When General Motors Corp. decided to reorganize its European business last year, the auto giant did what many multinationals do to lower its tax burden: It formed a holding company in a locale that charged low corporate levies. But GM eschewed traditional favorites such as Luxembourg and The Netherlands. Instead, it set up its holding company in Zaragoza, Spain. It helped that GM (GM)has an Opel subcompact car plant there, but more crucial is Spain's major push to attract foreign investment, a move that has made it a holding company mecca. "It's a very competitive tax system," says Ernesto Trigueros, GM's local general counsel. "Our expectation is to save an important amount of money."
Other corporate giants that have chosen Spain as a tax home include DuPont, Eli Lilly (LLY), and Britain's Vodafone. Not long ago, Spain had one of Europe's most costly and least flexible corporate tax environments. After the most recent holding company tax reforms, in 2000, Spain became the only country in Europe to offer tax exemptions on capital gains, dividends, goodwill, and the so-called capital duty, a charge levied in most other countries when a foreign company first sets up a holding operation. That compares favorably with The Netherlands, where holding companies are taxed by as much as 5% on capital gains and dividend income. Although still less competitive in overall corporate tax treatment than EU rival Ireland, Spain is setting the pace on the Continent.
Multinationals establish holding companies for a variety of reasons, but mostly to give the parent corporation a single destination through which to pool income from operations in many countries. Although these "paper" holding companies don't generate the employment or local income of factories or headquarters, Spain has been eager to attract them. That's because the revenue that flows in from the rest of the EU -- temporarily, at least -- before being repatriated to companies' home countries creates demand for accountants, lawyers, and other professional services. Foreign corporations in 2002 spent $20.7 billion to set up holding companies in Spain, compared with $560.7 million in 1998, according to government trade figures. And holding companies last year made up 63.2% of overall foreign investment, compared with 5.8% in 1998. They may just be "paper" but the benefits to Spain are real. By Paulo Prada in Madrid with Gail Edmondson in Frankfurt