- 1Spain: An attractive country for investment
- 2Setting up a business in Spain
- 3 Tax System
- 4 Investment aid and incentives in Spain
- 5 Labor and social security regulations
- 6 Intellectual property law
- 7Legal framework and tax implications of e-commerce in Spain
- AI Annex I Company and Commercial Law
- AIIAnnex II The Spanish financial system
- AIIIAnnex IIIAccounting and audit issues
- Central government taxes
- Corporate income tax
- Personal income tax
- Nonresident income tax
- Wealth tax
- Inheritance and Gift Tax
- Spanish Value Added Tax
- Transfer and stamp tax
- Excise and special taxes
- Custom duties on imports
- Tax on insurance premiums
- Reporting obligations relating to assets and rights abroad
- Special regimes of certain autonomous communities
- Local taxes
- Exhibit I - Corporate income tax incentives for investment
- Exhibit II - Treaty tax rates
- Exhibit III - Practical examples
- Exhibit IV - Case of Application of the Regime for foreign-securities holding companies (ETVE)...
- Exhibit V - Nonresident case study: Income obtained without a permanent establishment
- Exhibit VI - VAT case study
2. Central government taxes
2.1 Corporate income tax2
The regulation of CIT, for fiscal years starting on or after January 1, 2015, is basically contained in Corporate Income Tax Law 27/2014, of November 27, 2014, and in Royal Decree 634/2015, of July 10, 2015, approving the Corporate Income Tax Regulations.
The basic legislation applicable tax periods commencing as from January 1, 2020 is summarized below. For more detailed information on the legislation applicable to fiscal years beginning before that date, we refer the reader to the Guide corresponding to the year in question.
2.1.1 Tax residence
The key factor in determining the application of CIT is “residence”. A company is deemed to be resident in Spain for tax purposes if it meets any of the following conditions:
- It was incorporated under Spanish law.
- Its registered office is located in Spain.
- Its place of effective management is in Spain.
The Tax Administration can presume that entities, theoretically resident in tax havens or territories with zero taxation, have their tax residence in Spain when their principal assets directly or indirectly consist of property situated in Spain or rights that are exercised there, or when their principal activity is carried on in Spain, unless it is proven that their administration and effective management are handled in another country or territory and that their establishment and operation in Spain are for valid and compelling commercial and business reasons and not just as a means of managing securities or assets.
In principle, in order to determine which entities reside in tax havens, the provisions of article 1 of Royal Decree 1080/1991, of July 5 (listing 483 territories classified as such) will apply.
As from 2015, and in accordance with the current wording given to Additional Provision One of Law 36/2006 (establishing new criteria for determining whether a particular territory is or is not to be classed as a tax haven), the Directorate General of Taxes published a report on the validity of the current list of tax havens, according to which the possibility of such list being automatically updated is eliminated. The list must be expressly updated, in accordance with the criteria contained in aforementioned additional provision one of Law 36/2006, which came into force on 1 January 2015.
Those criteria are as follows:
- The existence with that country or territory of an international tax treaty with an exchange of information clause, a tax information exchange agreement or the Convention on Mutual Administrative Assistance in Tax Matters of the OECD and of the European Council, amended by the 2010 Protocol, which is applicable.
- The absence of an effective exchange of tax information, on the terms set forth below.
- The results of the peer reviews carried out by the Global Forum on Transparency and Exchange of Information for Tax Purposes.
In turn, the status of “zero-taxation country or territory” will be given to countries or territories which do not apply a tax identical or analogous to PIT, CIT or Nonresident Income Tax. For a tax to be considered identical or analogous to the above taxes, it should tax income and/or gains, regardless of whether the subject-matter of the tax consists of the income and/or gains, the revenues or their indicative elements4.
In addition, where Spain has signed a tax treaty, a tax of an identical or analogous nature which applies for the above-mentioned purposes will be deemed to exist.
Lastly, the countries or territories with which Spain considers there to be effective exchange of information are those which have executed the following:
- A tax treaty which includes an exchange-of-information provision (provided that there are no express limitations on its scope).
- A tax information exchange agreement (provided that its suitability for the above purposes has been expressly established)5.
- The Convention on Mutual Administrative Assistance in Tax Matters of the OECD and of the Council of Europe, amended by the Protocol of 2010.
In the event of a conflict of residence, the provisions of Spain’s tax treaties with other countries will, where applicable, prevail.
Resident companies are taxed on their worldwide income. Taxable income includes all the profits from business activities, income from investments not relating to the regular business purpose, and income derived from asset transfers.
In order to determine the tax liability of corporate income taxpayers, however, regard must also be had to the provisions of Spain’s tax treaties with other countries which, where applicable, can affect the determination of taxation in Spain.
Taxation of nonresident entities is regulated separately under the Revised Nonresident Income Tax Law approved by Legislative Royal Decree 5/2004, of March 5, amended by Law 26/2014, of November 27, 2014. This tax was mainly implemented in regulations through Royal Decree 1776/2004, of March 5, 2004. The most important aspects of nonresident income tax (IRNR) legislation are discussed in section 2.3.
The following section is structured in the same way as the CIT assessment.
2.1.2 Taxable income
There are three methods for determining taxable income: the direct assessment method, the indirect assessment method and the objective assessment method.
Under the direct assessment method (which is generally applicable), taxable income is defined as the difference between period revenues and period expenses. Taxable income is based on the income disclosed in the financial statements. However, as a result of applying accounting principles, at times the book income cannot be deemed representative of the taxpayer’s actual contribution capacity and, thus, must be adjusted by applying the tax principles established in the legislation of the tax.
In general, the expenses relating to the business activity are deductible if they are properly accounted for and justified, and if the timing of recognition is that established in the tax legislation.
The main criteria for calculating the taxable income are as follows
184.108.40.206 Revenue and expense allocation criteria
- General rules and principles
The tax principles for allocating revenues and expenses to determine taxable income generally coincide with accounting principles. In this regard, the method generally applicable for recognizing revenue and expenses is the accrual method.
As an exception, expenses recorded in a fiscal year subsequent to their accrual, or revenues recorded in a fiscal year prior to their accrual, are allocated for tax purposes in the year in which they are recorded, as long as this does not give rise to lower taxation than that which would have applied had the expenses and revenues been accounted for using the accrual method. The tax authorities have been ruling that there is lower taxation when expenses incurred in statute-barred years are deducted in later periods.
For certain operations (such as sales in which payment of the price is deferred) the possibility is envisaged of companies being able to apply allocation criteria other than the accrual method.
In the event of applying allocation criteria which differ from those envisaged in the tax rules, it must be demonstrated that there are grounds to substantiate such an approach and the criteria to be applied must be approved by the tax authorities.
The above notwithstanding, it should be borne in mind that as a general rule, the accounting recognition principle must be complied with, meaning that all expenses must be recorded for accounting purposes in order to qualify for deduction (subject to certain exceptions such as unrestricted depreciation).
For tax purposes, in the event of any conflict between an accounting principle and a principle applicable for tax purposes, it is the latter which must prevail.
- Time limits on the deductibility of certain losses
The law imposes time limits on the allocation of certain types of losses. These are therefore losses which, rather than being included in the tax base when incurred, are included later on, and in some cases are reduced in order to avoid situations of non-taxation.
b.1. Losses generated on intra-group transfers of shares or holdings, property, plant and equipment, investment property, intangible fixed assets, debt securities and permanent establishments abroad are not deductible.
As a general rule, these losses are to be included in the tax period in which (i) the assets are transferred to third parties not related to the group; (ii) the acquiring or transferring entities cease to form part of the group; (iii) the assets are deregistered by the acquirer, or (iv) the activity of the establishment ceases or the transferred company is dissolved (except in the case of a restructuring). In the case of amortizable assets, the loss may be included in all cases during the remaining useful life, applying the amortization method used up to that date.
For the inclusion of losses generated on intra-group transfers of shares or holdings in entities or on the transfer of permanent establishments, there are a series of special rules applicable which will be set out in section 2.1.6.
b.2. Impairment losses on tangible fixed assets, investment properties and intangible fixed assets, including goodwill, equity instruments and debt securities (fixed income) do not qualify for deduction.
These impairment losses are deductible:
- In the case of non-amortizable fixed assets, in the tax period in which such assets are transferred or deregistered.
- In the case of amortizable assets forming part of the property, plant and equipment, in the tax periods of remaining useful life, applying the amortization method used in relation to those assets, unless they are transferred or deregistered previously, in which case they will be included on occasion of that transfer or deregistration.
There are a series of special rules applicable in respect of impairment losses on holdings in entities, which will be set out under section 2.1.6.
b.3. Certain provisions which have generated deferred tax assets (DTAs)6 are in general to be included in the tax base, subject to a limit of 70% of the positive tax base prior to their inclusion, to the application of the capitalization reserve, and to the offset of tax losses. Specifically, this regime applies to the following provisions:
- The provisions recorded for impairment of receivables or other assets derived from insolvency of debtors not related to the taxpayer, not owed by public law entities, and which have not been deducted due to the elapsing of the six-month period since their maturity.
- The provisions or contributions to employee welfare systems and, as the case may be, pre-retirements that have not been deductible.
The general limit of 70% does not apply to entities whose net revenues for the 12 months immediately preceding the start of the tax period amounts to at least €20 million. In these cases, the limits are lower:
- 50% where net revenues amount to between €20 and €60 million.
- 25% where net revenues amount to over €60 million.
220.127.116.11 International “fiscal transparency” regime (“Controlled Foreign Corporations” provisions)
Under CIT rules, tax is levied on the “obtainment of income”; however, under fiscal transparency rules, tax is levied not on the income actually obtained by the taxpayer but on that obtained by a nonresident entity in which the taxpayer owns a holding, where certain circumstances are present. In short, it is an attribution (pass-through) regime.
The fiscal transparency regime applies where:
- The taxpayer (Spanish company) on its own or jointly with related persons or entities, holds 50% or more of the capital stock, equity, voting rights or results of the nonresident company.
- The tax (CIT or similar) paid by the nonresident on the attributable net income must be less than 75% of that which would have been payable under Spanish regulations.
The attribution must be done by the entity that meets the holding requirement mentioned, where it owns a stake directly or indirectly in the nonresident entity. In this last case, the income to be attributed will be that relating to the indirect holding.
The income to be attributed will be the following:
- Case I: Total attribution of the income of the nonresident entity:
The whole income shall be attributed where the nonresident entity does not have an organization of material and human resources to carry out its activity, even where its transactions are recurrent. However, the income of the nonresident entity composed of dividends, shares in income or gains on the transfer of holdings shall not be attributed if they derive from an entity in which the nonresident owns a stake (directly or indirectly), of more than 5%, if this holding is owned for at least one year, where, moreover, the following requirements are simultaneously met:
- The former directs and manages its shareholding.
- That entity has the relevant organization of material and human resources, and the investee is not deemed an asset-holding entity.
This case will not apply if it is proven that the transactions are carried out with the material and human resources existing at an entity not resident in Spain and belonging to the same group, on the terms of article 42 of the Commercial Code, irrespective of its residence and of the obligation to prepare consolidated financial statements, or that its formation and operations are based on valid economic reasons.
- Case II: Partial attribution of the income of the nonresident entity:
In the rest of cases in which the transparency rules apply, the taxpayer must attribute in its tax base only the income of the nonresident entity deriving from:
- Ownership of real estate or rights in rem on them, unless such real estate is used for a business activity or has been assigned to another nonresident group company (as defined in Article 42 of the Commercial Code).
- Share in equity and transfer to third parties of capital (with certain exceptions, such as financial assets held in order to meet statutory requirements, etc.).
- Capitalization and insurance operations, the beneficiary of which is the entity itself.
- Industrial and intellectual property, technical assistance, movable property, image rights and lease or sublease of businesses or mines, on the terms established in subarticle 4 of article 25 of Law 35/2006.
