Sophisticated Tax Avoidance Strategies in Spain

Tax avoidance in Spain has evolved into sophisticated strategies combining financial engineering, international structures and the exploitation of legal loopholes. To combat these practices, the government has introduced measures such as controlled foreign company rules, transfer pricing controls and crypto-asset regulation. Tax-planning mechanisms, however, continue to evolve.

This article is not intended to encourage tax avoidance. Its purpose is strictly informational.

The following are some of the tax avoidance methods used in Spain:

1. Aggressive tax planning by multinational companies

Subsidiaries in low-tax countries

Multinational companies design structures to shift profits to jurisdictions with low or no taxes, reducing their tax burden in Spain.

• Example: A Spanish group invoices consulting services through an Irish subsidiary (where the corporate income tax rate is 12.5%) instead of invoicing from Spain (25%).
• Mechanisms used:
  • “Double Irish”: using two Irish companies to shift profits with little or no taxation.
  • “Dutch Sandwich”: routing income through the Netherlands to minimise the tax burden before sending it to tax havens.

2. Using intermediary companies to conceal profits

Companies in domestic low-tax areas

• SICAVs (variable-capital investment companies): historically used to pay tax at 1% instead of 25%, although they have been reformed in recent years to prevent abuse.
• Companies in Navarre or the Basque Country: these regions have different tax regimes that may result in lower taxes than in the rest of Spain.

3. Financial and accounting engineering

Manipulated transfer pricing

Multinationals set artificial prices for transactions between their subsidiaries to shift profits to countries with lower taxes.

• Example: A Spanish company buys products from a Swiss subsidiary at inflated prices, reducing its profits in Spain and increasing those of the Swiss subsidiary, which pays less tax.

Intercompany loans

Companies create loans between their subsidiaries with high interest rates, reducing profits generated in Spain through interest payments to another subsidiary in a lower-tax country.

4. Using foundations and wealth-holding structures

Foundations and trusts abroad

• Structures are created in Andorra, Switzerland or Panama to hold personal or business assets and avoid wealth and inheritance taxes.
• Vehicles such as discretionary trusts are used, making it harder to identify the assets’ true owner.

5. False invoicing and bogus self-employment

Using shell companies

• Fictitious companies are set up in Spain or in tax havens to issue false invoices and reduce taxable profits.

Bogus self-employment

• In sectors such as technology and audiovisual production, employees are engaged as self-employed workers to avoid social security contributions and pay less tax.

6. Taxation of crypto-assets abroad

Using exchanges in countries without regulation

• Spanish investors trade cryptocurrencies on unregulated foreign platforms to evade tax.
• Crypto-assets are stored in cold wallets (offline) to avoid detection.

Here are some more sophisticated techniques:

1. “Double dip” (double deduction of expenses)

This method allows the same expense to be deducted in two different countries, reducing the taxable base in both.

• Example: A Spanish company sets up a subsidiary in the Netherlands, which finances another subsidiary in Switzerland. Interest on the loan is deductible in Spain and also in another country because of differences between their rules.

Why is it sophisticated?

• It uses tax mismatches between countries.
• It is not always covered by double-taxation treaties.

2. “Treaty shopping” (optimising tax treaties)

This involves structuring transactions through countries with favourable double-taxation treaties to minimise taxes.

• Example: A Spanish investor invests in the United States through a Luxembourg company because the US–Luxembourg treaty provides a lower withholding tax on dividends than the US–Spain treaty.

Why is it sophisticated?

• It requires advanced knowledge of double-taxation treaties.
• It involves restructuring ownership of assets.

3. “Hybrid mismatches”

This relies on financial instruments or entities being classified differently in different countries.

• Example: A loan is treated as debt in Spain (generating deductible interest) but as equity in another country (with no tax on interest).

Why is it sophisticated?

• It relies on differences in accounting and tax rules.
• Multinationals such as Google and Apple used it until the OECD’s BEPS reforms.

4. Using shell companies and opaque trusts

Shell companies make it possible to conceal the true ownership of assets or income.

• Example: A Spanish business owner creates a company in the Cayman Islands that owns another company in Delaware (United States), which in turn controls a company in Spain.

Why is it sophisticated?

• It uses multiple layers of companies to make tracing more difficult.
• It relies on jurisdictions with bank secrecy.

5. Advanced use of crypto-assets and decentralised finance (DeFi)

Crypto-assets and DeFi platforms enable almost anonymous transfers of value.

• Example: A Spanish investor buys Bitcoin on a decentralised exchange without KYC checks and stores it in a cold wallet in another country. The investor then uses the funds to obtain loans without selling the cryptocurrency and triggering a taxable event.

Why is it sophisticated?

• It is difficult for the authorities to trace.
• It provides access to liquidity without selling assets.

6. “Exit tax” and strategic changes of tax residence

This involves moving tax residence to a low-tax country before carrying out taxable transactions.

• Example: A Spanish millionaire moves to Portugal (which does not tax cryptocurrencies) before selling a Bitcoin investment, thereby avoiding 26% tax on the gain.

Why is it sophisticated?

• It requires planning and compliance with residence requirements.
• Some jurisdictions offer specific tax incentives to attract wealthy individuals.