Covid-19 Support to employment. Dividend distributions, Temporary layoffs- benefits and Tax havens.

Through Royal Decree-Law 18/2020, of May 12, on social measures in defense of employment (Official State Gazette of 05 May 2020) that extends the coverage of (Temporary) Lay-off Programs (Expedientes de Regulación (Temporal) de Empleo (“ER(T)Es”) temporary-layoffs instruments with which many employers try to mitigate the impact of confinement measures derived from the Covid-19 health emergency, until June 30, 2020. Along with employment measures, article 5 sets the following:

(A) Companies and entities with tax domicile in countries or territories classified as tax havens under current regulations do not qualify for the temporary lay-off programs.

As a preliminary comment, it would be surprising to find any company or entity of these countries or territories would have directly a permanent establishment or workplace in Spain, and should there be any, even with a PE, this would be a measure against these territories or jurisdictions. Another issue is to specifically list which territories fall under the definition of “tax havens under current regulations” which has undergone a complex, erratic process of legal changes from Royal Decree 1080/1991 which may involve some jurisdictions with non-infrequent transactions with Spain. State Tax Agency website includes a list of tax havens.

(B) Companies and other legal entities that as of February 29, 2020 have at least 50 employees who use of ER(T)Es receiving public subsidies or aids for this purpose are prohibited to declare dividends corresponding to the tax year in which these ERTEs are applied (unless they pay the social security contributions by application of ERTEs exemption). In order not to cause companies to trigger the shareholder’s right of withdrawal applicable when certain minimum amount of dividends is not distributed (pursuant to Article 348 bis of the Companies Act) the financial year of use of ER(T)Es will not be taken into account in the corresponding computation.

As urgent comments: it is difficult to find legal entities other than companies distributing dividends; one cannot think of a legal entity other than capital companies allowed to distribute “dividends”. This provision does not indicate when these “frozen” profits can be distributed, or what kind of reserve or account they ought to be booked. Besides, this prohibition does not include distribution of accumulated free reserves, nor operations of redemption of shares or similar. We trust that our legislators will soon clarify these issues.

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