7Other alternatives for operating in Spain
7.5. Participating loans
- Concept: It is a form of financing for companies subject to the terms and conditions described below.
- Contributions: As with a Silent Partnership Agreement, the funds corresponding to the principal of the participating loan are not considered share capital and therefore the lender is not considered a shareholder. However, participating loans will be considered equity for the purposes of determining whether the company is subject to a ground of mandatory capital reduction27 or of mandatory winding-up28. In addition, in the order of payment of debts, participating loans rank below ordinary creditors.
- Interest: The lender will receive variable interest which will be determined on the basis of the business performance of the borrower. The indicator for determining said performance will be: net income, business volume, total equity or such other indicator as may be freely agreed upon by the parties. The parties may also agree on a fixed interest rate not related to the performance of the business.
- Repayment: The parties may agree to a penalty clause in the case of early repayment. In any event, the borrower may repay the participating loan early only if the repayment is offset by an increase in equity of an equal amount and if it does not arise from the revaluation of assets.
- Tax implications: Any fixed and variable interest that accrues on or after January 1, 2015 as a result of the arrangement of participating loans29 will be deductible for corporate income tax purposes, unless the interest arises from participating loans in which the lender and borrower are companies in the same group within the meaning of article 42 of the Commercial Code. Such deduction is subject, however, to the restrictions on the deductibility of finance costs laid down in article 16 of the Corporate Income Tax Law (For more information, see section 2.1.2.4 of Chapter 3).
- Regulation: Article 20 of Royal Decree-Law 7/1996, on urgent measures of a tax nature and for the promotion and deregulation of economic activity.
27In accordance with article 327 of the Capital Companies Law, “in a public limited company, a capital reduction shall be mandatory where losses have reduced its equity to below two-thirds of its share capital and a fiscal year has elapsed without equity have been restored”.
28In accordance with article 363.1e) of the Capital Companies Law, a capital company must be wound up “as a result of losses that reduce its equity to an amount below half of its share capital, unless the share capital is sufficiently increased or reduced, and provided that it is not appropriate to petition for an insolvency order”. However, Royal Decree-Law 20/2022, of December 27, 2022, has extended the exceptional measures established by article 13 of Law 3/2020, of September 18, 2020, on procedural and organizational measures to confront Covid-19 in the sphere of the justice system, relating to grounds for winding up due to losses in the case set out in article 363.1e). Accordingly, losses from fiscal years 2020 and 2021 will not be taken into consideration until the 2024 year-end when determining whether the company is subject to ground of mandatory winding-up.
In addition, by virtue of article 13 of Law 28/2022, promoting the start-up ecosystem (known as the “Start-ups Law”), the ground of winding-up due to losses will not apply to start-ups (meaning companies that meet the requirements set out in article 3 of the same law) whose net worth has been reduced to less than one-half of the capital stock, provided that it does not arise from petitioning for an insolvency order, until three years have elapsed since the start-up was formed.
29Only applicable to participating loans between group companies granted after June 20, 2014 (Transitional Provision Seventeen of the Corporate Income Tax Law).