- Transfer of the assets or rights mentioned in the previous cases and which generate income.
- Financial derivative instruments, except those designated to cover a specifically identified risk derived from the performance of economic activities.
- Lending, financing, insurance and service activities (except services directly related to export activities) with related resident companies which incur deductible expenses. The attribution does not take place if more than 50% of this type of income derives from transactions carried out with unrelated entities.
In any case, under this form of transparency, there is no attribution either of the income specified in letters b and e, where it derives from an entity in which the nonresident owns a direct or indirect holding of at least 5% and this holding is owned for at least a year, where the following two requirements are met simultaneously:
- The former engages in directing and managing its investment.
- That entity has the relevant organization of material and human resources, and the investee is not deemed an asset-holding entity.
There is also an exception to the applicability of the regime for the income addressed in letters a. to f. above (i.e., the exception does not apply to the income mentioned in letter g) when the attributable income is below 15% of the total income obtained by the nonresident entity.
Moreover, the income mentioned in letters a) to g) shall not be attributed where it relates to non tax-deductible expenses of entities resident in Spain.
Other rules to be taken into account are the following:
- The amount of taxable income to be attributed will be determined in proportion to the share in income and, in the absence thereof, in proportion to the share in the capital, equity or voting rights of the investee and will be determined in accordance with the principles and criteria established in the CIT legislation. In any case, the attributed net income can never be higher than the total net income of the nonresident entity.
- The exchange rate for the attribution of income will be that in force at the nonresident entity’s fiscal year-end.
- The income shall be attributed in the period running from the last day of the nonresident entity’s fiscal year (which may not exceed 12 months for this purpose).
- Given that tax is levied on the “attribution” of income, the dividends relating to the attributed income are not taxed.
- A tax credit can be taken on the amount of CIT (or similar) actually paid by the nonresident entity and its subsidiaries as defined by law (in proportion to the net income attributed) and the tax actually paid as a result of the distribution of dividends. The limit for this tax credit is the Spanish tax. However, no tax credit is permitted for taxes paid in tax havens.
- Where the investee is resident in a country or territory classed as a tax haven, it will be presumed that:
- The amount paid by the nonresident entity in relation to a tax identical or similar to CIT, is lower than the 75% that would have been applicable in accordance with the CIT rules.
- The income obtained by the investee arises from the mentioned classes of income which require attributing the income on a transparent basis.
- The income obtained by the investee is 15% of the acquisition cost of the holding.
These assumptions are refutable.
- Lastly, the international fiscal transparency rules will not apply where the entity not resident in Spain is resident in another Member State of the European Union (“EU”), where the taxpayer evidences that (i) the formation and operation of the nonresident is based on valid economic reasons and (ii) it performs business activities.
18.104.22.168 Market price valuation
As a general rule, assets must be valued under the methods provided in the Commercial Code. Despite this fact, as a general rule, any variations in their value caused by applying the fair value method will have no effect for tax purposes if they do not have to be taken to income.
Furthermore, special rules are established with respect to the treatment of decreases in value, arising due to the application of the fair value criterion, of shares or holdings in entities, as shall be discussed in section 2.1.6.
Notwithstanding the above, in certain cases, market valuation (i.e. valuation on an arm’s-length basis) must be applied for tax purposes. This method is applicable to:
- Donated assets.
- Assets contributed to entities and the securities received in exchange.
- Assets transferred to shareholders in the event of dissolution, the withdrawal of shareholders, capital reductions with refund of contributions, paid-in surplus and the distribution of income.
- Assets transferred as a result of mergers, absorptions and full or partial spin-offs.
- Assets acquired through swap transactions.
- Assets acquired as a result of exchanges or conversions.
It should be noted that current legislation provides for a tax neutrality regime when certain of the transactions described above are carried out as part of a corporate reorganization, to which we will refer hereinbelow.
Transactions between related entities must be valued at arm’s-length value, i.e., the value which would have been agreed between independent persons or entities under normal market conditions.
Accordingly, the Tax Administration may verify both whether the valuation given to transactions performed between related entities is in accordance with arm’s-length value and the nature and legal classification of the transactions, and where appropriate, the Tax Administration may make the adjustments which it considers appropriate to any transactions subject to CIT, PIT or Nonresident Income Tax that have not been valued at arm’s length. The Tax Administration’s valuation of a certain transaction will also be applicable to the other related persons or entities involved in that transaction, and under no circumstances will the Administration’s valuation give rise to taxation of higher income for CIT, PIT or Nonresident Income Tax, than that actually derived from the transaction for the persons or entities as a whole that performed it.
As a result of this kind of inspection, therefore, the Administration can make the so-called primary and secondary adjustments. The primary adjustment is the traditional adjustment derived from the difference between the price agreed and the market value in a specific transaction. For example, if a Spanish entity receives management services from its Belgian parent and pays some fees which exceed the fees that would result from applying the market value of those services, the primary adjustment will entail a reduction (for tax purposes) in the expense of the Spanish company (and, thus, an increase in the taxable base subject to CIT). At the same time, if the parent company were Spanish rather than resident in Belgium, it would reduce its income subject to CIT.
The secondary adjustment is a consequence of the recharacterization of the income/expense attributed as a result of the primary adjustment, according to its actual nature. In the previous example, as the subsidiary is paying the parent a price higher than the market price, it may be considered to be distributing a dividend. Thus, along with the nondeductibility of the dividend (deriving from the primary adjustment) another charge could arise, for example, in the same case, a withholding on the payment of the dividends (unless some benefit applies that prevents that withholding), on account of the parent company’s nonresident income tax.
Related entities must make available to the Tax Administration the documentation established by regulations and with the minimum content expressly specified in the tax regulations. Based on those regulations, the documentation must include (i) on the one hand, data on the group to which the taxpayer belongs, detailing its structure; the various entities making it up; the nature, amounts and flows of related-party transactions; and, in general, the group’s transfer pricing policy, and (ii) on the other hand, the appropriate supporting documentation of the taxpayer, identifying the entities related to it, including a comparability analysis, as well as justification for the valuation method chosen, and any documentation supporting the valuation of its transactions.
This documentation will have a simplified content in relation to the related persons or entities whose net revenues are below €45 million, where none of the following transactions are involved:
- Those carried out by personal income taxpayers, in the pursuit of a business activity to which the objective assessment method applies, with entities in which they or their spouses, ascendants or descendants, individually or jointly with each other, own a holding of 25% or more in the capital or equity.
- Transactions consisting of the transfer of businesses.
- The transfer of securities or shares representing holdings in the equity of all kinds of entities not admitted to listing on any of the regulated securities markets, or which are admitted to listing on regulated markets located in countries or territories classed as tax havens.
- Transactions involving real estate.
- Transactions involving intangible assets.
The documentation will not be required in relation to the following transactions:
- In general, transactions carried out between entities forming the same consolidated tax group.
- Transactions carried out by economic interest groupings with their members or with other entities forming the same consolidated tax group.
- Transactions carried out in the context of public offerings or tender offers.
- Transactions carried out with the same related person or entity, where the consideration payable as a whole does not exceed a market value of €250,000. However, if these transactions have been carried out with entities resident in tax havens, they will have to be documented7 , regardless of whether that threshold is exceeded.
For tax periods commencing as from January 1, 2016, due to the approval of Royal Decree 634/2015, of July 10, 2015, approving the Corporate Income Tax Regulations, important changes were made in relation to transfer pricing, which include most notably the introduction of country-by-country reporting obligations8, which is an instrument for evaluating risks in the transfer pricing policy of a corporate group.
This obligation applies to (a) entities resident in Spain that have the status of parent of a corporate group and which are not, at the same time, subsidiaries of another resident or nonresident entity; and (b) Spanish subsidiaries of groups whose ultimate parent company (i) is not under the obligation to present this information in the jurisdiction in which it is resident, or (ii) where the tax authorities of the country or territory in which such company resides have not formalized an automatic information exchange agreement in this area (provided, in both cases, that the group has not appointed a “surrogate” entity entrusted with compliance with this obligation in a country other than Spain); and finally, (c) to Spanish subsidiaries which have been appointed by their group as the entity entrusted with the preparation and presentation of this information to the tax authorities (“surrogate entities”).
In that regard, it may be clarified that:
- Subsidiaries and permanent establishments located in Spanish territory are not required to submit documentation when:
- The multinational group has appointed a group subsidiary resident in an EU Member State to submit the subject documentation.
- The information has already been submitted by another nonresident company appointed by the group as a surrogate entity of the parent company for the purposes of submission of the documentation in its own tax residence territory. In any event, if the entity is not resident in an EU Member State, the conditions established in Annex III of Council Directive 2011/16/EU, of 15 February 2011, on administrative cooperation in the field of taxation must be met.
- If the nonresident entity refuses to provide all or part of the documentation corresponding to the group to the resident entity or permanent establishment located in Spanish territory that is required to submit the information, the resident entity or the permanent establishment shall submit any documentation available to it and report the circumstance to the Tax Administration.
In addition, any entity resident in Spanish territory which forms part of the group which is under the obligation to present country-by-country information is required to inform the Tax Agency of the identifying particulars, country or territory and status of the entity by which such information is prepared and presented.
This obligation only applies where the revenue of the persons or entities forming part of the group as a whole, in the 12 months preceding the start of the tax period, is at least €750 million.
Lastly, the legislation regulates the procedure for advance pricing arrangements.
The legislation establishes a penalty regime for failing to provide, or for providing incomplete, inaccurate or false data in such documentation, and the fact that the arm’s length value shown in the documentation provided by the taxpayer (it is presumed that the arm’s-length value must be shown by such documentation) differs from that declared in CIT, PIT or Nonresident Income Tax returns, will also constitute a serious tax infringement. In principle, therefore, incorrectly valuing a transaction is not an infringement but applying a price other than that deriving from the documentation furnished is an infringement.
For the purposes analyzed, the legislation contains a list of the persons or entities that are deemed to be related, which include, among others: (a) an entity and it shareholders; (b) an entity and its directors, except in relation to compensation for the performance of its functions; (c) two entities of a same group; (d) an entity and another entity in which the first-mentioned entity has an indirect holding of at least 25% of the capital stock or equity; (e) an entity resident in Spain and its permanent establishments abroad, or an entity not resident in Spain and its permanent establishments in Spain.
Added to these cases are a number of others where dealings are established between entities or between them and individuals pursuant to kinship relationships with family members of the shareholders or directors of these entities.
It should be borne in mind that a group exists where an entity exerts or can exert control over another entity or other entities pursuant to Article 42 of the Commercial Code, regardless of where they have their residence or of the obligation to prepare consolidated financial statements.
Lastly, in order to determine the market value between related entities, the OECD methods apply, and it is up to the company to choose one or another according to the transaction to be valued:
- Comparable uncontrolled price method.
- Cost plus method.
- Resale price method.
- Profit split method.
- Transactional net margin method.
- Other generally accepted valuation methods and techniques that comply with the arm’s length principle.
The legislation envisages the possibility for taxpayers to submit to the Tax Administration a proposal for valuing its transactions with related entities based on market conditions. If the proposal is approved by the Tax Administration, such valuation is valid for tax purposes for a maximum period of four tax years9.
22.214.171.124 Deductibility of finance costs
Traditionally, in Spain, finance costs have been deductible with the restrictions derived (solely) from the rules on transfer pricing (set forth above) and thin capitalization (which, moreover, only applied to cases of excess net debt with nonresident related entities not resident in the EU, except for those residing in a tax haven). However, some years ago, the thin capitalization rule was replaced by a general limitation on the deductibility of finance costs (regardless of whether or not the debt is with related parties).
Specifically, the applicable legislation imposes a general limit on the deductibility of finance costs.
Net finance costs exceeding the limit of 30% of operating income (EBITDA) of the year are not deductible, net finance costs being deemed to mean the finance costs exceeding the revenue derived from the transfer to third parties of own capital and accrued in the tax period; however, net finance costs of the tax period of up to €1,000,000 will be deductible in all cases.
