CFC Rule for a Spanish-resident who's a CEO of an US-based C-Corp

[jamescameron]

I'm not sure if I get this right and I'm aware that I should chat with a professional tax attorney.

However, this forum is such a wealth of knowledge and I found out that some of the topics that you guys cover here are not even clear to the average attorney (or maybe I'm going to the wrong ones).

I'm a EU citizen who legally resides in Spain. I'm also a CEO of a startup based in Delaware (US) and a 50% shareholder together with my Co-Founder, who is instead the President and CTO of the company. He is an American national, resides in the US. He owns the other 50%.

I understand that I will be rightfully charged with income tax in Spain for my salary and eventual dividend proceedings coming to me from the C-Corp. And I also understand that there is a tax treaty between Spain and the US that seems to be avoiding double taxation. In my understanding, this means that I will not pay my personal taxes in the US but only in Spain, where I legally live.

Assuming that my above statement is correct, my concern is about the CFC rule.

Being the CEO, I'm in charge of the day-to-day operations of the company (although our hierarchical structure is flat, and both myself and the CTO are highly involved in any decision).

We don't serve the Spanish market, have zero customers in Spain and our client base is 80% in the US, 20% around the world (e.g. Middle East, UK).

Will Spain have any basis to claim that the company is Spanish and therefore subject to local Corporate Tax?

If so, will it help if I refuse to elect myself as a CEO and let my partner have the official title? What if instead we will be designated as Co-CEOs (not even sure if this is possible though)?

Also, bonus question if you allow me: will I need to pay Social Security contributions in Spain, although I would technically be employed abroad?

Thanks in advance

 

[JustAnotherNomad]

CFC rules probably won't be an issue, people get this wrong all the time. CFC rules are more about artificial situations, especially with license fees and other structures where the company was incorporated in another country just to save taxes, not when there are proper operational reasons behind it.

The question is if the company is tax resident in Spain (article 4) or if it has permanent establishment in Spain (article 5).
It would probably not be tax resident in Spain since your co-founder is in the US - it would be different if you were both in Spain.

Look at article 5 of the tax treaty. The question is if there could be a "place of management" in Spain:
If you have the power to sign contracts on behalf of the company and you habitually do so from Spain, it's possible that there is a PE.
Or if you have meetings with clients in Spain, etc.
If you don't have clients in Spain, you only work from home (no Spanish office), you don't sign contracts in Spain, you often fly to the US for business decisions, board meetings are held outside of Spain and so on - I would say it's absolutely possible that the company will owe no tax in Spain.
But as you said, only a Spanish tax attorney or accountant can really answer this.

Even if there is a PE, the company would only pay Spanish tax on the profits that were generated by its Spanish PE (article 7).
And even then, the company would pay less tax in the US to make up for this, since there would be double taxation otherwise.

And yes, if you are an employee, your US company will have to register in Spain as an employer and pay social security contributions like any Spanish company. I guess it could make sense not to be an employee, but rather just receive dividends instead.
Maybe you could send an invoice to the company instead as a freelancer, but I guess that could be considered hidden employment. You should really talk to an expert about that.

 

[jamescameron]

Thank you so much for your answer, I appreciate it.

Basic and perhaps obvious question: being the CEO would configure myself as an employee? Although I don't perceive any salary? I'm only after the dividends at this stage, since we reinvest whatever we make.

 

[JustAnotherNomad]

Basic and perhaps obvious question: being the CEO would configure myself as an employee? Although I don't perceive any salary? I'm only after the dividends at this stage, since we reinvest whatever we make.

Even if you're the CEO, why would there be a requirement to pay a salary/be an employee? It would surprise me if there was such a requirement in Delaware, and if there's no PE in Spain, I don't even think Spanish laws would apply to the company. And even then, I'm not sure if Spanish companies have to pay a salary to their CEO's. In fact, you should probably try to avoid being an employee if possible, since that would increase the risk of there being a PE due to your position in the company (ability to sign contracts on behalf of the company in Spain).

 

[jamescameron]

Thanks again for your help, appreciate the effort to respond.

Makes sense!

 

[Martin Everson]

I'm a EU citizen who legally resides in Spain. I'm also a CEO of a startup based in Delaware (US) and a 50% shareholder

Start buying that KY Jelly and practicing touching your toes for the Spanish taxman when he comes visit.

As 50% shareholder the overseas income of the Delaware company will be attributed directly to you as if the company did not exist and you earned the money directly. You want to ensure the business is really an active business and with material operations in its location also and that you are not just receiving what Spain may consider passive income for a thin structure. Speak to a tax advisor now.

https://www.pbs.es/en/use-offshore-companies-spanish-tax-rules/

 

[JustAnotherNomad]

That's complete bulls**t, he wrote it's a C-corp with a US co-founder.

 

[jamescameron]

That's complete bulls**t, he wrote it's a C-corp with a US co-founder.

If I can add to this, we are a legit active Company that develops tech (phisically in the US) and sells it on a subscription basis. I am also willing not to take any salary or dividend for at least a year.

 

[JustAnotherNomad]

@jamescameron It would be great if you could update the thread with what the Spanish tax lawyer/accountant told you.

 

[Martin Everson]

If I can add to this, we are a legit active Company that develops tech (phisically in the US) and sells it on a subscription basis. I am also willing not to take any salary or dividend for at least a year.

Makes no difference on whether the company pays out or not. The companies income can be treated as if you earned it personally period!!! The 50% ownership rule and whether income is passive or active in the taxmans eyes is critical. You really want to speak to a company like PBS etc and get it right first time around. Make sure its an active company and that Spanish taxman is not gonna bend you over your kitchen table.

 

[JustAnotherNomad]

CFC rules only apply to companies without substance (only being incorporated in a jurisdiction for tax reasons) and >15% passive income that are paying less than 25% of the Spanish tax rate.
The Spanish CIT rate is 25%, so the company would have to pay less than 18.75% CIT for this to even potentially be an issue.
The federal US CIT rate is 21% (and then there can be state taxes on top).
Yes, it's important to check this, but I cannot imagine that this will be an issue for a C-corp that pays >75% of the Spanish CIT, with a US co-founder, substance, real economic activity in the US and so on.

The bigger risk is permanent establishment in Spain. Which also shouldn't be that much of a deal since the difference in CIT isn't that big. It would probably just be a pain in terms of paperwork.

 

[legrant]

CFC rules only apply to companies without substance (only being incorporated in a jurisdiction for tax reasons) and >15% passive income that are paying less than 25% of the Spanish tax rate.
The Spanish CIT rate is 25%, so the company would have to pay less than 18.75% CIT for this to even potentially be an issue.
The federal US CIT rate is 21% (and then there can be state taxes on top).
Yes, it's important to check this, but I cannot imagine that this will be an issue for a C-corp that pays >75% of the Spanish CIT, with a US co-founder, substance, real economic activity in the US and so on.

The bigger risk is permanent establishment in Spain. Which also shouldn't be that much of a deal since the difference in CIT isn't that big. It would probably just be a pain in terms of paperwork.

Shouldn't it be 6.25% instead of 18.75%?

 

[JustAnotherNomad]

Sorry, I mistyped, can't edit my post now. It should have been "less than 75% of the Spanish tax rate" of course.