned itself in this space. For business investors and multinationals capable of demonstrating operational presence, the question is whether current structures fully capitalize on the opportunity. With effective rates potentially reaching between 15% and 17%, combined the holding regime/ETVE benefits, and genuine substance arguments, Spanish holdings deserve serious evaluation.

The revitalized capitalization reserve isn’t just another European tax incentive— it’s a strategic tool for groups ready to align tax efficiency with real economic activity.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

By Ishtar Sancho, José Manuel Calderón, and Juan José Sánchez are with A&O Shearman in Madrid, Spain.

Write for Us: Author Guidelines