This limitation applies in proportion to the duration of the tax period, so that in tax periods with a duration of less than a year, the limit is weighted according to the duration of the tax period with respect to the year.
Finance costs which are non-deductible owing to the application of this limit are deductible in subsequent tax periods, along with those corresponding to such periods, subject to the same limit.
If net finance costs for the period fall short of the limit described, the difference is to be added on to the limit for the deduction of net finance costs for the immediately ensuing five tax periods, until such difference has been deducted.
Apart from the above-mentioned general limit, the finance costs derived from debts used to acquire holdings in the capital or equity of any kind of entity shall be deductible with the additional limit of 30% of the acquirer’s operating income, without including in the operating income that relating to any entity that merges with the former in the 4 years following that acquisition, where the merger is not carried out under the tax neutrality regime established for this type of transaction (section 2.1.10).
The additional limit will not apply in the tax period in which the holdings are acquired if the acquisition price is at least 70% financed with debt. Moreover, this limit will not apply in the following tax periods where the amount of that debt is reduced, from the time of the acquisition, by at least the proportional part relating to each of the 8 following years, until the debt reaches 30% of the acquisition price.
126.96.36.199 Changes in residence, cessation of business by permanent establishments, transactions performed with persons or entities resident in tax havens
The tax law requires the inclusion in the tax base of the difference between the value per books and the normal market value of the assets which are owned by a resident entity that transfers its place of residence abroad (exit tax).
However, the taxpayer can request a postponement in the payment of the exit tax where the assets are transferred to a Member State of the EU or of the European Economic Area (“EEA”) with which there is effective exchange of tax information on the terms established in Law 36/2006, of November 29, 2006, on tax fraud prevention measures.
188.8.131.52 Inventory valuation
There are no special tax rules regarding the valuation of inventory. Accordingly, all inventory valuation methods (FIFO, acquisition cost or weighted average cost) applicable for accounting purposes are also acceptable for tax purposes.
184.108.40.206 Value adjustments
- Depreciation qualifies as a deductible expense only if it is effective and is recorded in the accounts (with certain exceptions).
- There are various general tax depreciation methods:
- Straight-line depreciation: This is the method most commonly applied by taxpayers. It consists of depreciating assets on a straight-line basis by applying a certain percentage to their cost. The law sets a range of percentages for each type of asset, which determines the minimum depreciation period (maximum depreciation rate) and the maximum depreciation period (minimum depreciation rate). Thus, for example, computer equipment may be depreciated in general between 12.5% (minimum rate for a maximum useful life of 8 years) and 25% (maximum rate).
The current legislation modified the straight-line depreciation tables in order to simplify them. Traditionally, these depreciation tables (regulated in the tax regulations) were organized by economic sectors and activities, with a last group for “common assets”. Under the current law, some new depreciation tables were approved (and included in the law itself) according to types of assets, without making a distinction by sectors, although the law states that the rates and periods established therein may be modified by regulations, or additional rates and periods may be established, although that possibility has not yet been implemented.
Transitionally, the law establishes that for assets whose depreciation rates have been modified with the current depreciation tables (in relation to those existing previously), the depreciation rates will apply to the net tax value of the assets.
The use of the depreciation rates contained in the official tables relieves the taxpayer from having to prove the actual depreciation.
There are special rules for assets used on a daily basis in more than one ordinary shift of work and for assets acquired second hand.
- Declining-balance depreciation (constant rate): Under this method, which may be applied to all assets except buildings, furniture and household goods, depreciation can be shifted to the early years of the asset’s useful life (when the actual decline in value will presumably be greater) by applying a rate to the asset’s book value.
- Sum-of-the-years’-digits method: This system is also permitted for all assets except buildings, furniture and household goods. The sum of the digits is determined on the basis of the depreciation period established in the official tables.
- Other depreciation methods: Companies which, for technical reasons, wish to depreciate their assets at different rates than those fixed by the official tables and also wish to obviate the uncertainties involved in proving the “actual” depreciation, can seek prior approval from the tax authorities for special depreciation plans with such annual rates of depreciation.
- Special case: Amortization of intangible assets
For tax periods commenced as from January 1, 2016, the tax treatment of this type of assets was modified10 , to align it with the accounting treatment.
The accounting treatment is as follows:
- There is no distinction between intangible assets according to whether their useful life is definite or indefinite, but rather it is understood that all intangible assets have a definite useful life.
- Intangible assets are amortized according to their useful life; it if cannot be estimated reliably, they are amortized over a period of 10 years, unless established otherwise by a provision of law.
- Goodwill only appears on the assets side of the balance sheet where it has been acquired for a consideration. Also, it is presumed, unless proven otherwise, that its useful life is 10 years. Goodwill can be amortized, not only impaired).
- There is no obligation to record a non-disposable reserve for the goodwill. Reserves recorded in past years (according to prior accounting legislation) must be reclassified as voluntary reserves and are disposable in the amount exceeding the goodwill recognized for accounting purposes.
- The Notes to the financial statements must specify the period and method for amortization of intangible assets.
The tax treatment is as follows:
- Intangible assets with a definite useful life. Starting in fiscal year 2016, they are amortized according to their useful life (as is done for accounting purposes). When this useful life cannot be estimated reliably, the amortization will be deductible up to the maximum annual limit of one-twentieth its amount (that is, at a lower rate than the accounting amortization11 ).
Nonetheless, this regime does not apply to intangible assets acquired before January 1, 2015 from entities forming part of the same group of companies as the acquirer in accordance with article 42 of the Commercial Code.
- Intangible assets with an indefinite useful life. Due to the reclassification of intangible assets with indefinite useful life as intangible assets with definite useful life, pursuant to accounting legislation, as from January 1, 2016, these assets are amortized according to the rules for intangible assets with definite useful life.12
- Intangible assets recorded in respect of goodwill. They can be amortized with the maximum annual limit of one-twentieth their amount (5%). Unlike the previous regulation, starting on January 1, 2016, the tax deductibility of goodwill is conditional on its accounting recognition.
- Straight-line depreciation: This is the method most commonly applied by taxpayers. It consists of depreciating assets on a straight-line basis by applying a certain percentage to their cost. The law sets a range of percentages for each type of asset, which determines the minimum depreciation period (maximum depreciation rate) and the maximum depreciation period (minimum depreciation rate). Thus, for example, computer equipment may be depreciated in general between 12.5% (minimum rate for a maximum useful life of 8 years) and 25% (maximum rate).
- Temporary limitation on depreciation: For tax periods commencing in 2013 and 2014, the accounting depreciation of tangible and intangible assets (only those with a definite useful life) and of investment property was only deductible up to 70% of that which would have been tax deductible in accordance with the aforementioned rules (the limitation also affected assets subject to the financial lease regime).
The accounting depreciation that was not tax deductible by application of this limit was deductible starting from the first tax period commencing in 2015, on a straight-line basis over a period of 10 years or during the useful life of the asset, at the election of the taxpayer.
As the non-deductible depreciation is deducted at lower tax rates than those applicable in preceding years (when a portion of the depreciation was nondeductible), the current law established a deduction for taxpayers subject to tax at the standard rate (or that established for newly formed entities) which are affected by the aforementioned limitation on the deductibility of depreciation (the 70% mentioned above). Specifically, these taxpayers may, in tax periods commencing in or after 2016, take an additional deduction in the gross tax payable of 5%13 of the amounts included in the tax base for the reversal of the amounts not depreciated for tax purposes.
- Finance lease contracts
Finance lease contracts (provided by finance entities, as legally defined) for movable assets must have a minimum term of two years, and those for real estate must have a minimum term of ten years, and the annual charge corresponding to the depreciation of the cost of the asset must remain the same or increase over the term of the lease.
Lease payments (interest plus the portion of principal relating to the cost of the asset) are deductible. Land and other non-depreciable assets will be deductible in the portion relating to interest. However, the ceiling on the deductibility of the depreciation cost of the asset is twice the maximum depreciation rate per the official tables.
- Accelerated depreciation
In recent years, various cases of accelerated depreciation have been regulated to encourage investment and maintain jobs (this latter requirement was initially applied but then eliminated). This incentive, which was established for tax periods commencing in 2010 2011, 2012, 2013, 2014 and 2015 and did not require the accounting recognition of the depreciation, also applied for certain investments made through financial lease contracts and for investments relating to new assets contracted through construction work agreements or investment projects (on certain conditions).
However, this incentive for new investments was eliminated and only applies for new assets acquired up to March 31, 2012, which could continue to be depreciated without restriction from that date onwards but with certain limitations.
Starting in 2015, the law introduced a new case of unrestricted depreciation for new tangible assets, where the unit value does not exceed €300, and up to the limit of €25,000 in the tax period.
The amounts taken as unrestricted depreciation will reduce the value of the depreciated assets for tax purposes.
- Impairment of assets
The law establishes various rules on the deductibility or non-deductibility of the impairment of assets:
- Impairment losses on receivables for bad debts
This provision covers the foreseeable losses in the realizable value of accounts receivable. The deductibility of this provision is subject to certain requirements. Under these requirements, the only method applicable is the individual balance method, whereby the status of each receivable is individually analyzed. The deduction of this provision is subject to satisfaction of any of the following tests:
- The balance must be more than six months past due.
- The debtor must have been held to be in insolvency.
- The debtor must have been taken to court for the criminal act of dealing in assets to defraud creditors.
- The obligations must have been claimed in court or the subject of a lawsuit or arbitration proceeding.
In any case, losses to cover the risk of bad debts of related entities cannot be recorded for tax purposes in respect of receivables from related parties, unless the related parties concerned are subject to insolvency proceedings and the judge has established the liquidation phase in accordance with the Insolvency Law.
Moreover, bad debt provisions will not be deductible where the debtor is a public entity or where sufficient guarantees have been provided, unless they are the subject of arbitration or court proceedings regarding their existence or amount.
Losses to cover the risk of foreseeable bad debts by financial institutions are subject to specific rules.
We recall that, as stated in the section on the timing of allocation rules, the law establishes time limits on the deductibility of certain insolvency provisions.
- Impairment of securities representing holdings in the capital of entities
As a general rule, impairment losses – on both investments in listed companies and holdings in non-listed companies – have been considered non-deductible since tax periods commencing as from January 1, 2013. The rules relating to impairment losses of these kinds will be analyzed in greater detail in section 2.1.6.
Since the impairment losses became non-deductible, there has been a transitional regime in place for the reversal of impairment losses deductible prior to 2013:
- Holdings in listed entities: In the case of entities listed on a regulated market, impairment losses recorded and deducted in periods commencing before January 1, 2013, shall be reversed in the tax base of the period in which the accounting recovery takes place.
- Holdings in unlisted entities: For holdings in unlisted entities, there is a transitional regime in place which basically consists of the following:
- Any impairment losses that were tax deductible in periods commencing before January 1, 2013 must be included in the CIT base.
- This inclusion must be done regardless of whether or not there have been other nondeductible value adjustments for impairment.
- The inclusion in the tax base must be done in the period in which the value of the investee’s equity is recovered, in the proportion relating to the holding and with the limit of that excess.
In both cases, with effect for years commencing as from January 1 2016, an additional rule was introduced, establishing a “minimum reinvestment” obligation which functions as follows:
- Impairment losses on holdings which were treated as deductible for tax purposes are to be included, as a minimum, in equal portions in the tax base for each of the first five tax periods commencing as from January 1, 2016.
- In the event that, by virtue of the application of the general rules on the recovery of portfolio impairment losses (e.g. in the case of unlisted companies, because there has been an increase in the equity of the investee), a larger impairment loss is required to be recovered in any of those years, it is that amount which is recoverable in the corresponding year; and the balance of remaining portfolio impairment loss which is pending recovery (once the larger reversal has been included) is to be included in equal portions over the remaining tax periods until the aforementioned period of five tax periods has been completed.
