What is the best way to invest in a Spanish SL: through a Spanish company or a UK company, and via a capital increase or a loan?

It is common for a foreign investor living in Ibiza who already owns a Spanish limited company (Sociedad Limitada, SL) to want to buy into a small local business. Before doing so, two decisions must be made: which company to invest through and how to structure the investment.

Invest through a Spanish SL or a foreign company?

In principle, the Spanish SL is the best vehicle. If it holds a significant stake (at least 5%) for a minimum of one year, it can apply the exemption in Article 21 of Law 27/2014 on Corporate Income Tax (Impuesto sobre Sociedades). This exemption covers 95% of dividends and of the gain on a future sale. At the standard 25% rate, the effective tax cost is around 1.25%.

If the investment is made through a UK company, things are more complex:

• Dividends will be subject to Spanish Non-Resident Income Tax (Impuesto sobre la Renta de No Residentes) withholding. The Spain–UK double taxation treaty may reduce or eliminate it if its conditions are met.
• You will need to check with your UK adviser how those dividends are taxed in the UK.
• The investment must be reported to the Foreign Investment Register (Registro de Inversiones Exteriores) on form D-1A.

Capital increase, share purchase or loan?

Taking equity (recommended if you want to be a shareholder). If the resulting percentages add up to 100% including the new shareholders, the transaction is a capital increase. New shares are issued, usually at nominal value plus a share premium (prima de asunción), rather than bought from an existing shareholder. Formalities and tax:

• The capital increase is executed before a notary and registered at the Companies Register (Registro Mercantil).
• It is not subject to Transfer Tax and Stamp Duty (ITP y AJD) under the corporate transactions heading.
• If existing shares are bought, the transfer is usually also exempt from ITP and VAT. The exception is where the company is mainly a property-holding company.

Loan. A loan gives no shareholding or voting rights, only the right to repayment and interest. That interest is taxable income for the lending company, and the borrower must withhold tax on it. It only makes sense as a convertible loan or profit-participating loan (préstamo participativo) if you want to stage the investment, and its terms must be drafted carefully.

Documents needed to complete the investment

• Target company details: name, tax ID (NIF), deed of incorporation and articles, current shareholding and latest annual accounts.
• Agreed structure: capital increase or share purchase, and split of the amount between nominal value and share premium.
• Shareholders' agreement: governance, transfer restrictions, drag-along and tag-along clauses and exit. Highly advisable where there are several shareholders.
• Board or directors' resolution of the investing company approving the transaction.
• Bank proof of the transfer from the investing company's account.

Before signing, it is advisable to carry out a basic due diligence on the tax position, Social Security debts and other liabilities of the target company.