- In the event of shareholdings being transferred during those five tax periods, the amounts pending reversal are to be included in the tax base for the tax period in which the transfer takes place, subject to a limit equal to the gain obtained on the transfer (which to some extent “consolidates” losses deducted which had not been reversed at the time of the transfer).
- Impairment losses on the value of property, plant and equipment, investment property and intangible assets, including goodwill, equity instruments and securities representing debt (fixed income).
We refer to the comments contained in the section relating to the timing of allocation rules (section 220.127.116.11.).
- Impairment losses on receivables for bad debts
The general rule in relation to provisions is that they are deductible provided they are correctly accounted for. However, the legislation establishes certain exceptions. In this regard, the following expenses are not deductible:
- Those resulting from implied or tacit obligations.
- Those relating to long-term compensation and other personnel benefits, except for the contributions of the sponsors of pension plans subject to certain requirements.
- Those concerning the costs of performing contracts which exceed the expected financial returns from them.
- Those resulting from restructurings, unless they refer to legal or contractual obligations, not merely tacit obligations.
- Those relating to the risk of sales returns.
- Personnel expenses relating to payments based on equity instruments, used as a form of employee compensation, paid in cash.
Any expenses that are not deductible according to the foregoing list will be included in the tax base for the tax period in which the provision is used for its intended purpose.
In relation to certain provisions, the deductibility is conditional on the fulfillment of certain requirements:
- Expenses relating to environmental actions are deductible if they are incurred under a plan prepared by the taxpayer and accepted by the Tax Administration.
- Expenses relating to insurance reserves made by insurance companies are deductible, to the extent of the minimum amounts established in applicable legislation. With that same limit, the amount recorded in the fiscal year for the equalization reserve will be deductible for purposes of determining the tax base, even where it has not been included in the income statement (provisions for outstanding premiums or fees will not be consistent, for the same balances, with provisions to cover foreseeable bad debts).
- In addition, the expenses relating to risks resulting from repair and inspection warranties (and ancillary expenses for sales returns) are deductible, up to the limit resulting from applying to the sales with outstanding warranties at the end of the tax period the average warranty expenses as a percentage of total sales under warranty in the current and the two preceding tax periods.
18.104.22.168 Nondeductible expenses:
The law contains an exhaustive list of nondeductible expenses. In particular, the following expenses are not deductible:
- Amounts representing a remuneration of equity. Since fiscal year 2015, this item is deemed to include the remuneration relating to participating loans provided by entities that form part of the same group of companies, according to article 42 of the Commercial Code, have the consideration of remuneration of equity. In these cases, however, the income will not be reportable at the lender This limitation on the deductibility of the remuneration of participating loans does not apply to loans provided before June 20, 2014.
- Those derived from accounting for CIT.
- Criminal and administrative fines and penalties, surcharges in the enforcement period and surcharges for late filing without prior requirement.
- Gambling losses.
- Free gifts and gratuities (although gifts to certain non-profit entities or those involving assets registered in the Register of Assets of Cultural Interest, or assets aimed at contributing to the conservation of assets of cultural interest or to the performance of activities of general interest, will give right to a tax credit of 35% of the gift, up to a limit of 10% of the net taxable income of the year).
Expenses for hospitality to customers or suppliers, those derived from customs and practices with the company’s personnel, those incurred to promote the sale of goods or services, or those correlated to income will not be deemed gifts or gratuities. However, the deductibility of the expenses for hospitality to customers or suppliers will be limited to 1% of the company’s revenues of the tax period.
The remuneration of directors for the pursuit of their senior management functions or others derived from an employment contract shall not be deemed gifts or gratuities either.
- Expenses derived from procedures that infringe the legal system.
- Expenses for services relating to transactions performed directly or indirectly with individuals or entities resident in designated tax havens or paid through individuals or entities resident in tax havens, unless the taxpayer can prove that the expense arose from a transaction effectively performed.
- Finance expenses accrued in the tax period derived from debts with group entities, according to the definition established in article 42 of the Commercial Code, regardless of residence and of the obligation to prepare consolidated financial statements, incurred to acquire, from other group entities, holdings in the capital or equity of any kind of entity, or to make contributions to the capital or equity of other group entities, unless the taxpayer evidences valid economic reasons for carrying out those transactions.
- Expenses deriving from the termination of an ordinary or special employment relationship, or of a commercial relationship of directors or board members of the company exceeding the amount of €1,000,000 per recipient or, if higher, the amount established as obligatory in the Workers’ Statute, in its implementing legislation or, as the case may be, in the legislation regulating the enforcement of judgments, which does not include that established pursuant to an agreement, accord or contract. Those expenses will not be deductible even if they are paid in several tax periods.
- Expenses relating to transactions carried out with related persons or entities which, as a consequence of a different tax classification given to them by the parties, do not generate income, or generate exempt income or income subject to a nominal tax rate below 10%.
- For fiscal years commencing as from 2017, certain impairment losses or losses corresponding to a decline in value resulting from the application of the fair value criterion to shareholdings in entities, as explained in section 2.1.6.
- Effective for fiscal years commencing on or after November 10, 2018, the resulting stamp tax payable on the execution of public deeds documenting mortgage loans.
22.214.171.124 Capital gains and losses
By contrast with other countries, Spanish CIT treats income resulting from the transfer of assets in the same way as other income. Accordingly, such income is generally added to (or deducted from) regular business income to determine the taxable income, it not being possible, since 2015, to reduce taxation by applying the tax credit for reinvestment of extraordinary income.
For fiscal years prior to 2015, special rules were envisaged for determining income resulting from real estate transfers to take into account the declining value of money (i.e., inflation). Under these rules, the acquisition cost and the annual depreciation were corrected by applying certain coefficients, with particularities according to the taxpayer’s indebtedness. However, that measure was eliminated in the legislation applicable for fiscal years commencing on or after January 1, 2015.
126.96.36.199 Income derived from stakes in a SICAV (open-end investment company)
The income derived from a capital reduction or distribution of additional paid-in capital by the shareholders (corporate income taxpayers) of a SICAV is subject to the following treatment:
- Capital reductions: The shareholders of the SICAV must include in their CIT base the total amount received as a result of the capital reduction, limited to the increase in the redemption value of the shares since their acquisition or subscription until the moment of the capital reduction. The shareholders will not be entitled to apply any tax credit because of this transaction.
- Distributions of additional paid-in capital: The shareholders must include in their tax base the total amount obtained in the distribution, without being able to apply any tax credit in this connection.
This regime will also apply to the shareholders of collective investment undertakings equivalent to SICAVs and registered in another Member State of the EU (and, in any case, it will apply to the companies covered by Directive 2009/65/EC of the European Parliament and of the Council, of July 13, 2009, on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities).
188.8.131.52 Capitalization reserve
The current law brought in (starting in 2015) a significant change whereby the portion of the taxpayer's profit that is appropriated to a restricted reserve (capitalization reserve) will not be taxable, without imposing any requirement to invest this reserve in any specific type of asset. The purpose of this measure is to encourage business capitalization by boosting equity and thus incentivize the clean-up of balance sheets and an increase in competitiveness.
Specifically, taxpayers subject to the 25% tax rate, new companies and entities taxed at the 30% rate will be entitled to a tax base reduction equal to 10% of the increase in their shareholders' funds, provided the following requirements are met:
- The amount of the increase in the entity's shareholders' funds must be maintained for a five-year period as from the end of the tax period in which the reduction is applied, unless the entity reports losses.
- A reserve must be posted in the amount of the reduction and must be reflected in the balance sheet as a totally separate, appropriately named item, and will be restricted for the period stated in the preceding letter.
The reduction right may not in any event exceed 10% of the positive tax base for the tax period prior to this reduction, before including impairment charges on receivables or other assets due to possible debtor insolvency and before offsetting tax losses.
Nonetheless, if the tax base is insufficient to apply the reduction, the outstanding amounts may be applied in tax periods ending in the immediately successive two-year period following the end of the tax period in which the reduction right is generated, together with any reduction that may be generated in the relevant tax period and subject to the same limit.
184.108.40.206 Income from the assignment of the right to use or exploit certain intangible assets (patent box)14.
This is a tax base reduction scheme applicable to income from the assignment of the right to use or exploit certain intangibles.
Law 6/2018, of July 3, 2018, of General State Budgets for 2018 (“GSB 2018”), adapting the regulations of the regime to the agreements adopted within the EU and the OECD, specified the income that qualifies for that regime, effective for tax periods starting on or after January 1, 2018. According to the GSB 2018, income derived from the license of the right to use or exploit patents, utility models, supplementary medicinal protection certificates and plant protection products, designs and models, protected by law, also derived from research and development and technological innovation activities and registered advanced software derived from research and development activities, qualifies for a reduction in the tax base.
On this basis, for tax periods that commenced between July 1, 2016 and December 31, 2017, regard must be had to the previous wording of the article, which established that the regime may be applied to income obtained from the licensing to third parties of the right of use or exploitation of know-how (industrial, commercial or scientific), patents, drawings or models, plans, formulae or secret procedures.
The reduction in the tax base is determined in relation to the percentage arrived at by multiplying by 60% the result of the following coefficient:
- As numerator: The expenses incurred by the licensing entity which are directly related to the creation of the asset, including any deriving from the subcontracting of third parties unrelated to such entity. These expenses are to be increased by 30%, although the numerator may in no case exceed the amount of the denominator.
- As denominator: The expenses incurred by the licensing entity which are directly related to the creation of the asset, including any deriving from subcontracting , both with third parties not related to the licensing entity and with persons or entities related to it15 and from the acquisition of the asset.
The expenses referred to cannot include finance costs, the depreciation of real property, or other expenses not directly related to the creation of the asset.
This reduction is also applicable in the event of a transfer of such intangibles, when the transfer takes place between entities which are not classed as being related.
Under the new wording, this tax benefit will not apply to income derived from the licensing of the right to use or exploit, or from the transfer of, brands, literary, artistic or scientific works, including cinematographic films, transferable personal rights, such as image rights, computer programs (other than registered advance software, mentioned previously), industrial, commercial or scientific equipment) as up to now, but it will also not apply to income derived from the license of the right to use or exploit, or from the transfer of, plans, formulae or secret procedures, rights on information relating to industrial, commercial or scientific experiences.
The definition of income is extended16 and is now defined as the positive difference between income from both the licensing of the right to use or exploit the assets and the positive income derived from their transfer which exceeds the sum of the expenses incurred by the entity directly related to the creation of the assets which have not been included in the value of the assets, of the amounts deducted as amortization, impairment and expenses that have been included in the tax base, and of the expenses related directly to the assets, which have been included in the tax base.
Moreover, if a loss is incurred in a tax period because expenses exceed income (whereas, in prior tax periods, positive income was obtained to which the reduction was applied), that loss will be reduced by the aforementioned reduction percentage, as long as the losses generated do not exceed the positive income included in previous periods. The total excess will be included in the tax base and, in that case, the positive income obtained in a later tax period will be included in full up to that amount, and the aforementioned percentage may be applied to the excess.
In order to apply this benefit17 :
- The assignee must use the rights of use or exploitation in a business activity; additionally, the results of such use must not lead to the supply of goods or provision of services by the assignee generating tax deductible expenses in the assigning entity, provided, in this latter case, that such entity is related to the assignee.
- The assignee may not reside in a country or territory where there is zero taxation or that is classed as a tax haven, unless it is an EU Member State and the taxpayer provides evidence of valid economic reasons for the transaction and of its engagement in economic activities.
- Where the contract for the assignment of use includes the provision of other incidental services, the contract must specify the consideration corresponding to them.
- The assigning entity must keep the necessary accounting records to determine direct and indirect income and expenses pertaining to the intangible assets assigned.
The scheme provides for the possibility, before the transactions are completed, of applying to the Administration for an advance pricing agreement in connection with the income from the assignment and the expenses, as well as with the income generated on the transfer.
An advance agreement classifying the assets in the categories included in the incentive may also be requested before the transactions are completed.
As a consequence of the existence of various regimes regulating the application of this incentive (owing to the succession of legislative changes taking place), it has been necessary to implement a transitional regime which functions as follows:
- The licensing of the right to use or exploit intangible assets, executed before the entry into force of Law 14/2013, of September 27, 2014, on support of entrepreneurs and their internationalization, can be subject, in all the tax periods remaining until the end of the contracts, to the regime established in the former CIT Law (Legislative Royal Decree 4/2004). The application of this regime should have been opted for in the tax return for 2016. This option shall, in any event, be applicable only though to June 30, 2021, and from then onwards, the regime regulated in the GSB 2018 becomes applicable.
- The licensing of the right to use or exploit intangible assets carried out as from the entry into force of said Law 14/2013 and up to June 30, 2016, can be subject, in all the tax periods remaining until the end of the contracts, to the regime established in the current CIT Law (Law 27/2014), according to the wording in force on January 1, 2015. The application of this regime should also have been opted for in the tax return for 2016. This option shall, in any event, be applicable only though to June 30, 2021, and from then onwards, the regime regulated in the GSB 2018 becomes applicable.
The transfer of intangible assets, carried out as of July 1, 2016 and until June 30, 2021, can be subject to the regime established in the current CIT Law, according to the wording in force on January 1, 2015. The application of this regime should be opted for in the tax return relating to the tax period in which the transfer was carried out.
220.127.116.11 Offset of tax losses
Since fiscal year 2015, the time limit on the offset of tax losses against future taxable income has been eliminated (this also applies to amounts pending offset at the start of 2015).
Nonetheless, the offsetting of these tax losses is subject to quantitative limits. Since the subsequent reform of December 2016, the rules on the offsetting of tax losses have been as follows:
- As a general rule, entities whose net revenues for the preceding 12 months amount to less than €20 million may offset tax losses up to a limit equal to 70% of the positive pre-offset tax base.
- Entities whose net revenues for the preceding 12 months amount to at least €20 million may offset tax losses subject to the following limits, applicable as from tax periods commencing in 2016:
- 50%, when the entity’s net revenues are between €20 and €60 million.
- 25%, when its net revenues are above €60 million.
However, it is still not possible to offset tax losses against taxable income obtained in prior tax periods.
Moreover, in order to avoid the acquisition of dormant or quasi-dormant companies with tax losses or the commencement of activities at entities with accumulated tax losses, the law establishes measures that preclude their use. Specifically, tax losses cannot be offset in the following circumstances:
- The majority of share capital or rights to a share of the entity's profits have been acquired by a related person or entity (or related group of persons or entities) following the end of the tax period to which the tax losses relate.
- The acquiring persons or entities had an interest of less than 25% at the end of the period to which the tax losses relate.
- The target entity is in any of the following circumstances:
- It did not carry on any business activity during a three-month period prior to the acquisition.
- It will perform a business activity in the two-year period following the acquisition that is different from or additional to the activity previously performed.
- It is a holding company.
- It has been struck off the companies’ index for failing to file the return for three consecutive tax periods.
Lastly, the Administration's right to inspect tax losses that have been offset or are outstanding offset will become statute barred 10 years as from the day following the end date of the period stipulated for the filing of the tax return or self-assessment for the tax period in which the right to offset the tax losses was generated.
Once that period has elapsed, the taxpayer must evidence the tax losses that it intends to offset only by exhibiting the assessment or self-assessment and the accounting records, including evidence that they have been filed at the Mercantile Registry during that period.
18.104.22.168 Tax restatements
A voluntary tax restatement was provided for periods commencing in 2013, at a rate of 5% on the restated amount.
The recent tax rate cuts (mentioned previously and referred to below in detail) entail that depreciation charges on the restated assets will be included in the tax base at a lower rate than the rate applied on restatement, when a 5% rate was paid, as indicated. In order to mitigate this negative effect, taxpayers subject to the general rate (or the rate applicable to new companies) which availed themselves of the fixed asset restatement will be entitled to a tax credit equal to 5%18 of the amounts included in the tax base in respect of depreciation charges on the net increase in value resulting from the restatement.
These tax credits will be subsequently applied to other applicable tax credits and allowances. Amounts not deducted because tax payable is insufficient may be deducted in subsequent tax periods.
2.1.3 Tax rates
The standard CIT rate in Spain is 25% for fiscal years commencing on or after January 1, 2016 (from 2008 to 2014, it was 30% and in 2015, it was 28%).
However, special rates are applicable to certain entities such as listed collective investment institutions including real estate investment funds (1%), certain cooperatives (20%) or entities engaging in oil and gas research and exploitation activities (30%).
In the case of listed corporations for investment in the real estate market (known as SOCIMIs), the tax rate is 19%. However, entities whose shareholders owning a holding of more than 5% in their capital are taxed on the distributed dividends at a rate of at least 10% will be subject to a tax rate of 0%.
Lastly, entities formed on or after January 1, 2013, they will be taxed at the rate of 15% in the first tax period in which they have taxable income and in the next tax period.
2.1.4 Tax credits, withholdings and prepayments
Under this heading we will describe the main tax credits applicable for 202019.
22.214.171.124 Investment tax credits
- Research and development and technological innovation tax credit.
A tax credit for 25% of the expenses incurred in the tax period on scientific R&D. If the investment made exceeds average expenses incurred in the previous two years, 42% is applied to the excess.
In addition, a tax credit for 12% of the expenses incurred in the tax period on technological innovation.
Research and development (R&D) expenses included in the tax credit base must relate to activities carried out in Spain or in any member state of the EU or of the EEA. R&D expenses will include the amounts paid by the taxpayer individually or in collaboration with other entities to fund the conduct of R&D activities in Spain or in any member state of the EU or of the EEA.
The amount of the base for this tax credit is reduced by 100% of any subsidies received to encourage such activities.
An 8% tax credit is also established for investments in tangible fixed assets and intangible assets (excluding investment in buildings or land) to be used exclusively for R&D activities.
This tax credit will be incompatible with the other tax credits provided for the same investments in the chapter on Tax Credits to encourage the pursuit of certain activities.
The entities subject to the general tax rate (which include entities of a reduced size, starting on January 1, 2016) or to the rate of 30%, will have the following options in relation to these tax credits:
- The tax credits generated in tax periods commencing on or after January 1, 2013, can be applied, optionally, without limit of tax payable but with a 20% discount in their amount.
- Nevertheless, even in case of insufficient tax payable (before applying the aforementioned discount), it is established the possibility to request the payment of the tax credits from the tax authorities through the tax return in cash. The payment of these amounts will not be deemed a refund of amounts incorrectly paid over and will not generate the right to collect late-payment interest even if it is made more than six months after the request.
In the case of the tax credit for technological innovation activities, the tax credits taken or collected cannot exceed as a whole €1 million annually. Moreover, an overall limit of €3 million is established for R&D and technological innovation tax credits taken or collected as indicated. Both limits will apply to the entire group of companies in the case of entities forming part of the group according to the criteria of article 41 of the Commercial Code.
In order to apply the two mechanisms, the following requirements must be met:
- At least one year must elapse following the end of the tax period in which the tax credit was generated without its having been taken.
- The average workforce or, alternatively, the average workforce assigned to R&D and technological innovation activities must be maintained from the end of the tax period in which the tax credit was generated until the end of the period indicated in the following point.
- In the 24 months following the end of the tax period for which the tax return recorded the use or collection of the tax credit, an amount equal to the tax credit used or collected must be assigned to R&D or technological innovation activities or to investments in property, plant or equipment or intangible assets used exclusively in those activities, excluding real estate.
- The taxpayer must have obtained a reasoned report on the classification of the activity as R&D or technological innovation, or an advance pricing agreement on the expenses and investments relating to those activities.
Other tax credits for investments:
- Tax credit for investments in film productions, audiovisual series and live performing and musical arts productions:
- A 30% tax credit is provided for the first €1 million of the tax base and a 25% tax credit for the excess in respect of investments in Spanish productions of feature films, short films and fiction series, animated films or documentaries that allow the construction of a physical support prior to industrial production, subject to a maximum tax credit of €10 million, for years starting on or after January 1, 2020.20
The tax credit calculation base is formed by the production cost and expenses incurred to obtain copies, and advertising and promotion expenditure, incurred by the producer, up to 40% of the production cost. At least 50% of the calculation base must relate to costs incurred in Spain. Grants received to finance the investments will reduce the tax credit calculation base.
In the case of co-productions, the amounts will be calculated for each co-producer based on their share of the co-production.
- Producers entered in the Administrative Register of the Institute of Cinema and Audiovisual Arts that execute a foreign feature film production or audiovisual productions that allow the construction of a physical support prior to industrial series production will qualify for a 30% tax credit with respect to the first €1 million of tax credit base, and 25% on the excess, provided the expenses are at least €1 million. However, for expenses on preproduction and post-production of animated films and visual effects incurred in Spain, the limit is set at €200,000.
The tax credit generated in each tax period may not exceed the amount of €10 million for each production made.21
- Finally, costs incurred to produce and exhibit live performing and musical arts productions will qualify for a tax credit equal to 20% of direct artistic, technical or promotional costs, less grants received.
The tax credit generated in each tax period may not exceed €500,000 per taxpayer.
- A 30% tax credit is provided for the first €1 million of the tax base and a 25% tax credit for the excess in respect of investments in Spanish productions of feature films, short films and fiction series, animated films or documentaries that allow the construction of a physical support prior to industrial production, subject to a maximum tax credit of €10 million, for years starting on or after January 1, 2020.20
- Tax credit for hiring workers with disabilities:
This tax credit is calculated per person/year of increase in the average number of disabled persons hired by the taxpayer during the tax period, with respect to the average number of disabled employees in the immediately preceding period. In particular, the tax credit applies in two tranches:
- €9,000 per person with a degree of disability of between 33% and 65%.
- €12,000 per person with a degree of disability exceeding 65%.
There are no requirements regarding the indefinite term or otherwise of the employment contracts or the fulltime employment.
The employees that entitle the taxpayer to take this tax credit will not be computed for purposes of the provision establishing unrestricted amortization with job creation.
- Common rules on tax credits for investment
In general, the abovementioned tax credits (for Spanish motion picture or audiovisual productions, R&D and technological innovation, hiring workers with disabilities and, creating jobs) are limited to 25% of the gross tax payable, net of domestic and international double taxation tax credits and of tax allowances (the limit will be raised to 50% where the R&D and technological innovation tax credit relating to expenditure and investment in the tax period exceed 10% of the gross tax payable).
However, any excess can be carried forward for use in the following 15 years (in the case of the tax credit for scientific research and technological innovation activities, the period will be up to 18 years). The period will be counted from the first subsequent year in which an entity reports taxable income in the case of newly-incorporated entities or entities offsetting prior year’s losses by effective contributions of new resources.
The Administration's right to initiate inspection proceedings in relation to the tax credits envisaged in the preceding sections, that have been taken or are outstanding use, will become statute-barred 10 years as from the day following the end date of the period stipulated for the filing of the tax return or self-assessment for the tax period in which the right to apply the tax credits was generated.
Once that period has elapsed, the taxpayer must evidence the tax credits that it intends to offset by exhibiting the assessment or self-assessment and the accounting records, including evidence that they have been filed at the Mercantile Registry during that period.
2.1.5 Treatment of double taxation
The tax credit and exemption scheme stipulated in the previous regulations based on the type of income was amended substantially by the current law (for tax periods commencing as from 2015), through a general exemption scheme for significant shareholdings applicable in both the domestic and international arenas.
- For dividends or shares of profits from shareholdings in resident entities, the previous law (applicable up to 2014) established a tax credit that could amount to 100% or 50% of gross tax payable on the tax base for the income, based on the shareholding percentage and the time during which the shares were owned.
There is now an exemption scheme similar to the scheme existing before, for shareholdings in non-resident companies, as described below.
- Income from the transfer of shares in resident companies was subject to the specific provision that a tax credit could be applied in certain cases in respect of reserves accumulated by the investee during the shareholding period.
The exemption now applies to this income, also in line with the scheme already in force up to 2014 for foreign-source income where certain requirements were met.
- Dividends and income from shareholdings in non-resident entities and income obtained by permanent establishments abroad will remain exempt, although some changes have been made to related requirements.
- Lastly, the law maintains the tax credit for both (i) income and capital gains obtained abroad and (ii) foreign-source dividends and shares in income, as an alternative to an exemption. The law also maintains the possibility of deducting tax paid abroad when the tax base includes income obtained and taxed outside Spain, up to the limit of the tax that would have been payable in Spain had the income been obtained in Spain; it is now possible to deduct in the tax base the excess foreign tax that cannot be applied as a tax credit because the above-mentioned limit is exceeded.
Basically, under this tax credit method, the entire amount of income or capital gains obtained abroad by companies resident in Spain must be included in the tax base in order to calculate the tax, but the taxes actually paid by the taxpayer abroad are deducted from the resulting amount of tax (tax payable), up to the limit of the tax that would have been paid on the income had it been obtained in Spain. The calculation is made by including in the tax base all the income obtained in the same country, except in the case of permanent establishments, where the income obtained by each permanent establishment is grouped together.
In the case of dividends or shares in income paid by an entity not resident in Spain, the tax actually paid by this entity on the profits out of which the dividend is paid (known as the underlying tax) may also be deducted.
The deduction of this underlying tax applies without limit regarding tier (i.e., that of the subsidiaries, their subsidiaries and so on). The requirements for deducting this underlying tax are that the direct or indirect shareholding in the non-resident entity must be at least 5% and such shareholding must have been held uninterruptedly for one year prior to the year of the dividend distribution (or the one-year period must be completed following the distribution), and the resident entity must include in its tax base the profits of the entity that pays out the dividend.
The sum of both deductions (of the underlying tax and of the tax borne by the taxpayer abroad) may not exceed the gross tax that would have been payable in Spain on the income.
Amounts not deducted because gross tax payable is insufficient may be offset in subsequent tax periods.
With effect for fiscal years commencing as from January 1, 2016, a limit to the application of these credits for the avoidance of double taxation was established for entities whose net revenues for the preceding 12 months amount to at least €20 million . Specifically, their combined application may not exceed 50% of gross tax payable for the year.
This limit affects both credits generated as from 2016 and those already reported and pending application.
126.96.36.199 Dividends and income from shareholdings in entities resident in Spain: Exemption scheme
As indicated, the law now establishes a general exemption method for this type of income derived from resident entities.
In order to apply this exemption, the shareholding in the resident entity (i) must be at least 5% or, alternatively, must have a value of over €20 million; and (ii) must be held uninterruptedly for at least one year, although any period during which the shareholding was owned by a different group company as defined in Article 42 of the Code of Commerce may be taken into account.
In the event that the investee obtains dividends, shares of profits or income from the transfer of shares or equity interests in other entities, representing over 70% of its income, the exemption for such amounts may be applied provided the taxpayer has an indirect interest in those entities that fulfills the above-mentioned percentage or acquisition value and ownership requirements.
The income percentage (70%) will be calculated based on the consolidated profit for the year in the event that the directly-owned entity is a parent of a group as defined in Article 42 of the Code of Commerce and issues consolidated annual accounts.
In the case of an indirect interest in subsidiaries at level 2 or lower, the minimum 5% interest must be observed, unless the subsidiaries meet the requirements of Article 42 of the Code of Commerce to form part of the same group of companies as the directly owned entity and issue consolidated financial statements.
The indirect shareholding requirement will not be applicable when the taxpayer demonstrates that the dividends or shares of profits received have been included in the tax base of the directly or indirectly owned entity as dividends, shares of profits or income from the transfer of shares or equity interests in entities not entitled to apply an exemption scheme or a double taxation tax credit scheme.
The creation of this exemption scheme for income obtained from the transfer of shares in entities resident in Spain for periods commencing on or after 1 January 2015 entails (i) the elimination of the rules that were designed to avoid double taxation on the distribution of dividends, since such double taxation no longer occurs because the income obtained by the transferring parties will be exempt in the future; and (ii) the continued application of those rules on a transitional basis for cases in which the shares were acquired prior to that date and the former owners of the shares had actually paid tax in Spain as a result of the transfer of those shares.
188.8.131.52 Dividends and income from shareholdings in non-resident entities: exemption scheme
This exemption was already established previously although changes have been made to it for fiscal years as of 2015.
In order to apply this exemption, in addition to fulfilling the percentage and ownership requirements referred to in the previous section, the investee entity must have been subject to and not exempt from a tax that was identical or analogous to CIT at a nominal rate of at least 10%, irrespective of the application of any kind of exemption, allowance, reduction or tax credit.
The “identical or analogous tax” requirement will be deemed fulfilled when the investee is resident in a country with which Spanish has concluded an international double taxation treaty that is applicable to the investee and contains an information exchange clause.
For fiscal years as of 2017, it is added that in no case will this requirement be deemed met where the investee is resident in a country or territory classed as a tax haven, unless that country or territory is a Member State of the EU and the taxpayer proves that its formation and operations are based on valid economic reasons and that it performs economic activities.
In the event that the non-resident investee obtains dividends, shares of profits or income from the transfer of shares or equity interests in entities, the exemption for such amounts may be applied provided the "identical or analogous" tax requirements is fulfilled at least by the indirectly-owned entity.
As a general rule, it is not necessary for the investee's results to derive from a business activity carried on abroad, which was a provision of the Law prior to 2015.
184.108.40.206 Special rules governing the application of the exemption
- A proportional calculation formula is established for the exempt income in cases in which the non-resident investee entity has not been subject to an "identical or analogous tax", with respect to CIT, throughout the share ownership period.
- Also, a rule is, established which limits the exemption where the holdings were acquired in a contribution of (i) assets other than holdings in entities, or of (ii) holdings in entities that do not meet the minimum percentage requirement or, fully or partially, the minimum taxation requirement (being holdings in non-resident entities), if that contribution was made pursuant to the special neutrality regime for business restructurings (section 2.1.10), such that the income obtained from that contribution was not included in the tax base for CIT or non-resident income tax purposes.
In these cases, the exemption will not apply to the income that was deferred in that contribution unless it is proven that the acquiring entity has been taxed on that deferred income.
- The same type of limitation on the exemption is established in the case of holdings of personal income taxpayers that had received those holdings in a contribution of shares carried out under the special regime for business restructurings (section 2.1.10).
In these cases, where the holdings contributed in that restructuring are transferred in the two years after the contribution, the exemption will not apply to the income that was deferred in the contribution, unless it is proven that the individuals have transferred their holding in the entity during that period.
- The application of the exemption is precluded in the case of the transfer of shares in holding companies or economic interest groupings, in the part of the income that does not relate to an increase in retained earnings generated by the investee during the share ownership period. It is also not applicable to income from the transfer of shares in an entity that fulfills international tax transparency requirements, provided at least 15% of its income is subject to that regime.
220.127.116.11 Income generated by permanent establishments
Positive income obtained abroad through a permanent establishment located outside Spain will be exempt provided the permanent establishment has been subject to and exempt from a tax that is identical or analogous to CIT at a nominal rate of at least 10%.
Income from the transfer of a permanent establishment that fulfills the taxation requirement at a nominal rate of at least 10%, in the terms stated above, will also be exempt.
Lastly, the possibility of operating in the same country through different permanent establishments is specifically envisaged, in which case the exemption or tax credit regime will be applied to each permanent establishment separately.
2.1.6 Treatment of impairment expenses and losses derived from holdings in entities and the ownership of permanent establishments abroad
As has just been summarized in section 2.1.5, the CIT law establishes rules to prevent double taxation in relation to shares or holdings in entities. This double taxation is basically prevented through the application of an exemption on the income derived from holdings (dividends, capital gains) provided they meet certain requirements. As seen, these requirements mainly refer to the holding (percentage, cost, ownership period) or, in the case of non-resident entities, to the minimum taxation required. The same type of exemption is established for income from permanent establishments abroad.
For fiscal years commencing as from 2017, the lawmaker has introduced a parallelism between these benefits and the use of the losses incurred on those holdings. Thus, if a holding gives the right to the exemption on the income derived from it (dividends and capital gains), the losses (on transfer or impairment) incurred on that holding cannot be deducted. Before this reform, there were already certain restrictions on the use of losses but now, the restrictions have been extended (although we will discuss some of the restrictions that applied before 2016, for a better understanding of the issue, we refer to previous versions of this Guide).
This reform has been carried out through the amendment of the articles of the law referring to the timing of recognition of income, the deductibility of impairment expenses, nondeductible expenses and the exemption for dividends and capital gains. Given the complexity of this legislation, in this section we provide a systematic summary (not according to each of the articles of the law) of the treatment of the losses incurred on holdings in entities.
In order to understand this treatment, a distinction must be made between two types of holdings in entities:
- Those which we will refer to as “qualifying” holdings, i.e., holdings which give a right to the exemption for dividends and capital gains. They are holdings which meet the requirements of (i) percentage holding of at least 5% (or acquisition value of at least €20 million) owned for at least one year, and (ii) in the case of nonresident entities, holdings in entities with a minimum level of taxation (a nominal rate of at least 10%).
- Those which we will refer to as “non-qualifying”, i.e., holdings which do not meet the abovementioned requirements.
As stated previously, what the lawmaker has intended is that if a holding can benefit from the exemption for dividends and capital gains, then the losses incurred on that holding will never be deductible. With regard to other losses, they may be deducted before or after (at times reduced by certain amounts, as we shall explain below), and all of the foregoing with certain exceptions that will be noted.
On a summarized and systematic basis, the treatment is the following:
18.104.22.168 “Qualifying” holdings:
- The losses derived from their transfer will never be deductible. The non-deductibility of the losses, however, will be partial when the right to apply the exemption is also partial.
Along the same lines, the losses incurred abroad as a consequence of the transfer of a permanent establishment will not be deductible either.
- The impairment losses in respect of the holdings will not be deductible, on a permanent basis.
- However, the deductibility of the losses generated on the dissolution of the investee is expressly recognized, unless such dissolution is the consequence of a restructuring transaction or in case of the cessation of the permanent establishment.
In that case, the deductible amount of losses will be reduced by the amount of dividends or shares in income received from the investee or net income of the permanent establishment (depending on the case), obtained or generated in the ten years preceding the dissolution date, provided that:
- In the case of holdings in entities, those dividends or shares in income have not reduced the acquisition value and have had the right to apply an exemption or tax credit for the elimination of double taxation, in the amount of the exemption or tax credit.
- In the case of permanent establishments, the net income has had the right to apply an exemption or tax credit for the elimination of double taxation, also in the amount of that exemption or tax credit.
22.214.171.124 “Non-qualifying” holdings:
- In general, in the case of holdings in nonresident entities that do not meet the minimum taxation requirement (or that are located in tax havens), the losses or impairment expenses will not be deductible ever.
This includes value reductions derived from the application of the fair value method and which are allocated to the income statement, unless previously, an increase in value for the same amount has been included in the tax base as a consequence of the holding of uniform securities.
In the case of holdings in tax havens, the impairment expenses or losses may be deducted (where the rest of requirements are met for deductibility) only if the company resides in a Member State of the EU and the taxpayer evidences that its formation and operations are based on valid economic reasons and that it performs economic activities.
- In all other cases:
- The impairment expenses relating to holdings will not be deductible but this is a timing difference (because when the loss materializes, it could become deductible, as explained below).
- In the case of losses derived from intra-group transfers, as in any other kind of assets, the allocation of the loss is deferred until the holdings are transferred to third parties unrelated to the group, or the transferring entity or the acquirer leaves the group.
In those cases, when the losses are included, they must be reduced by the amount of income generated on the transfer to third parties22.
In the event of dissolution of the investee, the losses can be included in the tax base unless the dissolution is the result of a restructuring transaction23 or of any case of succession in the business activity.
- The losses incurred on the transfer to third parties will be included in the tax base but will also be reduced by the amount of income generated on any preceding intra-group transfer to which an exemption or tax credit for double taxation has been applied.
- In addition, the amount of losses will be reduced by the amount of dividends or shares in income received from the investee as from the tax period commencing in 2009, provided that those dividends or shares in income have not reduced the acquisition value and have had the right to apply the exemption for the prevention of double taxation.
2.1.7 Withholdings and advance payments
Non-operating income, such as interest, rent and dividends, must be subject to withholding tax at source, as an advance prepayment against the final tax liability.
In addition, with certain exceptions, leases of certain types of real estate are subject to withholding tax at source on the rent paid to lessors24.
Moreover, Spanish companies are also required to make three advance payments (in April, October and December of each year) based on the following methods:
- Calculation of prepayments based on tax payable (the “tax payable” method): Taxpayers with revenues not exceeding €6 million in the 12 months prior to the date on which their tax period commences will, as a general rule, make the prepayments by applying the rate of 18% to the gross tax payable (net of the related tax credits) of the last tax year whose deadline for filing a return has elapsed.
- Calculation of prepayments based on the tax base (the “tax base” method): This method is obligatory for taxpayers with revenues exceeding €6 million in the 12 months prior to the date on which their tax period commences, and optional for any other taxpayer that expressly decides to follow this method.
The prepayment is calculated on the portion of the tax base for the first three, nine or eleven months of the calendar year, applying a rate equal to 5/7 of the applicable tax rate (for taxpayers taxable at the standard rate, the advance payment would be 20% in 2015 and 17% from 2016 onwards). Certain reductions, withholdings from the taxpayer’s income and prepayments made during the tax period will be deducted from the resulting tax payable.
Notwithstanding, starting with the second prepayment of the 2016 tax period and for taxpayers whose revenues in the 12 months prior to the first day of the tax period are at least €10 million, the tax rate applicable to prepayments has been increased (generally, to 24%) and the rule has been reinstated, establishing a minimum prepayment which was no longer going to apply starting in 2016. Thus, the amount payable cannot in any case be less than 23% (25% for entities with a tax rate of 30%) of the income recorded on the income statement.
The following items are excluded from the income recorded on the income statement: (i) the income derived from payment deferrals and debt write-offs agreed with the taxpayer’s creditors (except the portion of their amount that is included in the tax base of the period) and (ii) the amount derived from increases in capital or equity through debt capitalization not included in the tax base.
The withholdings and prepayments can be taken as tax credits in the annual return for the corresponding year. If the sum of such credits exceeds the final tax payable, the company is entitled to a refund for the excess prepaid.
2.1.8 Consolidated tax regime
Spanish tax law envisages the possibility of certain corporate groups being taxed on a consolidated basis.
The filing of a consolidated return has certain advantages, most notably the fact that the losses obtained by some group companies can be offset against the profits of the others. Also, since inter-company profits are eliminated in calculating consolidated income, the arm’s-length test being applied in the valuation of inter-company transactions could be irrelevant25 (see the previous comments on this issue). However, the consolidated tax regime also has disadvantages. For example, the minimum general deduction of finance costs (€1,000,000) is not multiplied by the number of entities in the tax group but is a single deduction for the group as a whole.
For tax purposes, a consolidated group is a set of entities resident in Spain in which either a resident or a nonresident entity has a direct or indirect ownership interest of at least 75%26 of the capital and holds a majority of the voting rights of one or more other entities that are deemed subsidiaries on the first day of the tax period in which this tax regime applies.
Where an entity not resident in Spain or in a country or territory classified as a tax haven, with legal personality and subject to and not exempt from a tax identical or similar to Spanish CIT, has the status of parent with respect to two or more subsidiaries, the tax group will be formed only by the subsidiaries (all of which are to be included obligatorily).
Solely for the purpose of applying the consolidated tax regime, the permanent establishments of nonresident entities will be deemed Spanish resident investees, in which those nonresident entities own 100% of the capital and voting rights.
In order to request the application of the consolidated tax regime, the following requirements will have to be met:
- The controlling company or permanent establishment must have a direct or indirect holding of at least 75% in the capital stock of another company and must hold a majority of the voting rights of one or more other entities that are deemed subsidiaries on the first day of the tax period in which this tax regime applies.
- That holding and those voting rights must be maintained throughout the tax period.
- It must not be a direct or indirect subsidiary of any other company that meets the requirements to be deemed the parent.
- It must not be subject to the special regime for economic interest groupings, whether Spanish or European, joint ventures or like regimes.
- In the case of permanent establishments of entities not resident in Spain, those entities must not be direct or indirect subsidiaries of any other that meets the requirements to be deemed the parent, and they must not reside in a country or territory classed as a tax haven.
Resolutions for group companies to be taxed on a consolidated basis must be adopted by the Board of Directors (or equivalent body if they are not formed under the Commercial Code), and the tax authorities must be notified at any time during the tax period immediately prior to that in which the consolidated tax regime is applied. The regime will be applicable indefinitely so long as its application is not waived.
It should be highlighted that the status of representative of the tax group will fall on the parent where it is a resident in Spain, or on such entity of the tax group designated by it, where there are no other Spanish resident entities that meet the requirements to be deemed the parent.
2.1.9 Foreign-securities holding entities
The legislation of the regime governing foreign-securities holding entities (in Spanish, ETVEs) has been configured as one of the most competitive in the EU. However, due to the generalized application of the exemption for dividends and capital gains from foreign sources, together with the extensive network of tax treaties signed by Spain (which in many cases permit the non-taxation at source of dividends and capital gains derived from foreign holdings in entities resident in Spain) and the transposition into Spanish legislation of the Parent-Subsidiary Directive, this regime has lost its attraction (albeit not in all cases).
The main features of this special regime are summarized below:
126.96.36.199 Tax treatment of the income obtained by the ETVE from holdings in nonresident entities
The dividends or shares in the income of entities not resident in Spain, and gains deriving from the transfer of the holding, are exempt subject to the requirements and conditions provided for under the exemption method to avoid international double taxation.
As stated, a minimum holding of at least 5% must be owned in the nonresident entity to apply the aforementioned method. For the purpose of applying the exemption provided for in the ETVE regime, the minimum holding requirement is deemed to be met if the acquisition value of the holding is over €20 million.
Holdings of less than 5% may be held in second and subsequent level subsidiaries (when the €20 million requisite is maintained), if these subsidiaries meet the conditions referred to in Article 42 of the Commercial Code for forming part of the same group of companies as the first-level foreign entity and file consolidated financial statements.
The aforementioned €20 million limit does not apply at entities that already applied the ETVE regime in tax periods commencing before January 1, 2015 and met the quantitative limit of €6 million at their investees (which is the limit that was established in the legislation prior to that currently in force).
188.8.131.52 Treatment of income distributed by the ETVE
If the recipient of the income is an entity subject to Spanish CIT, the income received will entitle the recipient to the exemption for domestic double taxation.
In case the recipient is an individual subject to Spanish PIT, the income distributed will be considered savings income and he may apply the tax credit for taxes paid abroad on the terms provided for in PIT legislation.
Lastly, when the recipient is an individual or entity not resident in Spain, the profits distributed will not be deemed to have been obtained in Spain and, in this respect, the first distribution of profits will be deemed to derive from exempt income. In this respect, the distribution of additional paid-in capital is to be treated in the same way as the distribution of income, it being considered that the first income distributed comes from exempt income.
184.108.40.206 Treatment of the capital gains obtained on the transfer of the holdings in the ETVE
When the shareholder is an entity subject to Spanish CIT or to Nonresident Income Tax with a permanent establishment in Spain, it may apply the exemption to avoid double taxation (where it meets the percentage holding requirements established in the article regulating the exemption).
When the shareholder is a person or entity not resident in Spain, the income relating to the reserves allocated with a charge to the exempt income or to the value differences imputable to the holdings in nonresident entities which fulfill the requirements to apply the exemption to foreign source income, will not be deemed to have been obtained in Spain.
No special rules have been introduced for individual resident shareholders, who will be subject to PIT legislation.
220.127.116.11 Corporate purpose and application of the regime
The regime may be applied by notifying the Ministry of Finance (which need not grant permission to the taxpayer) of the fact that it has been opted for.
In order to apply the regime:
- The securities or interests representing the holding in the capital of the ETVE must be registered securities or interests. Therefore, the special regime is not available for listed companies.
- The corporate purpose of the ETVE must include the management and administration of securities representing the equity of entities not resident in Spanish territory, by means of the appropriate organization of material and personal resources.
18.104.22.168 Other issues
- ETVEs can belong to a consolidated tax group, if they meet the relevant requirements.
- The ETVE regime is not applicable to Spanish or European Interest Groupings, to joint ventures, or to entities which have as their principal activity the management of movable or immovable assets under certain conditions.
2.1.10 Tax neutrality regime for restructuring operations
In order to facilitate corporate reorganizations (mergers, spin-offs, contributions of assets, and exchanges of securities and transfers of registered office of a European company or a European cooperative society from one EU Member State to another), Spanish law provides for a well-established special regime based on the principles of non-intervention by the tax authorities and tax neutrality, which guarantees the deferral of or exemption from taxation, as appropriate, in respect of both direct and indirect taxation, for taxpayers carrying out such operations, along the same lines as the rest of the EU Member States.
Starting in fiscal year 2015, this regime is expressly configured as the general regime to be applied to restructuring transactions, meaning that the election to apply it has been eliminated. Instead, there is now a general obligation to notify the tax authorities of the performance of transactions to which this regime is applicable.
In mergers, the absorbing entity can be subrogated to the right to offset tax loss carryforwards of the absorbed entity or branch of activity.
2.1.11 Tax incentives for small and medium-sized entities
Entities whose net sales in the immediately preceding tax period (or in the current period in the case of newly-incorporated enterprises) amount to less than €10 million qualify for certain tax incentives. If the enterprise belongs to a group of companies within the meaning of Article 42 of the Commercial Code, the net sales figure will be calculated for the group as a whole.
This regime does not apply if the entity has the consideration of an asset-holding entity.
The special regime also applies:
- During the three successive tax periods following that in which the €10 million threshold is reached (provided that the conditions are met for these entities to be deemed entities of a reduced size, both in the period in question and in the two preceding tax periods).
- Where the €10 million threshold is exceeded as a consequence of a business restructuring carried out under the special tax neutrality regime, provided that all the entities involved in the transaction meet the conditions to be deemed entities of a reduced size, both in the tax period in which the transaction is performed and in the two preceding periods.
The incentives can summarized as follows:
- Unrestricted depreciation of their tangible fixed assets up to certain limits, provided that certain job creation requirements are met.
- Entitlement to increase by 2 the maximum straight-line depreciation rates permitted per the official depreciation tables (even if it has not been recorded for accounting purposes) for new tangible fixed assets, investment property and intangible assets placed at the disposal of the taxpayer in the year in which it meets the requirements to be classed as an entity of reduced size (except, amongst others, goodwill and trademarks, which can be depreciated by multiplying by 1.5 the maximum depreciation rates permitted per the official depreciation tables).
- Ability to record provisions for bad debts based on 1% of the balance of their accounts receivable at the end of the tax period.
- In 2015, the tax rate for entities of a reduced size was 25% for a tax base of up to €300,000, and 28% thereafter. From 2016 onwards, that rate is 25% on a general basis (that is, the general tax rate will apply) except for newly created companies, which will be taxed at 15% in the year of their creation and the following year.
This general tax rate of 25% would be reduced in case of application of the capitalization reserve and the tax base leveling-out reserve analyzed below, to approximately 20%.
- Application of the “tax base leveling-out reserve” system, which entails a reduction of up to 10% of the tax base, with a maximum annual limit of €1 million (or the proportional amount if the entity’s tax period were shorter than a year). This tax benefit has the following characteristics:
- This reduction will have to be included in the tax bases of the tax periods concluding in the 5 years immediately following the end of the tax period in which the reduction was applied, as and when the entity obtains tax losses. The amount not included at the end of that term, because sufficient tax losses have not been generated, will be added to the tax base of the period in which that term ends.
- A reserve shall be recorded for the amount of the reduction, out of income of the year in which the reduction is made, and it will be restricted during the aforementioned 5-year term. If this reserve cannot be recorded, the reduction will be conditional on the reserve being recorded out of the first income of the following fiscal years, in respect of which it is possible to record the reserve.
The breach of this requirement will trigger the inclusion in the tax base of the amounts that were reduced, plus 5%.
- The amounts used to record this reserve cannot be applied simultaneously to the capitalization reserve also regulated in the current law.
2.1.12 Tax incentives for venture capital funds and companies
Venture capital entities (both venture capital companies and venture capital funds) are subject to Spanish CIT and to the rules established in the general regime, with the special characteristics set out below.
22.214.171.124 Tax treatment for venture capital companies:
- Gains obtained by venture capital companies: Two different cases apply depending on whether or not the requirements for applying the exemption for double taxation mentioned in section 2.1.5 of this chapter are met:
- If the requirements for applying the exemption are met, the gains obtained by the venture capital company are fully exempt.
- If the requirements for applying the exemption are not met, a partial exemption of 99% will apply to gains obtained on the transfer of holdings, providing the transfer occurs between the start of the second year in which the interest is held, calculated as from the time of acquisition or delisting, and the 15th year, inclusive. The 15-year period can be extended to 20 years in certain circumstances.
In the cases listed below, application of the 99% partial exemption requires fulfilment of certain additional conditions:
- When over 50% of the investee’s assets comprise buildings, at least 85% of the total carrying amount of the buildings must be used, without interruption and during the entire time the securities are held, for carrying out a non-financial and non-real estate business activity.
- When a stake is held in a company that is subsequently listed on an official stock exchange (given that the corporate purpose of venture capital funds and companies is not to hold interests in listed companies), the venture capital company or fund must transfer its holding in that company within a maximum of three years from the date the company was admitted for trading. After that period, the entire amount of the gains obtained on the transfer are included in taxable income and subject to no reductions whatsoever, although in this case the corresponding general CIT double taxation rules would still apply (see section 2.1.5).
- Dividends or share profits obtained by the venture capital company: The exemption indicated in section 2.1.5 can apply to dividends obtained by this type of entity, irrespective of the percentage interest held and the duration for which the shares have been held.
126.96.36.199 Tax treatment for shareholders of venture capital companies
The tax treatment applicable to both the gains generated on the transfer or reimbursement of shares or holdings in venture capital companies and the dividends or share profits distributed by these entities is as follows:
- Resident legal entity shareholder or nonresident legal entity shareholder with a permanent establishment: The gains in question are exempt, irrespective of the percentage interest held and the duration for which the shares or holdings have been held.
- Nonresident individual shareholder or nonresident legal entity shareholder without a permanent establishment: The gains in question will not be deemed to have been obtained in Spain.
- Resident individual shareholder: The gains in question will be taxed in accordance with the general rules set out in the PIT Law (see section 2.2).
2.1.13 Other special taxation regimes
CIT legislation contains provisions governing special taxation regimes, established mainly as a result of the nature of the taxpayer or of the activities carried on by entities in a specific economic sector:
- Spanish and European Economic Interest Groupings (EIGs)
These entities and their members are subject to the general CIT rules, with the particularity that they do not pay the tax debt relating to the portion of their taxable income attributable to members resident in Spain and permanent establishments in Spain of nonresidents.
The nonresident members of a Spanish EIG are taxed pursuant to the NRITL and pursuant to the rules contained in the tax treaties. The nonresident members of a European EIG are only taxed in Spain on the income of the EIG attributed to them, if the activity performed by the members through the grouping gives rise to a permanent establishment in Spain.
- Temporary Business Associations (UTE)
These entities are taxed in the same way as EIGs. However, the foreign-source income (derived from activities carried on abroad) of UTEs is tax-exempt (subject to application to the tax authorities).
The losses obtained by a UTE abroad are imputed to the tax bases of its members. If, in future years, the UTE obtains income, it must be included in the tax base of its members up to the limit of the losses previously included.
- Other special tax systems
Other special tax systems apply to industrial and regional development companies and collective investment institutions.
Special regimes for economic sectors apply to both mining companies, companies engaging in oil and gas research and exploitation activities and to shipping entities on the basis of tonnage.
Lastly, the international fiscal transparency regime, already explained above, is established.
2.1.14 Formal requirements
Unless otherwise stipulated in the bylaws, the fiscal year is deemed to end on December 31 each year, coinciding with the calendar year, although taxpayers can establish a different fiscal year not exceeding 12 months but which can be shorter if (i) the entity is extinguished, (ii) the entity moves its residence abroad, or (iii) its legal form is altered and the resulting entity is not subject to taxation, its tax rate changes or it is subject to a special tax regime.
The tax becomes chargeable, in general, on the last day of the tax period. Thus, if the tax period coincides with the calendar year, the tax is chargeable on December 31.
Annual returns must be filed and the tax paid within 25 days following the six months after the end of the tax period (generally, therefore, by July 25 of each year, in relation to the preceding tax period).
At present, the tax forms to be used to report the tax are the following:
- Form 200. This return is generally used by companies that are subject to common legislation on the tax, regardless of their activity or size.
This form must be filed telematically27.
- Form 220. Its use is obligatory for tax groups and it must be filed by the parent company of the group (this does not preclude the obligation for all the group entities to file a Form 200).
2 Exhibit I: Tax incentives for investment
3 The following States are currently deemed tax havens: Emirate of the State of Bahrain, Sultanate of Brunei, Gibraltar, Anguilla, Antigua and Barbuda, Bermuda, Caiman Islands, Cook Islands, Dominican Republic, Granada, Fiji, Falkland Islands, Isle of Man, Mariana Islands, Islands of Guernsey and Jersey, Mauritius, Montserrat. Republic of Nauru, Solomon Islands, San Vicente and Grenadines, Santa Lucia, Turks and Caicos Islands, Republic of Vanuatu, British Virgin Islands, United States Virgin Islands, Hashemite Kingdom of Jordan, Lebanese Republic, Republic of Liberia, Principality of Liechtenstein, Macao, Monaco, and Republic of the Seychelles.
4 It is also established that the obligatory contributions effectively made by an individual to a public welfare system to cover contingencies similar to those covered by the Social Security will be classified as an identical or substantially similar tax for personal income tax purposes, as long as the country or territory concerned does not levy a tax that is identical or substantially similar to personal income tax.
5 At present, there are tax information exchange agreements at varying stages of completion with Bermuda, Guernsey, the Cayman Islands, the Cook Islands, Isle of Man, Jersey, Macau, Monaco, Saint Vincent and the Grenadines and Saint Lucia, at varying stages of completion.
6 DTAs can, in certain circumstances and subject to certain requirements being met, be converted into receivables from the tax authorities. Starting in fiscal year 2016, monetization requires having generated taxable income in the year when the provisions are recorded or otherwise, with respect to provisions of fiscal years 2008-2015, the payment of a monetary amount is made if there is not sufficient net tax payable.
7 Except for transactions carried out with entities that meet the following two requirements: a) they reside in a Member State of the European Union or in a State belonging to the European Economic Area with which there is an effective exchange of tax information; and b) provided that the taxpayer proves that the transactions are based on valid economic reasons and that those persons or entities perform economic activities.
8 In keeping with the latest work carried out by the OECD in the context of Action 13 of the Plan established within the BEPS Project.
9 Advance pricing arrangements may also be reached in connection with contributions for research, development and technological innovation or management expenses and in connection with the part of management expenses that may be allocated to a permanent establishment in Spain of a nonresident entity.
10 Amendment made by the Audit Law 22/2015, of July 20, 2015.
11 Under the law in force until 2015, intangible assets with a definite useful life could be amortized with the maximum annual limit of one-tenth of their amount (10%), provided that certain requirements were met.
12 Prior to January 1, 2016, intangible assets with indefinite useful life were amortizable with the maximum annual limit of one-twentieth their amount (5%), and the deduction of the amortization was not conditional on its accounting recognition in the statement of income.
13 The deduction percentage in 2015 was 2%.
14 With effect as from July 1, 2016 there was a change in the rules applicable to income from the right of use or exploitation of certain intangible assets, in the terms referred to, the purpose being to adapt these rules to agreements reached at EU and OECD levels. Under the old rules, only 40% of income deriving from the assignment to third parties of the right of use or exploitation of know-how (industrial, commercial or scientific), patents, drawings or models, plans, formulae or secret procedures, was required to be included in the tax base. This income also includes any deriving from the transfer of intangibles of these kinds when the transfer takes place between entities not pertaining to the same corporate group within the meaning of article 42 of the Commercial Code.
15 The wording in force in fiscal years commencing before January 1, 2018 established that the denominator included exclusively the expenses incurred by the licensing entity related directly to the creation of the asset, including expenses derived from subcontracting and, if any, from acquisition of the asset.
16 In the tax periods commencing between January 1 2016 and January 1, 2018, income was defined as the positive difference positive difference between income from the license of the right to use or exploit the assets and the amounts that are deducted in respect of amortization, impairment and expenses for the year directly related to the intangible.
17 Prior to July 1, 2016, the following additional requirements also applied:
- The assigning entity had to have created the assets being assigned to an extent equivalent to at least 25% of their cost.
- The transfer of the intangible assets could not take place between related parties.
18 This tax credit was 2% for tax periods commencing in 2015.
19 For tax periods starting on or after January 1, 2011, the following tax credits have been abolished: tax credit for export activities; tax credit for investment in vehicle navigation and tracking systems, tax credit for adaptation of vehicles for the disabled and for daycare centers for employees' children; tax credit for professional training expenses (save for those derived from expenses to familiarize employees with the use of new technologies); and tax credit for company contributions to employee pension plans. Effective for fiscal years commenced in 2015 onwards, the tax credit for reinvestment of extraordinary income has been abolished.
20 For tax periods commencing prior to January 1, 2020, the tax credit was 25% for the first €1 million of the tax base and 20% for the excess.
21 For tax periods commenced prior to January 1, 2017, this amount was €2.5 million.
22 In fiscal years prior to 2017, the subtraction of the losses from the taxable income could be avoided if the income had been taxed at an effective tax rate of at least 10%.
23 Up to 2016, only if the restructuring was carried out under the special regime discussed in section 2.1.10.
24 Royal Decree-Law 20/2011, of December 30, raised the standard withholding rate from 19% to 21% for fiscal years 2012 and 2013. This 21% rate was subsequently extended for 2014. For fiscal year 2015, the general withholding rate was 20%, and 19% for 2016 onwards.
25 In such cases, the legislation excludes transactions performed within the tax group from the documentation obligation generally applicable to related-party transactions.
26 Regarding entities whose shares are admitted to listing on a regulated market, the minimum holding of a parent company in its subsidiaries is reduced to 70% for the purposes of the definition of ‘tax group’, so long as they are subsidiaries whose shares are admitted to trading on a regulated market. The reduction will apply in tax periods beginning on or after January 1, 2010.
27 The entry into force of Public Authorities and Common Administrative Procedure Law 39/2015 on October 2, 2016, introduced the legal obligation on legal entities and entities without separate legal personality to deal electronically with the public authorities. These electronic dealings cover both notifications and the filing of documents and requests through registration.